Did you miss ALT-FACTS: EARNINGS VS EQUITIES?
THE EMPLOYMENT SITUATION—APRIL 2018
Total nonfarm payroll employment increased by 164,000 in April, and the unemployment rate edged down to 3.9 percent, the U.S. Bureau of Labor Statistics reported today.
U.S-China Trade Talks End Without a Deal
Two days of U.S.-China trade discussions ended in Beijing on Friday with an agreement to keep on talking, and little else.
China’s official Xinhua News Agency reported Friday afternoon that both sides reached a consensus on some trade issues, without providing details. They also acknowledged major disagreements on some matters and will continue communicating to work toward making more progress. (…)
As Trump’s tariffs bite, small U.S. manufacturers begin to tap the brakes |
(…) Reuters interviews with more than a dozen small to mid-sized manufacturing executives and recent U.S. economic data reveal Trump’s protectionist trade policy is starting to lead some of them to take a more cautious approach, and forcing them to put new investment and hiring plans on hold. (…)
U.S. Workers’ Productivity Edged Up in First Quarter U.S. worker productivity modestly improved to start the year, while labor costs grew at a faster rate.
Nonfarm business productivity—a measure of the goods and services Americans produced per hour worked—advanced at a seasonally and inflation adjusted annual rate of 0.7% in the first quarter, the Labor Department said Thursday. That was an acceleration from the fourth quarter’s upwardly revised 0.3% reading, but slightly below the gain economists had forecast.
From a year earlier, worker productivity advanced 1.3%. That is consistent with the sluggish 1.2% average annual rate recorded from 2007 through 2017, and well below the better than 2% annual average recorded since the end of World War II. (…)
Thursday’s report showed unit labor costs increased at a 2.7% annual rate in the first quarter from 2.1% pace in the fourth quarter. Unit labor costs reflect the amount a firm must pay in wages and other labor expenses to produce an unit of output. From a year earlier, those costs increased 1.1% in the first quarter, slightly ahead of the pace recorded the previous 10 years.
This Haver Analytics table shows the acceleration in compensation across the economy…
…but sales are rising at a faster rate, boosting operating profit margins.
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Arizona Teachers End Strike, Gain 20% Pay Raise Arizona teachers are expected to return to school Friday, ending a six-day strike, after Gov. Doug Ducey signed legislation that meets some of their demands.
COMPOSITE PMIs
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 54.6 in April, up from 54.0 in March. The latest index reading was the highest for three months and signalled a strong expansion in business activity across the service sector. Panellists attributed the output rise to increased order volumes from new and existing clients. That said, the rate of growth remained below the long-run series average of 55.2.
New business received by service providers increased further in April, and at a quicker rate. Moreover, the pace of the upturn was the fastest since March 2015 and sharp overall. Panellists suggested that growth was influenced by the acquisition of new clients and more favourable economic conditions, which buoyed demand.
In line with a sharp increase in new business, pressure was placed on operating capacity. Firms noted that strong employment growth stemmed from greater business requirements. Although the rate of job creation was unchanged since March, it was still one of the fastest in the last three years.
Backlogs of work also rose moderately as the pace of new order growth outstripped that seen for output. Moreover, outstanding business increased at the quickest rate since March 2015.
On the price front, input cost inflation picked up in April. The rate of increase was strong overall and the second-quickest since June 2015. Where price rises were reported, anecdotal evidence partly linked this to increased fuel costs. Respondents also linked inflation to higher raw material prices.
Average prices charged rose at a rate in line with the robust rate seen in March. Panellists stated that more favourable demand conditions allowed firms to partly pass higher input costs on to clients.
Finally, business expectations towards the coming year were robust in April. The degree of confidence reached the highest in almost three years, helped by recent solid rises in output and new orders.
The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index rose to 54.9 in April from 54.2 in March. The faster overall output expansion was driven by quicker growth in both the manufacturing and service sectors.
The latest composite reading signalled a strong start to the second quarter of 2018, despite being just below the long-run series average.
(…) As such, the data support the view that second quarter GDP growth will come in stronger than the 2.3% rate seen at the start of the year. The two surveys also collectively point to another month of solid job gains, commensurate with the official measure of non-farm payrolls rising by approximately 200,000 in April.
Perhaps the most important development, however, is the upturn in price pressures. Survey evidence indicates that rising demand has allowed increasing numbers of companies to raise prices for both goods and services in recent months. (…)
The final IHS Markit Eurozone PMI® Composite Output Index posted 55.1 in April, down from 55.2 in March and below the earlier flash estimate (also 55.2). The headline index has signalled expansion in each of the past 58 months and remains above its average for that sequence (54.0). April saw manufacturing production rise at a marginally quicker pace, but this was offset by growth in service sector activity easing to an eight-month low. (…)
The weaker growth of eurozone economic output reflected a tandem slowdown in the rate of expansion in incoming new business. New orders rose at the slowest, albeit still solid, pace for 15 months. Growth eased in both the manufacturing (17-month low) and service (eight-month low) sectors.
Intakes of new work were still sufficiently robust to test capacity, as indicated by a further rise in outstanding business in April. This encouraged companies to expand
employment, with job creation registered for the forty-second month in a row. The pace of growth also ticked higher and remained among the best seen over the past decade. Employment increased in all of the nations covered, with only Spain failing to see a faster rate of increase. (…)
Price pressures continued to moderate in April, with rates of increase in input costs and output charges easing to seven- and four-month lows respectively. Input price increases remained elevated nonetheless, reflecting high raw material costs (often due to demand exceeding supply) and growing staff costs.
The final IHS Markit Eurozone PMI® Services Business Activity Index fell to an eight-month low of 54.7 in April, down from 54.9 in March and below the earlier flash estimate of 55.0. The index remained at a level consistent with solid expansion and above its long-run average (53.2).
The final PMI numbers confirm the marked, broadbased fading of the eurozone’s growth spurt so far this year. The headline index has fallen from an eleven-and-a-half year peak in January to a 15-month low in April. Despite the drop, the PMI is not yet at a worryingly low level, but the survey details hint at further easing in the coming months.
While the expansion signalled by April’s PMI is disappointing relative to the elevated levels seen at the start of the year, the survey remains indicative of the eurozone economy growing at a robust quarterly rate of approximately 0.5-0.6%. Employment growth is also still booming, with the rate of job creation in the service sector at its highest for over a decade.
The Caixin China Composite PMI™ data (which covers both manufacturing and services) showed that growth of business activity across China picked up since March, but remained weaker than that seen at the turn of the year. At 52.3 in April, the Composite Output Index was up only slightly from a four-month low of 51.8 in March.
April survey data pointed to stronger increases in output across both the manufacturing and service sectors. Growth of services activity improved to a solid pace, although remained slower than that seen at the start of 2018. This was highlighted by the seasonally adjusted Caixin China General Services Business Activity Index posting 52.9 in April, up from March’s recent low of 52.3. At the same time, manufacturing production expanded at a slightly quicker, but still modest, rate.
New business placed at Chinese companies followed a similar trend to activity, with the rate of growth quickening slightly but remaining moderate overall. The acceleration was predominantly driven by service providers, who registered a stronger increase in sales during April amid reports of improved market conditions, greater tourist numbers and new product offerings. In contrast, factory orders increased at a softer pace.
Staffing levels continued to decline across the manufacturing sector in April, while services companies took on additional workers to assist with new projects. That said, the rate of job shedding at goods producers was marginal, while the pace of job creation at services companies was negligible. Consequently, employment at the composite level stabilised at the start of the second quarter, after a marginal decline in March.
Latest data signalled ongoing capacity pressures, with both manufacturers and services companies in China noting higher levels of backlogged work in April. While goods producers noted the strongest rise in unfinished work for three months, services providers registered only a marginal increase in the level of work-in-hand (but not yet completed). At the composite level, outstanding business rose at a modest pace that was the fastest since January.
The rate of input price inflation across China’s service sector continued to ease from January’s multi-year peak in April. Notably, the latest increase in operating expenses was the slowest seen for six months. Meanwhile, cost inflation picked up slightly at manufacturing companies, but remained much weaker than the rates seen late last year. Overall, input prices rose at a modest pace that was the softest since June 2017.
Higher cost burdens prompted firms to raise their selling prices again in April. Prices charged for services grew at a modest pace that was little-changed from the previous three months. Factory gate prices rose only slightly, with the rate of inflation easing from March. Consequently, prices charged at the composite level continued to increase modestly.
Weaker business confidence at manufacturers offset an improvement at services companies in April, pushing overall sentiment towards the year ahead outlook for output to the lowest level for three months.
It looks like the acceleration in world economic growth early this year has totally faded.
The headline JPMorgan Global Manufacturing PMI, compiled by IHS Markit, edged up from 53.3 in March to 53.5 in April. The latest reading failed to regain the peaks seen earlier in the year, but remained at a level consistent with global factory output rising at a solid annual rate of approximately 4% (at market exchange rates). (…) the survey indices collectively indicate that the global manufacturing cycle may have peaked.
As I noted Monday
The survey also brought worrying signs in relation to trade flows, with global export growth slipping to its weakest for one-and-a-half years. (…)
Exports were especially subdued in Asia. China’s goods exports showed the worst performance of the major world economies, with orders declining for the first time since November 2016. Exports from Asia excluding China and Japan also fell for the first time since late-2016, led by falling orders in South Korea, Malaysia and Indonesia. Japan’s export growth also slowed to near-stagnation, down sharply to a 20-month low from a near eight-year high at the start of the year.
While the eurozone continued to enjoy the fastest export order growth, followed by the UK, both have also seen rates of increase slow markedly so far this year. US export orders meanwhile rose at a slightly quicker pace, but from a low base, with only modest sales growth still indicated by the IHS Markit PMI.
Input costs meanwhile continued to rise at a solid pace, often linked to supply shortages. Suppliers’ delivery times, a key indicator of whether pricing power has moved to either sellers or buyers, showed the highest incidence of supply chain delays for seven years, a development which often leads to suppliers being able to hike their prices.
Most notable has been the acceleration of selling price and input cost inflation in the US, with prices and costs rising at the highest rates since the first half of 2011. Furthermore, while supply chain delays remained most commonly reported in the eurozone, the incidence of delays has also risen sharply to a four-year high in the US, highlighting the build-up of sellers’ pricing power.
Watch Out: Junk Bonds Are Getting Junkier The amount of money chasing the higher yield on offer from junk bonds has allowed issuers to get away with covenants protecting lenders that would never have been accepted in the past.
(…) The $1.4 billion of bonds, to repay temporary borrowing for the buyout of Unilever PLC’s margarine business, mark a new low in the quality of covenants protecting lenders and are yet another sign of the wall of money chasing the higher yield on offer from junk bonds. (…)
Investors and lawyers say that the sheer amount of money chasing deals allows high-profile issuers to get away with terms that would never have been accepted in the past, although some less well-known issuers have been forced to tighten proposed covenants recently. There have also been spillovers from the standardization of “covenant-lite” terms in the leveraged loans used by private equity. (…)
Moody’s calculates that almost 36% of U.S. junk-rated companies are rated in B’s lowest level or are already rated C, the riskiest grouping, higher than at the peak of the last recession. (…)
EARNINGS WATCH
Lower Tax Bills Fuel Best Earnings Quarter Since 2011 More than half of the total profit growth in the first quarter stemmed from a decline in tax rates
More than half of the combined net-income growth reported by 200 large public companies for the first quarter stemmed from a decline in the companies’ effective tax rates, a Wall Street Journal analysis of quarterly financial data from Calcbench found.
At a third of the companies, tax expenses fell in dollar terms even as pretax income rose, boosted by strong revenue growth and the expanding economy. (…)
Pretax earnings for the S&P 500 are forecast to rise about half as fast as after-tax earnings, at 12.1%, Thomson Reuters said. (…)
The lower tax rates were generally factored in estimates and yet, with 78% (391) of the S&P 500 companies in, the beat rate is 79% and the surprise factor is +6.7%. revenues are up a huge 8.2% (+1.2% surprise factor). Blended earnings are now seen up 25.5% (23.5% ex-Energy).
Analysts have not revised their estimates up for the remainder of the year. Q2, Q3 and Q4 estimates are +19.9%, +22.5% and +19.2% essentially unchanged from April 1st.
Pre-announcements for Q2 earnings show no alarming trends so far with negative pre-announcements about in line with Q2’17 and Q1’18 at the same time in the quarter.
Bloomberg’s New Paywall Will Charge Users $35 a Month
BB was the last of the very good financial media to be open and free. When I started this blog in 2009, only the FT had a pay wall.