THE DAILY EDGE (5 April 2018)

Tariff Showdown Shifts to Intense Negotiation Period The Trump administration’s tit-for-tat with Beijing over tariffs has ushered in a high-stakes standoff over the future of trade between the world’s two largest economies.

(…) “It’ll be a couple months before tariffs on either side would go into effect,” said White House press secretary Sarah Huckabee Sanders. “I would anticipate that if there are no changes to the behavior of China and they don’t stop the unfair trade practices, then we would move forward.” (…)

Under the U.S. plan to introduce tariffs, companies have 30 days to submit comments on the Chinese imports that will be subject to the 25% tariffs, a list of 1,333 goods that includes machinery and materials, upon which U.S. industry has grown to rely on to conduct business. Companies will have the opportunity to raise concerns and to note if goods crucial to business—highly specialized machine tools, for example—have been targeted, or if different goods should be included in the tariff list.

The Chinese side, meantime, has put together its own list, which includes levies on soybeans, autos and airplanes, the export of which has grown crucial to the success of many U.S. businesses. “Both sides have put their lists on the table,” China’s Vice Finance Minister Zhu Guangyao told reporters. “Now it’s time for negotiations.” (…)

U.S. business interests will be allowed to air concerns publicly at a May 15 hearing at the International Trade Commission, and companies will have until May 22 to object to the proposed tariffs.(…) After May 22, the U.S. government still has 180 days to decide whether to go ahead, meaning the standoff could last a long time. If Washington backs off, Beijing is likely to do the same. (…)

Both countries’ lists total approximately $50 billion worth of goods, a sum that hits about 38% of U.S. exports to China. As China is the much larger exporter, the sum hits only about 10% of Chinese exports to the U.S. (…)

• China says it never backs down in the face of threats after trade salvos with U.S.

• The Big Risk of a Trade War: Inflation

(…) Over the past two decades, China has, for the most part, exerted a giant deflationary force on prices in the U.S. and elsewhere. It is one reason why a shopping cart of clothes, for instance, costs less for U.S. consumers than 20 years ago. (…) While tariffs are still a threat, not a reality, disruptions to trade could ultimately prove inflationary, as they represent a shock to the supply side of the economy. (…)

• Why a trade war with China would hurt the US and its allies, too

Heavy-Duty Truck Orders Hit a Record Pace First-quarter orders for big rigs more than doubled from a year ago as truckers add capacity to meet surging freight demand

(…) DAT Solutions LLC, which matches available loads to trucks in the spot market, says shipments on its “load board” rose 27% from February to March while the number of trucks available increased only 14%.

The gap between demand and capacity has led truckers to charge higher prices, giving fleet owners more cash to replace older vehicles and greater confidence in future demand. DAT says average rates on the spot market were up nearly a third in March from the same month a year ago. (…)

PMIs

• U.S. service sector growth remains strong in March

March survey data indicated a strong expansion in business activity across the U.S. service sector. That said, the growth rate softened from that seen in February and was below the long-run series average. Similarly, the upturn in new business softened from the previous month but was sharp overall. In line with sustained increases in client demand, the rate of job creation accelerated to a seven-month high. Meanwhile, both input price and output charge inflation remained strong and above their respective series averages.

The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 54.0 in March, down from 55.9 in February. Nonetheless, output growth was strong overall. Moreover, the index average for first three months of 2018 was broadly in line with the rate of expansion seen over 2017 as a whole. Panellists largely linked the upturn in business activity to diversification and more favourable demand conditions.

New business received by service providers grew sharply in March, albeit at a slightly softer rate than February’s 35-month high. Furthermore, the rate of increase remained well above the long-run series average. Alongside greater client demand, panellists attributed the rise in new orders to wide-reaching marketing campaigns and increases in customer referrals.

Greater business requirements and a strong rise in output were listed as influential factors behind the latest increase in employment levels. Service providers registered a strong rate of job creation that was the fastest since August 2017.

For the eleventh successive month, the level of outstanding business at service providers increased. The rate of accumulation dipped to a three-month low and was only marginal, with respondents suggesting the latest rise was due to ongoing growth in new business.

On the price front, the rate of input cost inflation softened from February’s multi-year high. That said, cost burdens still rose at a strong pace. A number of survey respondents stated that the increase in input prices stemmed from higher fuel and wage costs.

Reflective of favourable demand conditions, greater cost burdens were largely passed on to clients through higher charges. The rate of output price inflation eased slightly from that seen in February but remained strong overall.

The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index dipped to 54.2 in March from 55.8 in February. Both the manufacturing and service sector recorded softer output growth than in February.

That said, the composite output increase was strong overall. Moreover, the average rise in new orders over the first three months of 2018 was the strongest since the third quarter of 2014. (…)

The month rounds off a quarter in which the PMI surveys indicate that the economy grew at an annualised rate of approximately 2.5% (though official GDP data are likely to come in at least 0.5% weaker, due to seasonality issues). (…)

• Eurozone economic growth slows further in March

The final IHS Markit Eurozone PMI® Composite Output Index posted 55.2 in March, down from 57.1 in February and below the earlier flash estimate of 55.3. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year.

National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month.

March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signalled in Germany, France, Italy and Ireland. The pace of expansion held steady in Spain. Growth in new orders remained sufficient to test capacity, however, as indicated by a further solid increase in backlogs of work.

Companies responded to the increase in outstanding business by raising employment for the forty-first consecutive month during March. Jobs growth remained among the best seen over the past decade, despite easing to its weakest since last September. Rates of increase moderated in all of the nations covered except Spain. Job creation was also underpinned by solid business optimism in March, with manufacturers and service providers both maintaining positive outlooks for the coming 12 months. Although the combined degree of confidence dipped to a four-month low, it stayed well above its post-financial crisis average.

Price pressures moderated in March. Output charge inflation eased to a three-month low, while costs increased at the slowest pace since last September. (…)

The eurozone economy came off the boil in March, though continued to run hot. Although the final PMI numbers showed the weakest rise in business activity since the start of last year, adding to signs that the growth spurt has peaked, the surveys are still indicative of the economy growing at an impressive 0.6% quarterly rate in March, down from a clearly unsustainably rapid 0.8-0.9% rate around the start of the year. (…)

Gauging the true extent of any slowdown is consequently difficult due to the disruptions to business from bad weather in recent months. April’s PMI data will therefore be particularly important in ascertaining true underlying growth momentum and in providing a steer on the likely timing of any ECB policy changes.

• China’s output growth eases across both manufacturing and service sectors

The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated that total Chinese business activity expanded at the slowest pace for four months at the end of the first quarter. Notably, the Composite Output Index fell from 53.3 in February to 51.8 in March, to signal only a modest pace of expansion.

The dip in the headline index was driven by weaker increases in output across both the manufacturing and service sectors during March. Furthermore, rates of growth slipped to four-month lows in both sectors. At 52.3 in March, the seasonally adjusted Caixin China General Services Business Activity Index fell further from January’s multi-year peak, having slipped from 54.2 in February. The latest reading pointed to a modest increase in services activity that was softer than the long-run trend. Growth in manufacturing output was also slightly weaker than that seen on average over the series’ 14-year history.

In line with the trend for activity, manufacturers and service providers both noted slower upturns in new order volumes during March. Moreover, rates of growth were identical and modest across both sectors. Services companies generally linked higher sales to new client wins and new offerings, but some cited concerns over exchange rate movements and lower tourist numbers. Consequently, softer rises across both monitored sectors led to the slowest expansion in composite new business for six months at the end of the first quarter.

Employment trends deteriorated across both sectors during March. Services companies added to their payrolls at a marginal pace that was the weakest in the current 19-month sequence of expansion. At the same time, job shedding intensified at goods producers, with workforce numbers declining at the fastest rate since last August. As a result, composite employment fell for the first time since last October, albeit at a marginal pace.

Outstanding business increased slightly at services companies, following broadly stagnant backlogs over the opening two months of the year. Meanwhile, unfinished workloads increased for the twenty-fifth month running at manufacturers, and at a stronger rate than in February. At the composite level, the amount of work-in-hand (but not yet completed) rose at a pace that, though modest, was the second-fastest since January 2017.

Services companies based in China signalled a further increase in input costs during March. That said, the rate of inflation was the slowest recorded for four months and moderate overall. Cost burdens also increased at a weaker pace across the manufacturing sector, where prices rose to the least extent for nine months. Overall, input costs grew at the softest pace since last July.

Chinese companies continued to increase their selling prices in March as part of attempts to pass on higher cost burdens to clients. Although both manufacturers and services companies recorded slightly faster rates of charge inflation compared to February, increases were modest overall.

While the level of positive sentiment strengthened to a one-year high at manufacturers, optimism across the service sector dipped to a six-month low in March. At the composite level, business confidence edged up fractionally to the highest for nine months.

EARNINGS WATCH

We already have 22 companies in and 77% have exceeded expectations. Twelve of the 22 are in Consumer Discretionary (6/67%) and Consumer Staples (6/83%). Another 6 are in IT (83%) and 4 in Industrials (75%). Beat rates on revenues are similar. The surprise factor is a big +8.6% overall on EPS and +1.7% on revenues.

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