THE DAILY EDGE: 4 FEBRUARY 2020

USA: Manufacturing growth slows at start of 2020 as exports fall

U.S. manufacturing firms indicated a slower overall improvement in operating conditions in January, in part stemming from a renewed drop in export orders. Firms also increased their workforce numbers at a slower pace amid less robust demand conditions. Nevertheless, manufacturers were more confident of a rise in production over the coming year as output expectations strengthened.

Meanwhile, inflationary pressures softened and were historically subdued. In an effort to attract new clients, firms raised their output charges at only a fractional rate despite some upward pressure on costs from tariffs.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 51.9 in January, up slightly from the flash figure of 51.7, but down from 52.4 in December. The latest headline reading signalled a modest improvement in operating conditions across the U.S. manufacturing sector at the start of 2020.

The rate of output growth matched that seen in December and was moderate overall. The pace of expansion was below the long-run series trend.

At the same time, manufacturers registered a slower and only mild increase in new orders at the start of 2020. Although firms stated that the upturn stemmed from greater client requests, the pace of growth was the softest for three months. While domestic demand continued to rise, new export orders fell for the first time since last September to act as the principal drag on overall order books.

As a result, firms signalled greater hesitancy in relation to hiring additional staff, with workforce numbers rising only slightly and at the least marked pace for four months. A number of firms noted that they had not replaced voluntary leavers following slower new business growth. Companies also indicated spare capacity as backlogs of work fell for the first time since last September, hinting that jobs could come under pressure in coming months unless order book growth accelerates.

Nevertheless, goods producers expressed a stronger degree of confidence in the outlook for output over the coming year in January. Greater investment in marketing and hopes of a pick up in client demand reportedly drove sentiment to a seven-month high.

On the price front, input costs rose at the second-fastest rate since last April. Panellists attributed the rise in operating expenses to supplier price hikes, especially for metals, as well as tariffs. Firms were reluctant to raise factory gate charges, however, in an effort to stay competitive. Output prices increased at only a fractional pace overall that was the slowest for three months.

Finally, purchasing activity rose at a softer pace in January, with firms noting that input stock levels were sufficient to fulfill production requirements. Stocks of purchases were broadly unchanged and finished goods inventories decreased. Despite slower input buying, delivery delays remained moderate as suppliers reportedly faced capacity constraints.

Chris Williamson, Chief Business Economist at IHS Markit:

(…) Weakness looks broad-based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods. Production of capital goods such as business equipment, plant and machinery meanwhile fell for the first time in almost four years, hinting at weakened business investment.(…)

Goldilocks Is Back, With a Face Mask On. Bears Beware The promise of easy money means there’s no alternative to U.S. stocks, damage from China’s coronavirus epidemic permitting.

(…) The surveys would not yet show any impact from the virus, so they give a good idea of whether the recent extreme bearishness in the bond market has been driven only by the epidemic, or by more fundamental trends. And they suggest that things were indeed improving, as many thought at the end of last year, at the point that the virus took over the news. This chart shows the survey numbers for Germany, recently the sick man of global manufacturing, the eurozone, China and the U.S.:

(…) If companies cannot meet orders from existing inventories, they will have to make more; this is the classic business cycle at work:

(…) it seems to me [John Authers] that the predominant belief is that the epidemic has interrupted what was otherwise looking like a reflationary picture. (…)

While the risk of the epidemic remains, and while it continues to dent the Chinese activity that is essential to much of the global economy, there is nothing for it but to keep money very easy — and this, as we all know well by now — supports stocks. In the face of disease and contagion, There Is No Alternative to U.S. stocks. Meanwhile, Chinese stocks and the halo of emerging markets depending on them are set to suffer. And nothing matters more than the damage that the virus can do.

The market is expecting multiple rate cuts in 2020

“The playbook has worked extremely well and it’s one that I’ve deployed, which is [to] rely on central bank injections because the marketplace believes that liquidity can decouple us from fundamentals for a very long time,” El-Erian said during his CNBC interview. (AXIOS)

For how long?

Global Cases Rise to 20,600: Virus Update

More than 20,600 cases have now been reported, an increase from about 17,000 the previous day. (…)

BP Plc said the outbreak threatens to wipe out a third of global oil-demand growth this year. The comments come as OPEC and its allies prepare to meet to assess the impact on global demand — Chinese oil demand has dropped by about 3 million barrels a day, or 20% of total consumption. (…)

Meanwhile, China’s car sales are likely to slump the most on record in the first two months of 2020 as the coronavirus keeps buyers away from showrooms. Sales are set to fall by 25% to 30% in the period, according to a preliminary forecast by Cui Dongshu, secretary general of China Passenger Car Association. (…)

Hyundai Motor Co. is halting production in South Korea this week because of a component shortage caused by the coronavirus, the first global automaker to suspend output outside China because of the outbreak. (…)

Coronavirus and Three Forecasts

Optimistic case: peak of ~42k infections by the 2nd week of March
Base case: peak of ~85k infections at the end of March
Pessimistic case: peak of ~128k infections by the 1st week of April

Image: J.P. Morgan (via Isabelnet)

China’s Economic Contagion The world will pay a growth price for the Wuhan coronavirus.

(…) Like it or not, the Chinese and world economies sniffle and cough together.

Commodities prices sank on Monday amid news that the coronavirus and resulting economic contagion are spreading. U.S. crude oil prices have fallen 20% over the last three weeks as Chinese oil demand is expected to fall by two million barrels a day and global economic growth forecasts have plunged. Copper is down 13%, and iron and steel prices have tumbled.

More than 20,000 coronavirus cases have been confirmed worldwide—an eight-fold increase over the last week—and experts say hundreds of thousands may not yet have been diagnosed. Two dozen or so countries have reported cases, and many have restricted travel from China to limit the contagion. Companies are evacuating employees from China. (…)

Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings. (…)

But the virus’s rapid spread across China suggests it is more infectious than SARS, which took eight months to contain in 2003. China is also now far more important to the world economy, accounting for about 15% of global GDP compared to 4% in 2003. (…)

It’s probably too much to ask Mr. Trump to lift his tariffs on Chinese exports, though it would help. At the very least he could give Beijing more latitude to meet its promise to buy $200 billion more in U.S. products over the next two years. The last thing the President should want when campaigning for re-election is an economic pandemic.

Trump Administration Denying More Tariff-Exemption Requests Thousands of companies have asked to be exempt from the U.S. tariffs placed on Chinese-made goods, but the approval rate has sunk to just 3% in the third round of levies, down from 35% previously.

U.S. Construction Spending Declines Unexpectedly; Upward Revisions Softens Blow

The value of construction put-in-place declined 0.2% in December (+5.0% year-on-year). November was revised up to a 0.7% gain (was 0.6%), while October was recast to 0.4% from 0.1%. (…)

Private construction edged down 0.1% (+2.9% y/y) in December while public contracted 0.4% (+11.5% y/y).

Residential construction increased 1.4% (5.5% y/y) with the 2.7% gain in single family (5.2% y/y), more than offsetting the 1.8% decline in multifamily (-7.1% y/y). Nonresidential construction fell 1.8% (-0.1% y/y) with the four largest sectors — power, commercial, manufacturing, and office all down in December.

The January 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices

Regarding loans to businesses, banks in the January survey indicated that, on balance over the fourth quarter, they left standards on commercial and industrial (C&I) loans basically unchanged, while demand weakened from firms of all sizes. Also, banks reported that lending standards and demand were unchanged for all commercial real estate (CRE) loan categories except construction and land development loans, for which standards tightened and demand weakened over the fourth quarter of 2019.

For loans to households, banks reportedly left their lending standards unchanged for all types of residential real estate loans (RRE) over the fourth quarter, while demand strengthened for most categories of closed-end mortgage loans and weakened for home equity lines of credit (HELOCs). However, banks reportedly tightened their lending standards on credit card and auto loans, while demand remained unchanged for credit cards and weakened for auto loans.

(…) Banks reported expecting to tighten standards for most categories of business loans, credit card loans, and auto loans, but to leave standards unchanged for closed-end mortgage loans. Banks expect demand to remain unchanged for all types of loans except multifamily CRE and auto loans, for which they expect demand to weaken, and credit cards, for which they expect demand to strengthen. Meanwhile, banks expect loan performance to deteriorate somewhat for most surveyed loan categories. As one notable exception, banks expect no deterioration in loan performance for closed-end residential mortgage loans over 2020. In contrast, credit card and auto loans to nonprime borrowers stand out as the loan categories for which the largest net shares of banks expect a deterioration in loan performance over 2020.

Treat yourself:

Disruption 2020: An Interview With Clayton M. Christensen With technology and capital rapidly increasing the pace of innovation, Christensen’s thinking is more relevant today than ever. What do we know now about the power of disruption and where it’s taking us?