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MANUFACTURING PMIs
US manufacturing performance declines at sharper pace as demand conditions weaken
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI) posted 47.9 in December, down from 49.4 in November and lower than the earlier released ‘flash’ estimate of 48.2. The latest decline in the health of the sector was modest overall and the quickest since August.
Contributing to the overall decline in operating conditions was a sharper fall in new orders during December. The decrease in sales quickened and was the fastest since August. Many companies stated that weak client demand stemmed from lower purchasing power at customers and global economic uncertainty.
External demand conditions also faltered, as new export orders returned to contraction territory. The pace of decline was only fractional, however.
Subsequently, firms lowered their production levels for the first time in four months at the end of 2023. Output dropped at a modest pace that was the fastest in six months. Some companies also suggested that higher input prices weighed on purchasing decisions, which in turn slowed production processes.
At the same time, cost burdens rose at a quicker pace. Hikes in supplier prices for metals and plastics, alongside greater transportation charges, reportedly drove the uptick in inflation. The pace of increase in input prices was slower than the historical series average, however.
Despite a sluggish sales environment, firms opted to pass through higher costs to customers in December. Selling prices rose at a solid pace that was the steepest since April.
At the same time, muted client demand led to a third successive monthly drop in employment at the end of 2023. The rate of job shedding was slightly quicker than that seen in November and the joint-sharpest since June 2020. Manufacturers reported on the non-replacement of voluntary leavers in a bid to cut costs amid lower new orders.
Evidence of spare capacity remained, however, as backlogs contracted at a steeper pace. Although employment fell again, firms were able to process incoming new work in a timely manner. Moreover, the pace of backlog depletion was the strongest since July. (…)
Firms sought to rundown stocks amid cost-cutting initiatives, with both pre- and post-production inventories declining in December. Nonetheless, lower than anticipated new orders led to slower rates of decrease, according to panellists. (…)
Canada: Manufacturing downturn deepens in December
The downturn in Canada’s manufacturing sector intensified during December, with accelerated declines in both output and new orders signalled. There was also a return to job shedding, whilst confidence in the future remained subdued in the context of the survey history. Prices rose again, despite further evidence of deteriorating demand for inputs and improved supply. (…)
Mexico: Manufacturers step-up input buying at year-end as new orders rise
The headline S&P Global Mexico Manufacturing Purchasing Managers’ Index™ (PMI®) slipped to 52.0 in December, from 52.5 in November, and pointed to a moderate improvement in the health of the sector that outpaced the series trend. Moreover, favourable readings throughout the latest three months rounded off the best quarterly performance for the sector since Q1 2018. (…)
Although new work intakes rose further at the end of 2023, growth lost momentum. The rate of expansion was moderate and the slowest for three months, but remained above the long-run series average. Where sales increased, goods producers mentioned healthy client appetite and favourable demand conditions.
A key aspect of the slowdown in total sales growth was weakness in international sales trends. New export orders decreased for the fourth month in a row during December, though to the least extent over this period.
Eurozone manufacturing sector finishes 2023 with another strong reduction in output
The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, rose marginally in December to 44.4, from 44.2 in November. Crucially, the headline index remained in sub-50.0 territory, indicating a further month of deteriorating operating conditions faced by factories across the single-currency union. According to data split by the three main industrial groups, challenges were their most acute for intermediate goods producers, as has generally been the case across the manufacturing industry’s current downturn (which has been ongoing for a year-and-a-half).
The increase in the HCOB Eurozone Manufacturing PMI primarily reflected softer deteriorations in Germany and Italy. Notably, France, the second-largest economy in the euro area, recorded the strongest worsening of business conditions in over three-and-a-half years. Greece remained the solitary area of improvement, with growth edging up to a four-month high.
The level of factory production across the euro area continued to shrink in December, with the rate of contraction accelerating slightly. Overall, the pace of decline was strong, albeit the second-weakest since May. France was the main driver of the latest fall, country-level data showed.
Output continued to be constrained by a lack of new business as demand for eurozone goods decreased once again. Although the decline was the softest for seven months, it was sharp nevertheless. New orders from external customers were also down on the month, extending the current sequence of shrinking export sales to nearly two years.
Sustained weakness in demand conditions led firms to make further progress with backlogs. The volume of work outstanding decreased further, highlighting another month of spare capacity across the euro area manufacturing sector. The rate of depletion, albeit sharp, was the slowest since May. Subsequently, factory employment across the eurozone continued to fall, in line with the trend since last June.
A slower rate of decline was also seen in purchasing activity during December. Although eurozone manufacturing companies continued to cut input buying at a considerable rate, the reduction was the weakest in seven months. Stocks of purchases were depleted more rapidly, however, and to one of the greatest degrees in the survey history. Amid sustained inventory reductions and lower demand for inputs, the latest survey data signalled a further improvement in suppliers’ delivery times. The extent to which vendor performance improved was the smallest in almost a year.
Meanwhile, growth expectations for the coming year improved in December. Overall, eurozone manufacturers were their most confident in the outlook for production since last April, although the prevailing level of optimism was still subdued by historical comparisons.
Turning to prices data, eurozone factory input costs continued to decrease at the end of 2023, as was the case in the previous nine months. This presented manufacturers with a greater allowance over their own pricing decisions, with the latest survey data indicating another month of discounting. That said, the extents to which input prices and output charges fell were the least marked for eight and seven months, respectively.
China: Manufacturing sector growth picks up in December
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) edged up from 50.7 in November to 50.8 in the final month of 2023. This signalled an improvement in the health of the sector for the fourth time in the past five months, albeit one that remained marginal overall.
The slight uplift in the headline index was partly due to a stronger rise in new orders during December. Although modest, the latest increase in overall sales was the quickest recorded since February, with particularly strong demand for consumer goods.
Companies often mentioned that improved market conditions and greater client spending had supported the latest rise in new work. At the same time, the downturn in new foreign sales moderated in December, with new export business declining at a marginal rate that was the weakest in six months.
Higher amounts of new orders led manufacturers to raise output for the second straight month in December. The rate of growth was the most pronounced in seven months, albeit modest overall. Despite the quicker increases in production and sales, manufacturers maintained a cautious approach to staffing levels. Notably, employment across the sector fell for the fourth straight month, and at the quickest pace since May.
Firms often mentioned that they had opted not to replace voluntary leavers or trimmed headcounts as demand was more subdued than expected. Moreover, companies indicated that capacity pressures eased in December, with backlogs of work falling for the first time in seven months.
Purchasing activity meanwhile stagnated after a marginal rise in November. A number of companies cited greater usage of existing stocks to cut costs, driving a further marginal drop in inventories of inputs. Stocks of finished goods meanwhile increased slightly, partly due to the delayed shipment of items to clients. (…)
Although input costs continued to rise at the end of the year, the rate of inflation moderated to a four-month low and was only marginal. Concurrently, firms signalled only a fractional rise in selling prices, with companies often reluctant to pass on higher expenses to clients amid greater market competition. (…)
ASEAN manufacturing sector slips back into contraction territory during December
The headline S&P Global ASEAN Manufacturing Purchasing Managers’ Index (PMI®) fell from 50.0 in November to 49.7 in December, indicating a deterioration in the health of the ASEAN manufacturing sector for the third time in the past four months. That said, the rate of decline was only marginal. (…)
Weighing on the headline ASEAN Manufacturing PMI was a further deterioration in overall client demand in December. New business across the region has now declined in each of the past four months. Though modest, the pace of contraction was the fastest since August 2021. Demand conditions were weak across overseas markets as well, with new export business also falling again in December. Consequently, growth of factory output weakened, with the latest upturn the slowest in the current 27-month period of expansion. (…)
MORE ON CHINA
China’s Workers Suffer Biggest Drop in Hiring Salaries on Record Average wages for new hires fell by most since at least 2016
Average salaries offered by companies to new hires in 38 key Chinese cities fell 1.3% to 10,420 yuan ($1,458) in the fourth quarter of 2023 from a year ago. That was the worst drop since at least 2016, according to data from online recruitment platform Zhaopin Ltd. compiled by Bloomberg.
It’s also the third straight quarter of decline, the longest run since data on yearly changes were first available in 2016.
In Beijing, the wages decreased 2.7% from a year ago in the fourth consecutive quarter of contraction. Salaries in the southern metropolis of Guangzhou fell 4.5%.
The data highlights the mounting deflation risks faced by China going into 2024, which weigh on its growth outlook. A gloomy job market means residents could pare back their spending, adding to downward pressure on consumer prices that are already falling at the steepest pace in three years.
It also bodes ill for the property market, which is extending its worst slump in history. With an uncertain income outlook, households could continue to delay their home purchases and avoid taking out mortgages.
A consumer confidence index compiled by the National Bureau of Statistics shows sentiment hovered around a historical low as of November, the most recent month for which data is available.
Source: @business
China Fortune Land’s Bond Investors Get Only Partial Payment Some creditors received 0.55% of principal versus 1.8% due
(…) Creditors who participated in the offshore debt restructuring received about 0.55% of the principal as of Tuesday afternoon in Hong Kong, the people said, asking not to be identified as the information is private. The distressed builder, which was obliged to repay 1.8% of the principal, said the delay was due to a technical problem, the people said.
The development underscores how some Chinese builders may be still struggling with debt payment post-restructuring despite Beijing’s recent efforts to revive home sales and smooth financing. The nation’s home sales plunged 34.6% in December from a year earlier, steeper than an almost 30% decline in the prior month, according to preliminary data from China Real Estate Information Corp. last week. (…)
Xi’s Mixed Messages Leave Whiplashed Investors Wary of China Conflicting goals have left investors confused and put bureaucrats on edge.
(…) His government’s apparent backpedal this week is the latest example. Regulators shocked gaming companies on Dec. 22 with rules to cap in-game spending and prohibit mechanisms to incentivize more play time, in a bid to control a sector with growing sway over the nation’s youth. That wiped $80 billion in market value off firms such as tech giant Tencent Holdings Ltd.
Then came a report that authorities had fired the top official at the country’s gaming regulator and Beijing said it may review the controversial rules, suggesting a heightened sensitivity to offending markets. Tencent — the operator of WeChat — recovered some of its gains, but remains down about 4% since the proposed curbs emerged. China’s government hasn’t commented publicly on the reported personnel changes. (…)
Local officials are putting growth in the backseat, as they try to avoid political missteps, according to six bureaucrats who spoke on the condition of anonymity. In that environment, two official measures of foreign direct investment into China fell to record lows last year, with one marking its first contraction. (…)
“Businesses do not know where they stand due to mixed messaging from the Chinese government.” (…)
For local officials charged with implementing Xi’s vision, it’s clear which goal takes priority. Navigating the political landscape is the primary concern, according to conversations with the six officials, who are directly involved in local economic development policies in provinces including Zhejiang and Sichuan.
Growth isn’t a key measure for performance reviews and Beijing’s warm words about foreign investment are directed to those overseas, said two separate officials. Their comments reflect the challenges business leaders face when dealing with bureaucrats interpreting messages from Beijing. (…)
There’s now no clear figure in the party’s upper echelons advocating a pro-growth message, according to one business person who has been engaged in high-level dialogue with senior officials for over two decades. Instead, those promoting national security have become more active, particularly in the past three years, they told Bloomberg on the condition of anonymity. (…)
Businesspeople mulling trips to China are increasingly inquiring about the risks of detention, according to one US diplomat. That anxiety has clashed with Xi’s call for “heartwarming” measures to attract investors, such as looser visa rules for some nations and extending preferential tax benefits to foreign nationals. (…)
China Injects $50 Billion Into Policy Banks in Stimulus Push Net injection marks largest increase via tool since Nov. 2022
The People’s Bank of China injected nearly $50 billion worth of low-cost funds into policy-oriented banks last month, suggesting the central bank may be ramping up financing for housing and infrastructure projects to support the economy.
The outstanding amount of the PBOC’s Pledged Supplemental Lending program to policy banks climbed to 3.25 trillion yuan ($456 billion) at the end of December from 2.9 trillion yuan in the previous month, the central bank said in a Tuesday statement. The net injection of 350 billion yuan was the largest increase via the tool since November 2022.
The PSL program is seen as an important tool in Beijing’s arsenal, which the government can use to shore up the property sector and stabilize growth this year. Markets have been expecting the central bank to use the money to drive construction of public housing in a bid to alleviate a multi-year property slump that’s hammered consumer confidence. (…)
U.S. Auto Sales Bounced Back in 2023 Automakers could confront more difficulties this year with industrywide sales expected to level off.
(…) Now, consumers are finding more options at dealerships as some of the snarls that impeded factory production in recent years have eased. Increasing inventory levels have led to moderating new-vehicle prices, discounts and sales promotions, providing a welcome relief for car shoppers who have dealt with sharply increasing price tags.
“We’re finally getting back to the traditional buyer’s market,” said Cole Potamkin, chief operating officer at Potamkin Cos., which runs a chain of dealerships across the country.
Rather than relying on pent-up demand, auto dealers will have to start courting buyers again, Potamkin said.
Carmakers, too, have enjoyed several years of robust profits, partly because of consumers willing to pay more for vehicles that were in short supply. Now they are confronting a more hesitant group with some auto executives saying new-car prices will drop further this year. (…)
Throughout the pandemic, auto executives pledged to keep inventories tight as a way to maximize profits, a sign that industrywide sales aren’t likely to return to prepandemic levels where results for several years topped 17 million vehicles.
Cox Automotive projects modest sales growth for 2024 with forecasts of about 15.6 million in annual sales.
While car prices remain far above what they were in 2019, the average price paid for a new vehicle peaked in December 2022 and fell further last year to about $46,055 last month, according to research firm J.D. Power.
Electric-vehicle sales in the U.S. continued to rise in 2023, outpacing the broader industry. But the growth rate also slowed from the prior year, resulting in several car companies walking back or delaying some of their planned investment in EVs last year. (…)
Electric-car pioneer Tesla on Tuesday reported global vehicle deliveries of about 1.81 million EVs worldwide in 2023, slightly ahead of analysts’ expectations. But its growth rate slowed last year, despite steep price cuts, and Chinese automaker BYD surpassed it in the fourth quarter as the world’s largest EV seller.
Another obstacle for carmakers and potential buyers is the Biden administration’s recently defined rules on which electric models qualify for a $7,500 tax credit. Vehicles that are assembled using battery parts from “a foreign entity of concern,” including China, aren’t eligible for the credit starting this year.
A number of popular electric vehicles, including Ford’s Mustang Mach-E and some Tesla models, lost their eligibility for the tax credit at the turn of the year as a result.
Construction Spending Advances in November Sturdy Residential Construction Counteracts a Slip in Nonresidential Outlays
Construction spending posted another solid gain in November, rising 0.4% over the month. Amid high financing costs and shaky demand for real estate, overall momentum in the construction sector continues to be fueled by a few key segments.
First, private single-family outlays have now picked up for seven consecutive months, reflecting the relative attractiveness of new construction amid scarce supply and tough affordability conditions in the existing home market.
Builders increased outlays for the seventh straight month, spurring a robust 2.9% uptick in private single-family spending. Strong underlying demand for homes and low resale inventory are fueling the single-family construction renaissance. Home builders’ ability to offer mortgage rate buy-downs and discounts have also made new homes attractive to buyers.
Second, the manufacturing construction rally appears to be counteracting the broader interest rate headwinds facing nonresidential construction. Private manufacturing outlays climbed 0.5% in November amounting to a 59.4% year-over-year gain.
On the downside, multifamily outlays continue to moderate off of the post-pandemic construction boom alongside normalizing apartment demand and declining multifamily starts. Commercial construction also remains acutely challenged by elevated financing costs and restrictive lending conditions. (…)
BOND FACTS
(…) the rally in the bond market at the end of last year was sparked by the November 1 Treasury announcement that less would be raised in the note and bond markets and more in the bill market to finance the government’s deficits.
Also helping to push yields down during the last two months of 2023 was a drop in the Citigroup Economic Surprise Index from 63.4 at the end of October to 1.1 today. We don’t expect much more downside in the CESI in coming weeks.
The steep drop in the price of oil since September 27 has also been bullish for bonds since the former has an important influence on overall actual and expected inflation (chart). We don’t see much downside or upside in the price of oil in coming weeks unless the conflicts in the Middle East seriously reduce the supply of oil. (Ed Yardeni)
- Maturity buckets for marketable US Treasuries — Nearly $9 trillion over the next 12 months: {https://blinks.bloomberg.com/screens/g%20%2F%2Fkey%3A6867188%3A2306…}
@M_McDonough
- The trend in HY, as measured by the Daily MACD technical indicator, turned bullish around November 1 (green arrow lower section), and the trend turned bearish after last Friday’s close (circled red arrow lower section). Following is a daily price chart of the Pimco High-Yield bond mutual fund. Think of it as a proxy for the high-yield bond market in general. After the recent rally off the October 2023 low, a correction makes sense—the red horizontal lines in the top right of the chart plot technical retracement targets. (Steve Blumenthal)
MEMORIES
This chart from RBA reminds me of how miserable I was in 1999 after having outperformed equity markets for 12 consecutive years by 500bps on average. From hero to zero! 
Then came 2000 and 2001… 
Richard Bernstein thinks we’re about to have a replay of the 2000’s Lost Decade:
We envision an extended period during which the Magnificent 7 significantly underperform, but other sectors, industries, countries, and investment themes that are currently being ignored could present excellent opportunities.
With this backdrop, our portfolios enter 2024 with four embedded themes:
US Small Caps
US Cyclicals
Non-US and Emerging Markets
Industrials: Deglobalization spurs infrastructure