U.S. Light Vehicle Sales Rebound
The Autodata Corporation reported that sales of light vehicles during May increased 6.2% (1.2% y/y) to 17.40 million units (SAAR) and reversed April’s 6.1% decline.(…) Light-truck sales increased 8.0% (6.7% y/y) last month to a 12.38 million unit rate and reversed the 6.5% April decline. (…) Auto sales improved 1.6% (-10.2% y/y) to a 5.02 million annual unit pace following a 4.8% April decline. (…)
Trucks’ share of the U.S. vehicle market rose to a record high of 71.1%. The share rose from 68.2% last year and a low of 47.3% in 2009.
Imports share of the U.S. vehicle market eased last month to 22.5% but has been trending upward since 2015. Imports’ share of the passenger car market surged to 30.1%, nearly a six-year high. Imports share of the light truck market eased to 19.5%., but remained up from the 11.8% low in April 2014.
Still trending weak. Americans don’t seem to be rushing out to buy cars ahead of potential import tariffs.
U.S. Construction Spending Unchanged in April
“Unchanged” but only because public construction jumped 4.8% (+15.1% YoY!). Private construction declined 1.7% (-6.0%).
USA: Manufacturing PMI drops to lowest since September 2009
May survey data signalled only a marginal improvement in the health of the U.S. manufacturing sector. The headline PMI fell to its lowest level since September 2009 as output growth eased and new orders fell for the first time since August 2009. Weak demand conditions and ongoing trade tensions led firms to express the joint-lowest degree of confidence regarding future output growth since data on the outlook were first collected in mid-2012. At the same time, employment rose at the slowest rate since March 2017 and backlogs of work were unchanged. Meanwhile, inflationary pressures eased further, with both input costs and output prices increasing at softer rates.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.5 in May [flash PMI was 50.9), down from 52.6 in April. The latest headline figure signalled only a slight improvement in operating conditions, with the latest reading the lowest since September 2009. The data for the second quarter so far have indicated a distinct slowdown in the manufacturing sector compared to the first three months of 2019.
A key factor weighing on the headline reading was the softest expansion of output since June 2016. May data signalled only a marginal rise in production that was often linked to clearing backlogs of previously-placed orders. At the same time, manufacturers signalled the first decline in new orders since August 2009. Though only fractional, survey respondents stated that weak client demand drove the fall. Some firms also noted that customers were postponing orders due to growing uncertainty about the outlook. Similarly, new business from abroad contracted for the first time since July 2018, albeit at a marginal rate.
Consequently, manufacturers exhibited a lower degree of confidence towards output over the coming year. Expectations for growth dipped to their joint-lowest since the series began in July 2012, as firms highlighted concerns surrounding ongoing trade tensions and a growing trend of customers postponing new orders, especially among large clients.
On the price front, cost burdens increased at only a modest rate in May. The rise was the slowest since July 2017, with reports of tariffs driving costs higher being countered by increased competition among suppliers. Subsequently, firms increased their factory gate charges only marginally amid efforts to remain competitive.
Meanwhile, firms signalled a further increase in employment in May. The upturn was commonly linked to the replacement of voluntary leavers and retirees. Nonetheless, the expansion was the slowest since March 2017 amid tight labour market conditions.
Finally, purchasing activity was broadly unchanged in May as firms indicated greater efforts to use current inventories for production and increased efforts to readjust stock levels in light of softer demand conditions.
Chris Williamson, Chief Business Economist at IHS Markit:
While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lacklustre demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result. (…)
While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten-year history
In Canada, the U.S. main trading partner:
Canada’s manufacturing sector saw operating conditions worsen again in May. Production continued to contract amid the sharpest drop in new orders since December 2015. (…)
The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index® (PMI®) dropped from 49.7 in April to 49.1 in May, signalling a second successive monthly deterioration in business conditions. The latest PMI reading was the lowest in nearly three-and-a-half years, albeit still indicating only a slight downturn.
(…) Output contracted at the most marked rate since the end of 2015. Panellists linked this to falling new orders and subdued global trade conditions. (…)
Tariffs from the US also inflated cost burdens, which firms then passed on to customers through a solid uptick in output charges. (…) Ontario registered the sharpest downturn in manufacturing performance during May, partly reflecting a survey-record decline in new export sales. (…)
In Mexico, the other North American trading partner:
Mexico’s manufacturing industry continued to stutter in May, with the headline PMI showing no change in the health of the sector following a fractional improvement in April. Output growth was reinstated amid a renewed rise in exports and back-to-back increases in total sales, but in all three cases respective rates of expansion were lackluster. Challenges in securing meaningful volumes of new work in recent months translated into further job shedding and another cutback to input purchasing, with the contractions the fastest registered since the survey started in April 2011 as some companies faced cashflow issues and focused on cost reduction measures.
Also testing factories’ financial resources was a further increase in cost burdens parallel to limited pricing power amid demand weakness. (…)
Let’s recap the status of the manufacturing industry in North America:
- USA: “new orders fell for the first time since August 2009” on “weak client demand” and “postponed orders due to growing uncertainty about the outlook”. “New export business contracted for the first time since July 2018”. “Tariffs are driving costs higher” but “firms increased their factory gate charges only marginally amid efforts to remain competitive”.
- CANADA: “the sharpest drop in new orders since December 2015. (…) Output contracted at the most marked rate since the end of 2015” on “falling new orders and subdued global trade conditions. Tariffs from the US also inflated cost burdens”. Ontario saw a survey-record decline in new export sales.”
- MEXICO: “rates of expansion were lackluster” and new work so weak that corporate demand contracted at “the fastest rate registered since the survey started in April 2011” limiting “pricing power amid demand weakness”.
In fewer words: new manufacturing orders, domestic and foreign, are falling throughout North America amid generalized weak demand and uncertainty. This weak overall demand fuels increasing competition, limiting pricing power, preventing passing on cost increases and therefore squeezing margins.
This is a worldwide trend as the J.P. Morgan Global Manufacturing PMI reveals:
Global PMI surveys signalled that manufacturing downshifted into contraction during May. Business conditions deteriorated to the greatest extent in over six-and-a-half years, as
production volumes stagnated and new orders declined at the fastest pace since October 2012.The trend in international trade continued to weigh on the sector, with new export business contracting for the ninth month running. Business optimism fell for the second month in a row and to its lowest level since future activity data were first collected in July 2012. (…)
The downshift in growth in the US was the main driver of the slowdown in global manufacturing, as the US PMI slipped to its lowest level in almost a decade (September 2009). (…)
Efforts to maintain competitiveness led to the weakest rise in selling prices since September 2016 (…)
Most American media and commentators report on the ISM manufacturing survey. The ISM PMI declined 0.7 to 52.1 in May but remains well into expansion territory while Markit’s PMI flirts with contraction readings. Markit compared its survey results with others last month:
Charting the data highlights how the ISM and the aggregated regional surveys correlate closely, but that both overstated actual manufacturing growth for much of late 2016- to late 2018, an overstatement which is not observed in the IHS Markit data. (…)
The outperformance of the IHS Markit data relative to the ISM is likely a consequence of ISM only surveying large companies while the IHS Markit survey covers small, medium and large companies in the correct proportions, as defined by the official data.
The IHS Markit survey is also the only survey to incorporate a national weighting system for its survey responses based on company size and sector contribution to total manufacturing output, ensuring each company’s response contributes appropriately to the survey index each month.
Trade Risks Prompt Growing Predictions for Fed Rate Cuts Economists are projecting that uncertainty created by the Trump administration’s actions on tariffs will prompt the Fed to cut rates later this year.
(…) If trade tensions persist, “we could end up in a recession in three quarters,” said Morgan Stanley chief economist Chetan Ahya in a report Sunday. Recent conversations with investors “have reinforced the sense that markets are underestimating the impact of trade tensions.” (…)
“It feels as if the market is internalizing the fact that President Trump may not be solely focused on the health of financial markets,” said Roberto Perli, an analyst at Cornerstone Macro, in a report Monday.
Mr. Perli said Friday’s market expectations of the Fed’s future interest rate path over the following eight months posted the largest one-day drop since June 2016, when British voters approved a referendum to leave the European Union. The move was larger than all but 19 other such declines since 2008, with all of those declines occurring during the financial crisis in 2008.
“A change this big did not happen even at the time of the 2015-16 China scare, during which many investors thought the economy was definitely headed for recession,” Mr. Perli said. (…)
St. Louis Fed President James Bullard said the inverted yield curve and a perceived shift in the Trump administration’s prospects to achieve near-term trade agreements warranted the move.
“The narrative on global trade has darkened,” Mr. Bullard told reporters after a speech in Chicago on Monday.
“Monetary policy looks too restrictive in this environment,” Mr. Bullard said, referencing the inverted yield curve. “That’s usually been a bad sign for U.S. economic prospects.” (…)
Fed Chairman Jerome Powell is set to speak at a research conference in Chicago on Tuesday morning. (…)
-
Australia Cuts Rates for the First Time in Nearly Three Years Australia became the largest developed economy to cut interest rates in 2019, lowering borrowing costs for the first time in nearly three years to offset the effects of global trade tensions and a slowdown in China.
-
ECB Under Pressure as Inflation Slows More Than Forecast
Consumer prices rose 1.2% in May, dropping back to the lowest in more than a year, from an Easter-boosted 1.7% pace in April. The core inflation rate fell to 0.8%, with both figures coming in below the median estimates of economists. (…)
Yuan Watchers Say 7 Is No Longer a Sticking Point for China
(…) In the four days since ex-governor Zhou Xiaochuan dismissed the importance of 7, at least six analysts published reports laying out why the People’s Bank of China is likely to tolerate a weaker yuan. They say policy makers are more likely to prioritize supporting economic growth amid a worsening standoff with the U.S. over trade. (…)
China Warns Citizens Against U.S. Travel, Citing ‘Frequent’ Shootings “Recently, U.S. law enforcement agencies have repeatedly harassed Chinese citizens visiting the U.S.,” a report said.
SENTIMENT WATCH
Druckenmiller Piled Into Treasuries on Trump’s China Tweet
(…) “When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries,” Druckenmiller said Monday evening, referring to the May 5 tweet from President Donald Trump threatening an increase in tariffs on China. “Not because I’m trying to make money, I just don’t want to play in this environment.” (…)
“So I think if you’re confident in your long-term view and ability to make money, this is not a great environment to be going and betting the ranch. Not short, not long,” Druckenmiller said.
Liz Ann Sonders shows a NDR Research chart that I am not allowed to display here but can be seen on her post linked above.
(…) The table above shows the contrarian nature of sentiment at extremes, with market returns being weakest when investors are most optimistic. The contrary has an interesting wrinkle though. Also seen in the table above, the best zone for stocks is not while sentiment remains in the “extreme pessimism” zone, but when it has clawed its way out of that zone and moves up into the neutral zone. In other words, we may have to experience more market downside to trigger a better reading on this model.
Much of what is shown above represents attitudinal measures of sentiment; but there are also behavioral measures. A couple of them are captured in the CSP—the put/call ratio and Rydex flows—but there are others that I track as well.
One that is a perennial favorite among readers is ST’s “Smart Money” and “Dumb Money” Confidence readings (see their definitions in the footnote below the chart shown below). As of May 1, Dumb Money Confidence hit a high rarely seen in history; yet shortly thereafter—in keeping with the rollover in stocks—the spread between Dumb Money and Smart Money started to converge. The market’s decline since late-April was enough to finally push Smart Money above Dumb Money as the two groups are changing their mentality from hedging to covering (the Smart Money); and from being extremely long to reducing their exposure (the Dumb Money).
Smart Money Crosses Above Dumb Money
Source: Charles Schwab, SentimenTrader, as of May 31, 2019.
The cross seen above marked the first occurrence in four months. That’s one of the longer streaks over the past 20 years according to ST. The longest streaks historically were typically during the starts of bull markets however—not typically this long into an existing bull market.
With one major exception, these crosses were mostly good signals for stocks, although continued weakness tended to be concentrated in the subsequent month. The exception was in 2000, when it triggered right at that cycle’s peak, leading to more than a 30% loss over the next year. The sooner we see Dumb Money retreat closer to 30%, the less likely further major losses will occur according to historical precedent (although past performance is no guarantee of future results).
Finally, there are two other behavioral measures of investor sentiment—fund flows and households’ positioning in equities. On the former, the latest data from the Investment Company Institute (ICI) shows that equity mutual funds suffered an outflow of more than $42 billion in April alone—one of the largest losses ever for a single month. What’s especially notable according to ST is that while investors were yanking those funds out of stocks, stocks were still rising at the time and the S&P 500 was firmly above its 12-month moving average.
The near-term results for stocks after prior occurrences like this were mixed; with a couple of notable times when investors’ contrary sense paid off: in July 2011, and more recently in January 2018. Both times, stocks struggled immediately and continued to suffer hefty pullbacks. But those were the exceptions; and looking at the subsequent one-year returns for the S&P 500 after 19 prior signals since the mid-1980s, 95% of the time, returns were higher. (…)
In sum, we are beginning to see signs of a ramping of pessimism tied to the latest market weakness and concerns about recession. It may not be enough yet to suggest a contrarian case for a near-term bottom, but it may not take much additional weakness to get there given the heightened sensitivity toward even mild pullbacks. Longer-term though, an objective look at households’ exposure to equities suggests the likelihood of the next 10 years looking as good as the past 10 years is fairly low.
The Big Challenge for Policy Makers: Policing American Tech Giants Amazon, Apple, Facebook and Google don’t fit neatly into old monopolistic formulas that would signal harm to consumers
(…) On the surface, Google and Facebook—as well as Amazon.com Inc. and Apple Inc. —have traits that would traditionally raise concerns about stifled competition squelching choices for consumers. They all have dominant market shares in their sectors—from search to social media, e-commerce, online advertising and smartphone apps—and are protected by practices and conditions that make it hard for new rivals to challenge them.
And yet they don’t fit neatly into the old formulas that signal harm from such power: higher prices and less choice for consumers. On the contrary, these companies offer many of their core products to customers for no charge. And they have vastly expanded the ability of consumers to search, compare and buy a newly broad range of products from all over the world with a quick click, search, or download. (…)
Many economists say consumers do pay for all of these services, not with cash but by providing the tech companies with valuable information about their personal lives as well as shopping and search habits. Those companies in turn convert that data into big profits by selling it to advertisers and other users. These economists say that in a more competitive market, the real free-market price could be lower than it is. Consumers, they suggest, might be paid for that data. (…)
The report also suggests that data-privacy concerns—a nonmonetary “cost” borne by consumers using digital platforms—might be better addressed with more competition, if different companies tried to lure customers by offering tighter protections.
The huge share of the digital advertising market controlled by Google and Facebook also means they can charge more for those ads than they could in a more competitive market—costs that may be passed on to consumers with higher prices for the goods they buy online, the reports say. They add that the prominent placement of ads associated with those platforms also degrades the quality of the user experience for consumers. (…)
The Chicago report says that, with digital platforms, the “competition in the market” shaping most industries is replaced by “competition for the market,” meaning that once a firm has won the battle to control a sector, it faces little challenge from other rivals. (…)
The reports all recommend tougher antitrust policies toward the big digital platforms. That could include more active investigations of practices used to curb competition, as well as a more aggressive stance in blocking any future acquisitions by those firms of potential competitors, like Facebook’s purchase of Instagram and WhatsApp.
But the studies also say there are limits to what antitrust authorities, like the Justice Department, can do about Google or the other big tech firms given that technology leads to single-firm dominance and moves so quickly.
Both the Chicago and U.K. studies conclude that governments will need new powers to foster more competition.
Druckenmiller:
(…) the future of an economic war with China will be fought with artificial intelligence and the U.S. should be helping, not hurting related companies.
He said China started easing up on its private sector last autumn and has been highly supportive of its own tech sector. “What are we doing? Oh, we’re saving, steel, coal, aluminum. What are we doing with our leading tech companies? We’re throwing sand in the gears and making their life miserable.” (WSJ)
An Ethanol Sop to Farmers The EPA allows E15 blends in the summer to offset tariff damage.
Americans will pay for President Trump’s tariffs in many ways, and on Friday we learned one more. The Environmental Protection Agency released a final rule allowing gasoline to be blended with up to 15% ethanol year-round. The result will be smoggier air and costlier road trips.
The EPA has long restricted E15 sales in the summer. The concern is—or at least was—that the combination of sun, heat and the organic compounds released by ethanol blends would result in much more smog. The Clean Air Act allows the EPA to issue a waiver and allow sales of 10% ethanol blends between June 1 and Sept. 15, but the law includes no such carve-out for E15.
Despite dubious legal authority, the Trump Administration has now granted E15 this pass to pollute during peak smog season. (…)
Compared to pure gasoline, ethanol has about 33% less energy content, so drivers get fewer miles per gallon. Unless an engine is specially built to accommodate high-ethanol blends, anything over 10% is corrosive. (…)
The EPA uses credits called “renewable identification numbers,” or RINs, to enforce these ethanol quotas. The credits are created when ethanol and gasoline are mixed, but independent refiners usually aren’t blenders. They can’t create RINs, so they’re forced to buy them.
Big oil and corn producers and speculators have cornered the market for the credits, driving up prices. When the East Coast’s biggest refinery, Philadelphia Energy Solutions, filed for Chapter 11 bankruptcy in 2018, it blamed RINs. By 2017 the credits had cost twice as much as the company’s payroll.
The new regulations do little to prevent manipulation of the RINs market. Gone are earlier proposals that would have barred hoarding the credits and required speculators to sell promptly. The new rule does mandate more transparency, but that doesn’t change the basic incentives in this artificial market. Mark it down as another example that one bad economic policy leads to many more.
-
US farmers’ borrowing boom is built on shaky land values Debt levels approach peak before rural bankruptcy crisis of the 1980s