SERVICES PMIs
USA: Service sector expansion picks up, but demand conditions remain historically subdued
The seasonally adjusted final S&P Global US Services PMI Business Activity Index posted 51.4 in December, up from 50.8 in November and broadly in line with the earlier released ‘flash’ estimate of 51.3. The rate of growth in output accelerated for the third month running and was the sharpest since July. Where an increase in activity was reported, firms linked this to an improvement in demand conditions and a greater rise in new orders. The pace of expansion was only marginal, however, and slower than the series average.
Service providers recorded a quicker expansion in new business at the end of 2023, as the rate of growth picked up to the fastest since June. Although only modest and historically muted, greater new orders were attributed to stronger client demand, with some stating this stemmed from increased advertising spending and a rise in customer referrals.
The overall upturn in new business was dampened by a renewed contraction in new export orders, however. The fall was the first since September and reportedly driven by lower purchasing power among customers in key export markets.
A quicker rise in total new orders led service sector firms to step up their hiring during December, as employment rose at a steeper pace. The rate of job creation was the joint-fastest since June as firms sought to boost capacity in anticipation of greater activity in the coming months.
Increased staffing numbers aided service providers in their efforts to clear incomplete business. Backlogs of work fell for the sixth month running and at the fastest pace since September.
At the same time, greater wage bills and higher food and fuel costs led to a sharper rise in input prices at the end of the year. Cost burdens increased at the most marked pace for three months, with the rate of inflation historically elevated.
Efforts to drive new orders and spur client spending led to a softer uptick in selling prices. The pace of charge inflation remained steep in the context of the series history, but eased to one of the slowest in over three years.
December saw business confidence at service providers tick higher. Although still subdued relative to the series trend, the level of optimism was strong overall. Upbeat expectations for output over the coming year were underpinned by hopes of further upticks in client demand, anticipated reductions in interest rates and investment in advertising and new product development.
At 50.9 in December, the final S&P Global US Composite PMI Output Index was up slightly from 50.7 in November and signalled a marginal expansion in business activity. The rise in output was driven by further growth in service sector activity, with manufacturers posting a renewed decline in production.
Similarly, there was a sectoral divergence in new order trends as service providers recorded a stronger uptick in new sales while goods producers registered a faster fall in new business. Foreign client demand dragged on the overall expansion amid a broad-based drop in new export orders.
On the price front, total input costs rose at a sharper rate in December as operating expenses at manufacturers and service providers increased at faster paces. Despite a steeper uptick in output charges among goods producers, a softer rise at service providers dampened the overall pace of increase in selling prices.
Meanwhile, employment growth at service sector firms outweighed a marginal drop in manufacturing workforce numbers. Pressure on capacity dwindled further as private sector firms depleted backlogs of work at a solid pace.
Canada: Marked contraction of service sector as sales fall again
(…) Weighing on sector performance was an accelerated and marked drop in incoming new business. December’s survey showed that sales fell for a fifth successive month, and to the greatest degree in three years. There were many reports that market demand was subdued, characterised by hesitancy amongst clients in committing to new sales.
Several companies blamed high interest rates as a factor weighing on demand. However, weakness was not confined to the domestic market; new export business declined in December at the steepest rate since April 2021.
Subdued trends in activity and new business inevitably weighed on hiring decisions in December, with employment own marginally for a second month in a row. This was linked in the main to a lack of workloads at units although some firms signalled ongoing difficulties in recruiting suitably qualified workers. (…)
Wages were cited again by panellists as a source of inflation in December. (…)
Eurozone economy’s downturn continues in December
The HCOB Eurozone Services PMI Business Activity Index rose fractionally to 48.8 in December, from 48.7 in November, signalling a modest contraction in services output across the euro area that was broadly similar to that seen previously. Overall, the decline was the fifth in as many months, although the latest contraction was the softest over this sequence.
Demand for eurozone services fell at the end of the year. Having said that, the rate of decline in new business receipts was the lowest since last July. Sales made to foreign clients also contracted, with the decrease quickening since the month prior.
Employment growth was maintained across the euro area services economy. The rate of job creation was unchanged on the month and only marginal. In fact, the expansion in workforce numbers was the joint-second softest since February 2021. Backlogs of work continued to fall, as has been the case since last July.
Business confidence improved during December, rising to its highest level since mid-2023. Nevertheless, growth expectations remained weak by historical standards.Lastly, December survey data showed eurozone services firms were more aggressive with their price setting, despite input cost inflation slowing to a five-month low.
Euro-Area Inflation Picks Up Again as Energy Aid Is Removed
Euro-zone inflation quickened in December, highlighting the rocky path back to 2% foreseen by the European Central Bank as governments remove support for lofty energy costs.
Consumer prices rose 2.9% from a year ago, up from 2.4% in November, Eurostat said Friday. That matched the median estimate in a Bloomberg survey of economists.
The burden from energy eased by much less than in the previous month, driven in large part by Germany’s decision to cover households’ heating bills in the final month of 2022. A measure of core prices omitting such volatile elements fell for a fifth month, to 3.4%. (…)
BTW: Core HICP inflation, excluding energy, food, alcohol and tobacco, fell 0.14% in December.
An index of food-commodity prices created by the United Nations’ Food and Agriculture Organization fell about 10% in 2023, according to data released on Friday.
While the index tracks raw commodity costs rather than retail prices, the steep drop could indicate potential relief on the way for consumers, as food prices ease from a 2022 peak that followed Russia’s invasion of Ukraine and contributed to a cost-of-living crisis in countries across the world. (…)
Chinese Stock Indicator With 100% Success Rate Is Flashing Buy The risk premium of Chinese stocks reaches a level that historically leads to spectacular returns.
With sentiment toward China’s economy and markets as depressed as they are now, perhaps it pays to be a contrarian. And at least according to one measure, there’s a reason for optimism: The risk premium of Chinese stocks has reached a level that historically leads to spectacular returns.
China’s stock market is sinking to the bottom of the global ranking in the first week of 2024 trading. From its peak in 2021, the CSI 300 Index has lost about 42%, comparable to the drawdown during the burst of the stock bubble in 2015.
In contrast, China’s bond market has extended its rally, sending the yield on 10-year notes to 2.5%, the lowest since April 2020. Both markets are telling the same story about the macro weakness in China.
Compared with bonds, Chinese stocks have rarely been so cheap. At about 8%, the earnings yields of the CSI benchmark is 5.7 percentage points above the 10-year yield. Since 2005, the gap has rarely been this big. Similarly, the dividend yield of the stock benchmark has risen above the long-term bond yields for the first time since at least 2005. (…)
There’s been five previous periods in almost two decades that the stock-bond yield gap has reached 5.5 points or more, including during the 2008 financial crisis and the pandemic in 2020. Stocks rose in the following 12 months each time, with a whopping return of 57% on average. (…)
Of course, valuation alone isn’t enough to turn around the market, a painful lesson we learned last year. A positive performance needs earnings to improve, valuation multiples to expand, or ideally, both. For that to happen, the housing market needs to stabilize and deflation needs to give way to modest inflation. So far, neither look promising without more forceful policy support. (…)
Whether China is morally or financially investable remains debatable. But valuation is better as these Alpine Macro charts show:
Good news: Services activity expands at quickest pace for five months in December
Growth momentum across China’s service sector continued to revive at the end of 2023, according to the latest PMI data. Companies signalled solid increases in activity and new business, with the latter expanding at the quickest pace since May. As a result, firms tentatively raised their workforce numbers for the first time in three months, while optimism regarding the year ahead also improved. (…)
Bad news: The year-long slow motion accident is now happening in real time:
Troubled China Shadow Bank Zhongzhi Files for Bankruptcy
Chinese shadow banking giant Zhongzhi Enterprise Group Co. filed for bankruptcy, cementing the rapid downfall of a firm that oversaw more than $140 billion at its peak before succumbing to the property crisis that has wreaked havoc on the world’s second-largest economy.
Zhongzhi said it “obviously” lacked the ability to repay its debts, according to a statement Friday from Beijing’s First Intermediate People’s Court, which accepted the case. An audit found Zhongzhi’s debts total 420 billion yuan to 460 billion yuan ($64.4 billion), compared with assets of 200 billion yuan, according to a letter to investors in November. (…)
While creditors are mostly wealthy individuals rather than financial institutions — limiting the direct impact on the financial system — the collapse exposes potential cracks in the $2.9 trillion trust sector amid disappointing economic growth and a worsening property slump. (…)
China’s highest-profile debt failures in recent years have tended to go through debt restructurings first, avoiding formal bankruptcy filings. HNA Group Co., the conglomerate that collapsed with billions of dollars of debt, completed its restructuring work in 2022. China Evergrande Group, whose default in 2021 accelerated the country’s property debt crisis and which has some $327 billion of liabilities, is still struggling to avoid liquidation and hasn’t filed for local bankruptcy proceedings yet.
Shadow banks like Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. China’s trust industry is a key alternative funding source for weaker borrowers unable to get regular bank loans such as real estate developers and local government financing vehicles. (…)
- Country Garden’s sales in 2023 less than half previous year’s Sharp dip in December points to ongoing woes for Chinese developer
Embattled Chinese property developer Country Garden Holdings’ contracted sales in 2023 plunged to less than half the previous year’s level, with a sharp dip in December underscoring the dire situation facing the company.
Contracted sales are the company’s main source of revenue but the figure for December dipped almost 70% year on year, according to a filing to the Hong Kong Exchange on Thursday evening.
In a brief announcement of unaudited operating data for the final month of 2023, the company said contracted sales reached 6.91 billion yuan ($972.8 million) by value and 680,000 square meters by area. Those figures are down 69% and 76%, respectively, on the year.
Contracted sales are the most important source of funds for developers to service debt. (…)
Contracted sales last year came to 174.3 billion yuan, a 51% decline from the year before. The 2023 figure was about 69% lower than its pre-crisis years of 2021 and 2020. (…)
Of its borrowings, 108.7 billion yuan was repayable by the end of June 2024. (…)
Ronshine China Holdings on Thursday said its 2023 sales dropped 72% from the year before to 16.3 billion yuan.
The company is also facing financial headwinds. It announced on Dec. 15 that it was unable to pay the principal and interest on an offshore bond that became due that day, totaling $425 million. It is still in the 30-day grace period for repayment on this bond, and Chairman Ou Zonghong has pledged to “actively engage with its creditors and seek an overall solution,” but the company has already defaulted on other debt obligations. (…)
Zhenro Properties Group on Wednesday said its sales last year came to 15.3 billion yuan, a 54% drop from the prior year.
The company’s total debt from bank borrowings and bond issuances was 62.9 billion yuan as of June, of which 95% is either due by June 2024 or payable on demand from creditors. Its cash and cash equivalents were slightly over 3 billion yuan. (…)
China Probes EU Liquor, Sinking Shares as Trade Spat Worsens
China is launching an anti-dumping investigation into liquor products like brandy from the European Union, in a relatively modest step after the bloc opened a probe last fall into its electric vehicle subsidies.
The investigation, which Beijing said was prompted by an application from a domestic liquor association, targets French cognac, a niche but lucrative product in China for producers like Pernod Ricard SA and Remy Cointreau SA, and sent their stocks plunging. France was the main backer of Brussels’ probe into Chinese EVs, with French carmakers Renault SA and Stellantis NV particularly exposed to the threat of imports. (…)
The EU’s recent trade actions toward China have extended beyond electric vehicles. Last month, the EU also opened anti-dumping probes into Chinese biodiesel and melamine exports. In November, the bloc imposed provisional anti-dumping duties on imports of some plastics products from China. (…)
Investors Are Rushing to Cash at Record Pace in First Week, BofA Says
(…) While inflows to money markets are typical at the start of each year, the sum was the largest ever for the first week, strategists led by Michael Hartnett wrote in a note, citing EPFR Global data. (…)
For now, cash is maintaining its appeal even after money-market funds received a record $1.2 trillion last year, far above the global inflows to shares, showing investors missed out on 2023’s equity market rally. (…)
