FLASH PMIs
Eurozone economic contraction intensifies in October
The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index fell from 48.1 in September to 47.1 in October, according to the preliminary ‘flash’ reading based on approximately 85% of usual survey responses. The PMI has now registered below the neutral 50.0 level, indicating falling business activity levels, for four consecutive months. The rate of decline has accelerated over this period to reach the fastest since November 2020. Excluding pandemic lockdown months, the latest reading was the lowest since April 2013.
Manufacturing led the downturn, with factory output declining for a fifth month running and slumping at a rate not seen prior to the pandemic since July 2012. Service sector output also fell, down for a third consecutive month, contracting to a degree not witnessed outside of pandemic lockdowns since May 2013.
Any growth was confined to technology, industrial services and pharmaceuticals & biotech firms. Some of the steepest downturns were seen in the chemical & plastics and basic resource sectors, often reflecting high energy dependencies.
Within the euro area, the steepest decline continued to be recorded in Germany, where the composite PMI sank to 44.1, its lowest since May 2020 and, excluding the pandemic, its weakest since June 2009. Germany’s manufacturing and service sectors both reported steep and accelerated rates of contraction.
Output meanwhile stalled in France, the composite PMI registering 50.0 from 51.2 in September, representing the first month in which output has failed to grow since March 2021. A modest expansion of service sector output offset a marked (albeit moderating) decline in manufacturing.
Elsewhere across the region, output fell for the second successive month, dropping at the fastest rate since January 2021, and excluding the pandemic since June 2013. A modest decline in service sector output was accompanied by a steeper fall in factory production.
New orders placed for goods and services meanwhile fell for a fourth straight month, the rate of loss accelerating to a pace not seen since December 2012 barring pandemic lockdown months, to indicate a steepening downturn in demand. Excluding the pandemic, the drop in manufacturing orders was the sharpest since April 2009, while the decline in new business inflows into service sector companies was the steepest since June 2013.
The drop in new orders meant companies continued to rely on existing backlogs of work to help maintain business activity levels, causing backlogs of orders to fall for a fourth month in a row, led by a particularly sharp decline in manufacturing. The backlogs decline was most marked in Germany, whereas France reported rising outstanding business.
While employment growth ticked up slightly in October, the latest gain was the third-lowest seen over the past year-and-a-half, reflecting job cutting at some firms amid signs of surplus capacity relative to sales and a broader reticence to hire amid uncertainty regarding the outlook.
Business expectations for the year ahead remained subdued, running at the second-lowest since the early pandemic lockdowns. Confidence was especially low in manufacturing, and particularly in Germany, reflecting concerns over energy as well as the rising cost of living and global growth slowdowns. While sentiment picked up slightly in the service sector from the previous month, it remained weaker than at any other time since early-2020 and far below levels seen earlier in the year, linked principally to concerns over the rising cost of living and tightening financial conditions.
Although factory output was again subdued in many cases by component shortages and concerns over energy, October saw the overall incidence of supply chain delays ease to the lowest for just over two years. Companies reported fewer component shortages and improved shipping, albeit often linked to suppliers being less busy due to weaker demand. Input buying by manufacturers fell at one of the steepest rates seen since the global financial crisis, reflecting lower production requirements and increasingly broad-based deliberate inventory reduction policies amid weaker than expected sales.
Although easing raw material supply constraints helped alleviate some inflationary pressures, rising energy costs and upward wage pressures ensured the overall rate of input cost inflation remained highly elevated, easing only slightly from September’s three-month high (and even increasing slightly in services).
Higher costs fed through to a stubbornly high rate of increase of prices charged for goods and services, which dipped only marginally compared to September to register the sixth-largest monthly increase since comparable data were first available in late-2002. Rates of selling price inflation cooled only marginally in both manufacturing and services, in both cases remaining far higher than anything ever seen prior to the pandemic.
Japan: Faster rise in business activity, but inflationary pressures remain elevated
Latest flash PMI data has pointed to a further improvement in Japan’s private sector economy in October. The recent easing in international border restrictions and the launching of the Nationwide Travel Discount Programme earlier this month boosted activity levels and order book volumes. The manufacturing sector, however, continued to struggle in the face of weak demand conditions and severe cost pressures. In fact, the rate of output price inflation rose to a fresh survey peak in October as firms continued to share increasing cost burdens with their clients. With inflationary pressures remaining elevated across the private sector, business confidence dipped to a six-month low. (…)
For the fourth month running both output and new orders declined, albeit at softer paces than in September. Meanwhile, cost pressures across the manufacturing sector remained elevated, while the rate of output price inflation accelerated to a fresh survey peak. Despite this, overall business sentiment ticked higher amid hopes for of a sustained COVID-19 recovery.
China’s Economy Grew 3.9% in the Third Quarter Result topped the 3.5% economic growth expected by economists
(…) Monday’s figure also put overall growth for the first nine months of 2022 at 3.0%, well below the official full-year target of about 5.5% set in March. (…)\
Industrial production grew by 6.3% in September from a year earlier, accelerating from a 4.2% increase in August, as policy stimulus measures kicked in and a power shortage caused by extreme weather during the summer eased.
Growth in fixed-asset investment, including for infrastructure projects, remained steady, expanding by 5.9% during the first nine months of the year compared with a year earlier, slightly faster than 5.8% gains in the first eight months of 2022.
China’s property slump, which was triggered in part by Mr. Xi’s attempts to tamp down on speculation in the sector, showed little sign of reversing in September, as property investment, new construction starts and home prices fell more.
The prolonged slide in Chinese new-home prices accelerated last month. Prices fell at their steepest level in more than seven years in September, even after officials rolled out more policies to boost the embattled sector and support home buyer demand.
Average new-home prices in 70 major cities in September fell 2.3% from a year earlier, after falling 2.1% in August, according to Wall Street Journal calculations based on data released Monday by China’s statistics bureau. (…)
It’s not only new homes per GS:
The share of cities that experienced sequentially higher property prices fell further in both the primary and secondary markets in September
Source: NBS, Goldman Sachs Global Investment Research
Retail sales, a gauge of consumer spending, rose by a weaker-than-expected 2.5% from a year earlier in September, down from a 5.4% increase in August.
China’s headline measure of joblessness, the urban surveyed unemployment rate, edged up to 5.5% in September from 5.3% for the previous month, the statistics bureau said. Joblessness among people aged between 16 to 24 remained elevated at 17.9%. (…)
Shipments out of China rose 5.7% from a year earlier in September, down from a 7.1% increase in August, China’s General Administration of Customs said Monday, after also having delayed its data release by more than a week.
China’s imports increased by an anemic 0.3% in September from a year earlier, on par with August’s figure, partly because of the real-estate downturn, which dampened China’s appetite for raw materials. (…)
(ZeroHedge)
Fed Rate Slowdown Talk Offers Respite for Markets Signs that the Federal Reserve might soon slow the pace of its interest-rate increases helped calm Treasury yields at the end of last week, offering some hope to investors that a more-stable bond market could ease pressure on stocks.
- James Bullard said the strong US labor market gives the central bank more room to raise interest rates—another 75-basis-point hike is all but a lock—so it can get inflation back to the 2% target “relatively quickly.”
- Colleague Mary Daly said policymakers should start planning for a reduction in the size of rate increases while reiterating that rates as high as 5% next year were still “a fairly good indication of where things are looking.”
Most in NABE Survey Say US Already in Recession or May Be Soon
A National Association for Business Economics survey showed over half of the respondents view a recession as more probable than not, while another 11% indicated the economy is already in one. The survey of 55 NABE members conducted Oct. 3-10 also indicated slower demand, an easing in labor market tightness and a slight moderation in price pressures. (…)
Some 33% reported higher employment at their firms over the past three months, down from 38% in the July survey. Hiring plans also eased, with only 22% of respondents expecting to increase headcount over the next three months. That’s down from 50% at the start of the year.
While nearly two-thirds of respondents said wages rose at their firms over the past three months, wage cost expectations for the coming months dropped significantly and now match the lowest reading since April 2021.
As for inflation, an index of materials costs fell 24 percentage points from a record reading in the previous survey. The outlook for costs also declined, and a smaller share of those surveyed expect an increase in the prices their firms charge in the coming months.
Whirling winds at Whirlpool
- Net sales decline of (12.8)%, or (9.7)% excluding currency, impacted by lower volume as a result of slowing demand, partially offset by favorable product price/mix
- Continued demand weakness across key countries; revenue decline, excluding currency and Russia, of ~8.0 percent
- N.A. EBIT margin of 9.8 percent, compared to 17.7 percent in the same prior-year period, impacted by aggressive inventory reduction
- Expect full-year 2022 revenues of approximately $20.1 billion (down ~9 percent)
- Reduced earnings per diluted share from $22.00 to $24.00 to ~$19.00 on an ongoing basis
On the call, management said they are right-sizing production and inventories, reducing fixed and variable costs, and focusing on cash generation and deleveraging. Production is reduced to levels seen in the 2Q20 covid shutdowns, and will be maintained through 4Q and into early 2023 given the low visibility.
WHR is obviously directly impacted by the housing recession but it also reflects deteriorating consumer demand and the impact that mitigating measures are having on the economy.
The average monthly payment on a new vehicle hit a high of $703 during the quarter.
- The amount that buyers financed for a new vehicle reached an all-time high of $41,347, compared to $38,315 last year.
- Rates are pricier for used car loans — the average is 9.2%, according to data from Edmunds.
- 14% of borrowers in Q3 committed to paying $1,000 or more a month on their car loan — compared to 8.3% in 2021.
Restaurants’ Post-Covid Boom Is Winding Down The rising cost of eating out is crimping customer traffic
A September survey from research firm Datassential Inc. found half of consumers had recently cut back on restaurant meals due to high inflation. It was the No. 1 expenditure respondents opted to trim, followed by apparel and travel. About 30% of those surveyed said they plan to dine out less or stop visiting restaurants entirely in the coming months. (…)
While the Commerce Department reported the total value of September retail sales at restaurants and bars rose by 0.5% from the prior month, the data isn’t adjusted for price changes. After adjusting for menu increases, the National Restaurant Association found sales declined, marking the third such drop in four months. (…)
Olive Garden owner Darden Restaurants Inc. sales missed Wall Street’s expectations in the quarter ended Aug. 28. The company, which has raised its prices, blamed inflation for lower spending, especially among those who earn less than $50,000 a year.
September saw a higher number of consumers who slashed spending versus August, according to Cowen. Dining out and social events were the top expenditures being cut or expected to be cut. This outpaced other categories such as travel or groceries, according to the financial-service company’s monthly survey of 2,500 US consumers. (…)
LABOR MARKET WATCH
Job Seeker Interest in Holiday Jobs Up 33% from 2021 Employer demand appears to cool as searches increase.
Job seeker interest in holiday work is heating up after two lukewarm years. As of September 30, holiday-related seasonal job searches on Indeed as a share of total job searches (see Methodology) reached its highest level since 2019. In contrast, employer demand for holiday workers — measured by seasonal job postings on Indeed — has cooled from last year. Such job ads were down 8.2%, but still 5.2% above pre-pandemic levels. Retail sector jobs continued to lead the pack, accounting for 56.5% of seasonal postings in September.
The combination of warming job seeker interest and cooling employer demand suggests workers may have fewer advantages in the hunt for seasonal jobs this year. Meanwhile, employers may benefit from a larger pool of potential applicants competing for fewer positions than a year ago.
Since many seasonal jobs are in-person, the increase may partly reflect an easing of job seeker worries about COVID-19. Additionally, inflation and the rising cost of living may be prompting people to look for seasonal employment to supplement household income. Still, there’s no indication US workers are taking multiple jobs at elevated rates this year. In September 2022, only 4.9% of total employment came from multiple job holders, lower than 5.3% in 2019. Multiple job-holding rates tend to tick up slightly in holiday months, but the current trend remains below pre-pandemic averages. (…)
Not only are employers advertising fewer openings on Indeed, but they’re also showing less urgency to fill those jobs. In September 2021, around 10% of holiday-related job ads used words that expressed an urgent need to hire, such as “hiring urgently,” “urgent hire,” or “immediate start.” Fast forward a year and the intensity has faded, with a little over 6% of seasonal job postings communicating hiring urgency this September. This drop is significant, but hiring intensity and urgency are still elevated compared with pre-COVID trends.
The number of job postings offering hiring incentives such as signing bonuses or cash tells a similar story. As of September 30, only 0.7% of seasonal job postings advertised hiring incentives — a 2.6 percentage point decrease from the 3.3% spike in September 2021. This pullback, along with fewer job postings and less urgency, suggests softening employer demand and reduced intensity in the hunt for seasonal workers.
This scatter graph from CalculatedRisk compares October retail hiring with the real increase (inflation adjusted) for retail sales (Q4 over previous Q4) between 2005 and 2021. “The dot in the upper right – with real Retail sales up almost 10% YoY is for 2020 – when retail sales soared due to the pandemic spending on goods (service spending was soft).”
- Re the JOLTS job openings: “Half of our listings are a little bit of ‘fishing listings,’ ” Foreman said. “What I mean by ‘fishing listings’ is we don’t really need to fill the position, but if we come across a résumé that really looks special, we would fill the position.” (WaPo)
Canada Retail Sales Fell in September After Short-Lived Rebound Receipts for retailers dropped 0.5% last month, according to an advance estimate released Friday by Statistics Canada. That erases much of a 0.7% jump in August, according to the agency, and brings sales down near July levels, a very weak month that saw receipts fall by 2.2% — the biggest drop in more than a year.
EARNINGS WATCH
From Refinitiv/IBES:
Through Oct. 21, 99 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 74.7% reported earnings above analyst expectations and 22.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 5.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.
Of these companies, 67.7% reported revenue above analyst expectations and 32.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.
In aggregate, companies are reporting revenues that are 1.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.
The estimated earnings growth rate for the S&P 500 for 22Q3 is 3.1% [+3.6% one week ago]. [Note that Factset is at +1.5%] If the energy sector is excluded, the growth rate declines to -3.5% [-3.1%].
The estimated revenue growth rate for the S&P 500 for 22Q3 is 9.9% [10.1%]. If the energy sector is excluded, the growth rate declines to 6.8% [6.5%].
The estimated earnings growth rate for the S&P 500 for 22Q4 is 4.4% [5.0%]. If the energy sector is excluded, the growth rate declines to 0.4% [0.8%].
In spite of the beats, estimates are being reduced. Analyst are reducing nearly 2 estimates out of 3. For Q3, 7 of the 11 sectors have seen their Q3 EPS growth rates decreased since Oct. 1, from +4.5% in aggregate to +3.1%. For Q4, 9 of 11 have been reduced, from +5.8% to 4.4%.
Trailing EPS are now $221.54. Full year 2022: $222.14e. 12-m fw: $232.61e. Full year 2023: $238.78e.
- The Philly Fed’s manufacturing index points to a crash in corporate earnings.
Source: @MikaelSarwe via The Daily Shot
As of Friday’s close:
- The S&P 500 median trailing P/E is now 17.6 (17.3 last week, 17.7 four weeks ago). On forward: 15.9 (15.1 and 15.7).
- The 6 largest stocks by weight (24.2% of the index) have an average P/E of 43.5 (41.6 and 47.0). On forward: 28.9 (26.8 last week).
- 39.0% of the companies have a P/E below 15.0 (41.0% last week). On forward: 43.4% (48.4%).
- 17.6% (19.4% last week) are below 10x. On forward: 19.2% (21.0%).
CEO CONFIDENCE AND EQUITY MARKETS
A reader sent me a note on my posting last week of the Conference Board CEO Confidence Index: “at this level of past CEO bearishness it has proved to be an excellent long term buying entry point for the S&P index.”
I had posted the chart in the context of assessing recession probabilities but Gerry raised a potentially more practical application: is it a dependable market timing tool?
No, … and yes…
- No: In the 3 instances when the Index reached 40, the S&P 500 kept dropping: equities bottomed in 09/02, 38% lower than in Q4/00. They bottomed at 666 in 03/09, significantly lower than at any point in 2007 or 2008. In 2019, equities flattened after Q1 along with profits but the pandemic changed everything thereafter.
- Yes: in the sense that pessimistic CEOs likely reflect a deteriorating profit outlook. Quarterly profits peaked in Q4’00 and declined 31% in 2001. Profits peaked in June 2007 before collapsing during the next 18 months. They flattened between Q2’12 and Q2’13 and again in 2019.
To the extent that equities react to profits, poor CEO confidence warn us of a more difficult profit cycle ahead which can negatively impact equities, sometimes quite significantly.
The recent CB CEO survey was conducted in the last 2 weeks of September. Some details:
- 81% said economic conditions were worse than 6 months ago.
- 74% expected conditions to worsen. Just 5% of CEOs said conditions would improve.
- 52% said conditions in their own industries were worse, up from 48%.
- 54% expect conditions to worsen, up from 48%. Just 19% expected conditions to improve.
- 44% expect to expand their workforce over the next 12 months, down from 50% in Q3.
Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta published their latest CFO survey on September 28, 2022.
CFOs said their optimism about the overall economy rose modestly from its recent low. Optimism about their own firms, though well below levels from a year ago, remained steady alongside some improvement in expectations for revenue, employment and cost growth.
CFOs said inflation was the most pressing concern facing their firms. Firms revised unit cost growth during 2022 down to 8.9 percent from 10.2 percent in the prior survey. These costs remain at elevated levels, and nearly all firms reported experiencing larger-than-normal cost increases.
“The share of firms with abnormally large increases in the majority of their costs doubled since the second quarter of last year, from 26 percent to more than 52 percent,” said Atlanta Fed economist Brent Meyer. “More than 80 percent of firms expect cost pressures to persist into next year, and around a third expect these pressures to last longer than a year.
Compared to the last survey, fewer respondents said they planned to invest in structures or equipment over the next six months, with most saying they had ample capacity. In addition, the share of CFOs noting unfavorable financing conditions doubled to 15 percent, and the share citing a need to preserve cash increased 10 percentage points to 38 percent.
CFOs said they anticipate continuing to hire at a moderate pace, despite concerns about labor quality and availability.
Note that CFOs are currently much more optimistic about their own company than CEOs. Note also that that was also the case in 2007 and early 2008…
Morgan Stanley’s Wilson Sticks to Bullish Call Amid Client Doubt
One of Wall Street’s most vocal bears is doubling down on his short-term bullish call on equities a week after his initial view was met with skepticism by clients.
Morgan Stanley’s Michael Wilson sees stocks grinding higher as markets transition to expectations of falling inflation and lower interest rates, he said in a note Monday.
(…) Wilson said a pullback in bond yields should provide fuel for the next leg of the tactical rally, “until we get full capitulation on 2023 earnings estimates, something we think may take a few more months.”
“While some may argue a recession is inevitable over the next 6-to-12 months, the market will not price it, in our view, until it is definitive (!!),” Morgan Stanley’s Wilson said.
The strategist, who correctly predicted this year’s slump, sees the S&P 500 Index bouncing as much as 15% if it breaches its 200-week moving average of 3,605 points, about 4% below Friday’s close. A similar view is held by Stifel Nicolaus & Co. strategists, who said in a separate note they see the benchmark rallying to 4,300 points in the next 6 months as inflation cools and recession is pushed back to the third quarter of next year. (…)
Not all strategists are so sanguine. Those at Goldman Sachs Group Inc. say share prices “do not reflect the risk of a US recession that many investors expect during the coming year,” they wrote in a separate note, favoring reasonably valued defensive sectors.
Equity fund flows
The strength of the US dollar continues to grab the financial headlines not least for how it may impact emerging economies. The equity flow data from EPFR offers some fresh perspective on this. Measured on a cumulative basis, and with respect to the start of 2020, European equity markets have seen a major exodus of investment capital, with geopolitical instability clearly a key reason for this.
Chiming though with the dollar’s strength, US equity markets have, in contrast, been a major beneficiary of capital inflows. Somewhat surprisingly (at least to this observer) emerging equity markets too saw relatively solid net inflows of capital during 2021, possibly because trade growth for many of these economies was quite firm at that time. But, this trend has now started to reverse over the past 6 months, in tandem with the strength of the dollar.
Never have so many lost so much More superlatives via Goldman’s flow guru Scott Rubner.
GS
Four years into the trade war, are the US and China decoupling? US imports of some Chinese products have tanked. Others are higher than ever. How Trump’s selective trade war continues to matter.
(…) On the one hand, US imports of certain products from China—including semiconductors, some IT hardware, and consumer electronics—have fallen dramatically. Even clothing, footwear, and furniture imports are down.
But on the other, imports from China of laptops and computer monitors, phones, video game consoles, and toys are higher than ever. Demand for these products surged in response to the COVID-19 pandemic. Stuck at home, Americans switched their spending away from services and toward many of these goods manufactured in China. (…)
So far, the decoupling that is—and is not—occurring is partly the result of President Donald Trump’s trade war, the selective way it was waged, and the continuation of many of those policies under the Biden administration. A more recent motivating factor that may be spurring decoupling is the desire for increased diversification of imports to make supply chains for certain goods more resilient. Other drivers include human rights, democracy, and geopolitical concerns.
But the data also show something else. Even if policymakers foresee long-run benefits in disentangling the two economies, their choices come with immediate costs. These costs include product shortages, as supply chains struggle to adjust, as well as inflation, as companies find it expensive to establish new suppliers. Firms and ultimately consumers need to prepare to pay the price for the new policy-induced reality. (…)
Today, US imports from China (red line) remain well below the pre-trade war trend (dashed line), as defined (conservatively) by US imports from the world, and have only recently returned to pre-trade war levels of June 2018.[2] China is now the source of only 18 percent of total US goods imports, down from 22 percent at the onset of the trade war.
In comparison, current US imports from the rest of the world are 38 percent higher than pre-trade war levels and are even above trend (blue line). With a few exceptions, these imports were not hit with new US tariffs.[3] They have also recovered strongly following the onset of the pandemic. (…)
Imports of products never hit with trade war tariffs are now 50 percent higher than immediately prior to the trade war. (US imports from the rest of the world of those same products are also up but by only 38 percent.) Products not facing tariffs made up roughly 33 percent of total US imports from China before the trade war and have grown to 47 percent today. (…)
US tariffs are not the only “cause” of the United States importing less from China. Some labor-intensive production closely associated with much of the clothing and footwear industry was likely relocating anyway, following a trend that was visible even before the trade war. China was losing competitiveness in this industry, relative to other emerging economies, as local wages have increased. (For other products, Vietnam may be rising as a source at the expense of other higher-income countries, such as South Korea.) (…)