SERVICES PMIs
USA: Sharp upturn in business activity, but inflationary pressures strengthen to record high
US service providers recorded a steep expansion in business activity during April, according to the latest PMI™ data. The rate of output growth eased to the slowest for three months, but was sharp overall. Similarly, higher selling prices weighed on client spending as the pace of new business expansion softened. Nonetheless, demand conditions remained strong and sparked the fastest rise in employment for a year as backlogs mounted at a near-record pace.
Meanwhile, input and labor shortages pushed up cost burdens to the greatest extent on record. In response, firms raised their output charges notably and at the sharpest pace since data collection began in October 2009. Concerns regarding inflation weighed on business confidence, which slipped to the lowest in six months.
The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 55.6 in April, down from 58.0 in March, but higher than the earlier released ‘flash’ estimate of 54.7. The latest upturn in business activity was sharp overall and quicker than the series average, despite easing to the slowest in three months. Where firms reported a rise in output, this was linked to strong demand conditions and a further increase in new orders. The loosening of COVID-19 restrictions boosted customer spending, according to panellists.
The rate of growth in new business also softened to a three-month low at the start of the second quarter, but was steep. Although higher selling prices dampened demand slightly, firms reported healthy sales volumes to new and existing clients.
Alongside strong domestic demand, new export orders rose at the quickest rate since data collection for the respective seasonally adjusted series began in September 2014. The easing of restrictions in key export markets reportedly boosted footfall and customer activity.
At the same time, cost burdens rose substantially in April. Higher wage, transportation and material costs drove up input prices. Service providers mentioned greater food, energy and fuel costs in particular. The rate of input price inflation accelerated for the third successive month to the fastest in 11-and-a-half years of data collection.
Subsequently, services firms increased efforts to pass-through higher cost burdens on to clients through hikes in selling prices. The pace of charge inflation accelerated notably, and for the fourth month running, to the fastest on record.
Meanwhile, further upticks in new orders and business requirements resulted in another increase in employment at service providers. The rate of job creation quickened to the sharpest for a year and was sharp overall.
Backlogs of continued to rise, thereby extending the current sequence of expansion that began in July 2020. Although employment increased, some firms highlighted that ongoing labor shortages hampered progress with depleting incomplete business. Companies also stated that input delivery delays put pressure on capacity. The rate of growth in unfinished business was broadly in line with that seen in March and the second-fastest on record.
Services firms remained upbeat regarding the outlook for output over the coming year in April. Hopes of increased client demand and greater opportunities to fill vacancies spurred optimism. That said, the degree of business confidence slipped to a six-month low amid concerns regarding inflation.
The S&P Global US Composite PMI Output Index posted 56.0 in April, down from 57.7 in March. Although slightly slower than the upturn at the end of the first quarter, the rise in overall output was sharp overall. A faster expansion in manufacturing production was offset by softer service growth.
Similarly, the overall expansion in new business eased following a slower upturn in service sector new orders. Nonetheless, the rise in new sales was sharp as domestic and foreign client demand strengthened. New export orders rose at the fastest pace since May 2021.
Meanwhile, inflationary pressures intensified further in April. Input prices and output charges increased at the sharpest rates on record. Material and labor shortages, alongside greater transportation costs drove the rise in prices.
Although firms registered a further rise in employment, labor shortages continued to be highlighted. As a result, backlogs of work grew at a sharp pace.
Services wages appear to have crested at 5% YoY…
…although their Q1 pace was 6.3% annualized:
Eurozone: Service sector drives eurozone growth higher in April as manufacturing slowdown continues
April survey data highlighted the growing emergence of a two-speed economy across the euro area as faster service sector growth starkly contrasted with a slowdown across manufacturers. Nonetheless, private sector output within the eurozone grew at the fastest pace in seven months at the start of the second quarter as demand continued to be buoyed by fewer COVID-19 restrictions.
Signs of fragility were also apparent across the composite data as new export orders declined for a second successive month, while business confidence remained well beneath February’s level (and therefore prior to Russia’s invasion of Ukraine) as rising inflation and heightened geopolitical tensions both weighed on sentiment.
Prices data meanwhile highlighted the intense inflationary environment across the eurozone in April as prices charged for goods and services increased at an unprecedented rate amid steep cost pressures.
The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index rose to 55.8 in April, up from 54.9 in March and indicative of an accelerated expansion in eurozone economic activity that was the strongest since September 2021.
That said, the improvement in the headline figure masked widely divergent trends at the sector level, with data revealing sharp services activity growth but a sluggish increase in manufacturing output. In fact, the rise in goods production was marginal and the slowest in the current 22-month growth period. By contrast, business activity among services firms rose at the quickest pace in eight months.
By country, latest survey data showed France as the fastest-growing monitored eurozone constituent. The French private sector posted its sharpest expansion in over four years during April. Quicker upturns were also seen in Spain and Italy, while Germany bucked the trend as growth here slowed to a three-month low.
According to surveyed businesses, the lifting of COVID-19 restrictions in recent months continued to support greater levels of activity in April, with some companies catching up on work and reporting greater client appetite. Incoming new business volumes rose strongly and at a faster pace at the beginning of the second quarter amid a further improvement in general demand conditions across the euro area.
That said, increases in new orders were a reflection of domestic market gains in April as new export orders (which includes trade between euro area countries) fell. The reduction, albeit only modest, was the second in successive months and the sharpest since November 2020. Sub-sector data showed a stagnation in overseas demand for services and a continued contraction in goods exports.
The strong trend in jobs growth seen since around the middle of last year continued in April as employment rose at the fastest pace in five months. Overall, the increase in staffing levels was considerably stronger than its historical average, with robust hiring activity recorded across both monitored sectors.
Nevertheless, operating capacities were stretched further during April, as evidenced by a fourteenth successive monthly increase in backlogs of work. The rate of accumulation in outstanding business edged up slightly since March, but remained weaker than the survey highs seen last year.
Regarding prices, latest survey data highlighted intense inflationary pressures across the euro area in April. Input costs rose at the second-sharpest rate in nearly 24 years of data collection, with the rate of increase slowing only slightly from March’s survey record. To protect margins, euro area businesses raised their prices charged to the greatest extent on record (output prices data were first collected in November 2002).
Lastly, business expectations remained somewhat subdued in April, particularly when compared with the levels of optimism seen in January and February. Having slumped to a 17-month low in March, business confidence moved only slightly higher in the latest survey period as the war in Ukraine and concerns surrounding inflation weighed on the outlook.
The S&P Global Eurozone PMI Services Business Activity Index rose to 57.7 in April, from 55.6 in March, signalling a thirteenth successive monthly expansion in services output across the euro area. Moreover, the expansion signalled was the strongest since last August and marked a further improvement from January’s recent low.
Supporting activity was a strong rise in new business during April. The rate of new order growth accelerated to an eight-month high. New export business was unchanged from March, however.
Strong jobs growth continued during the latest survey period and was unchanged from March’s four-month high. Nonetheless, service providers recorded a further increase in their outstanding business volumes.
Steep price pressures remained apparent in April as input costs rose at the second-fastest rate on record. Prices charged for the provision of euro area services rose at the strongest pace on record as firms passed on greater cost burdens to their customers.
Lastly, although the level of business confidence improved since March, it was the second-weakest since November 2020.
The survey data are consistent with GDP rising at a quarterly rate of around 0.7% at the start of the second quarter after signalling a 0.4% rise in the first quarter. (…)
China: Services activity falls at sharper pace in April
The introduction of tighter COVID-19 containment measures in China led to quicker reductions in service sector business activity and overall sales in April. Notably, both activity and new orders fell at the second-sharpest rates since the survey began in November 2005, and were exceeded only by those seen at the initial onset of the pandemic in February 2020. Input costs meanwhile rose solidly, but efforts to attract new business drove a renewed drop in prices charged by services companies.
Encouragingly, business confidence improved slightly on the month, with many firms anticipating that activity levels will rise once pandemic-related restrictions eased. At the same time, service sector employment fell only marginally in April.
The seasonally adjusted headline Business Activity Index slipped from 42.0 in March to 36.2 in April, to signal a second successive monthly fall in services activity. Furthermore, the rate of reduction was the second-sharpest seen in the survey history (behind only February 2020), with companies frequently linking the fall to tighter COVID-19 restrictions and subsequent disruption to operations.
The escalation of measures to contain the spread of the virus, which included restrictions on mobility and lockdowns, also weighed heavily on customer demand at the start of the second quarter. Total new business fell at the second-steepest rate on record (after February 2020), while new export orders declined at the sharpest rate for two years.
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INFLATION WATCH
Yesterday, Bloomberg posted this chart suggesting peak inflation is here.
It may be, but be aware that the Cleveland Fed numbers only show a marginal improvement so far that keeps annualized inflation in the 5-6% range:
The Cleveland Fed explains:
Our inflation nowcasts are produced with a model that uses a small number of available data series at different frequencies, including daily oil prices, weekly gasoline prices, and monthly CPI and PCE inflation readings. The model generates nowcasts of monthly inflation, and these are combined for nowcasting current-quarter inflation. As with any forecast, there is no guarantee that these inflation nowcasts will be accurate all of the time. But historically, the Cleveland Fed’s model nowcasts have done quite well—in many cases, they have been more accurate than common benchmarks from alternative statistical models and even consensus inflation nowcasts from surveys of professional forecasters. (…)
Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.
Outperforming the Fed’s forecasts is not a particularly spectacular achievement… I would have preferred to know how accurately the model forecasts actual inflation.
Fed Lifts Interest Rates by Half Point in Biggest Hike Since 2000 Central bank officials announce plans to start shrinking $9 trillion asset portfolio, another step to tighten policy and lower inflation
(…) Bonds and stocks rallied Wednesday after Mr. Powell said officials aren’t considering an even larger increase of three-fourths of a percentage point, or 75 basis points, at the Fed’s June meeting.
[But] Fed Chairman Jerome Powell said at a news conference that officials broadly agreed that additional half-point increases could be warranted in June and July given current economic conditions. (…)
Fed officials also said they would start shrinking their mammoth holdings of Treasury and mortgage securities passively—by allowing bonds to mature without reinvesting the proceeds into new securities rather than by selling them in the open market.
Officials will allow up to $30 billion in Treasurys and $17.5 billion in mortgage bonds to roll off every month in June, July and August. After that, they will allow $60 billion in Treasurys and $35 billion in mortgage securities to run off every month. Reducing the portfolio serves as an additional way to remove stimulus and lift borrowing costs. (…)
During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do now—by 4 percentage points—without causing a recession. In this case, the central bank will need a number of factors out of its control to break its way, including help from abroad. (…)
“There’s a path by which we would be able to have demand moderate in the labor market” without causing a recession, Mr. Powell said. He later added: “It’s not going to be easy. And it may well depend, of course, on events that are not under our control.” (…)
Brazil’s Central Bank Raises Key Rate to 12.75%, Sees Smaller Rate Increase at Next Meeting The Central Bank of Brazil raised its benchmark Selic lending rate to the highest level in five years and said it would continue with its strategy as long as needed until the country’s rapid inflation starts to slow.
Inflation in Turkey soars to almost 70% as cost of food and transport rises
Soaring inflation threatens to plunge Britain into recession, warns Bank of England
Toronto home sales plunge 27 per cent in April, home prices dip
A little more than 8,000 homes sold last month – down 27 per cent from March and 41 per cent below April of last year – with the biggest declines happening in detached houses in the Toronto suburbs, according to the Toronto Regional Real Estate Board, or TRREB.
The home-price index, which adjusts for pricing volatility and is the industry’s preferred measure of home values, was $1,354,000 in April. That was down 1.6 per cent over March and represents the first monthly decline since October, 2020. From February to March of this year, the index was up 2.7 per cent; in the January period, the typical home price rose 6.4 per cent.
April marked a sharp turnaround for Toronto’s housing market, which over the first two years of the pandemic was characterized by fierce bidding wars and soaring home prices. Today, homes are taking longer to sell. Properties are drawing a handful of showings, if any at all, and some homes are not getting any offers.
“It literally changed overnight,” said Natalie Lewin, a realtor with Re/Max Hallmark Realty Ltd. who has sold homes in Toronto for more than two decades.
(…) some would-be sellers are rushing to put their homes up for sale because they are afraid that the number of buyers will continue to dwindle when the Bank of Canada raises rates again. (…)
In the USA, Redfin says the market remains tight but some signs point to a coming reaction to the 39% jump in the typical homebuyer’s monthly mortgage payment:
- Fewer people searched for “homes for sale” on Google—searches during the week ending April 23 were down 6% from a year earlier.
- The seasonally-adjusted Redfin Homebuyer Demand Index—a measure of requests for home tours and other home-buying services from Redfin agents—was flat year over year during the week ending April 24. It dropped 8% in the past four weeks, compared with a 3% decrease during the same period a year earlier.
- Touring activity from the first week of January through April 24 was 19 percentage points behind the same period in 2021, according to home tour technology company ShowingTime.
- Mortgage purchase applications were down 17% from a year earlier, while the seasonally-adjusted index decreased 8% week over week during the week ending April 22.
- Pending home sales were down 3% year over year, the largest decrease since mid-February.
- On average, 3.5% of homes for sale each week had a price drop. Overall, 14% dropped their price in the past four weeks, up from 11% a month earlier and 9% a year ago. This was the highest share since the end of November.
In Australia:
Building approvals are back to pre-COVID levels in most States
Source: ABS, Goldman Sachs Global Investment Research
ArcelorMittal expects steel consumption to contract as outlook turns gloomier
From Almost Daily Grant’s:
Stateside, conditions for speculative grade corporate borrowers are getting a little hairy. This morning, medical device firm Bioventus shelved a $415 offering of triple-C-plus rated notes after investors balked at the proposed terms, which included a 9.75% to 10% coupon and original issue discount, Bloomberg reports. The reluctance is understandable, considering the triple-C-rated portion of the Bloomberg High Yield Index posted losses for nine consecutive sessions through Tuesday to sit at 10.59%, its highest since summer 2020.
On the better-groomed end of high yield, some 25% of the population of double-B-rated corporate bonds had slumped below 90 cents on the dollar as of Friday, strategists at Barclays find, approaching the highest such tally since the 2008 era.
Also from ADG, underscoring the income squeeze:
Perhaps most concerningly, even smokers are pulling back on their fix. Cigarette sale volumes in the U.S. sank 9.4% year-over-year during the four weeks ended March 26, data from Nielsen show. Coming on the heels of a 7.9% annual contraction in February, the March data are paired against a much easier year-over-year comparison relative to the prior month. Considering that the cigarette industry is thought of as highly price inelastic, those drastic declines underscore the shift in consumer behavior.
EARNINGS WATCH
We now have 368 reports in, an 80% beat rate and a +7.2% surprise factor.
Q1 EPS are seen rising 9.7% (9.3% yesterday) vs 6.4% on April 1. Trailing EPS are now $213.90.
But Q2 estimates are now declining. Growth is now seen at 5.4% (5.6%), down from 6.8% on April 1. Q3 and Q4 estimates are unchanged at 10.5%.
Corporate guidance is on the same pace as at the same time during the first quarter but the number of companies offering guidance is up 43%. Of the 18 additional companies having given guidance, 11 guidd lower, 5 higher and 2 in line.
TECHNICALS WATCH
Yesterday’s surge in the last hour produced an 80%-up day with strong breadth as traders rushed to reposition from deeply oversold conditions.
SentimenTrader’s Jason Goepfert yesterday tweeted “The S&P 500 is on track for more than a 2.25% gain on a day the Fed hiked interest rates. That’s happened only one other time in 40 years. It was March 21, 2000.”
To which Charles Schwab’s Liz Ann Sonders replied “The ultimate top was 3 days later, on 3/24/00”.
CMG Wealth’s 10 indicators are now all colored in red or orange.
The S&P 500 index 100dma has now crossed below its 200dma which is now declining.
- Dr. Copper is signaling an economic downturn is ahead (red arrow bottom right in the lower clip).
Greg Ip: The Postpandemic Normal Is Here and It Isn’t That Special Plunging shares of pandemic beneficiaries such as Amazon, Netflix, and PayPal suggest a more sober view of economy’s transformation
(…) There are parallels with the dot-com bubble that burst in 2000. In both episodes, technology did fundamentally alter our way of life, but the market, aided by the Federal Reserve’s easy money, drove stock prices to levels that assumed these trends would continue indefinitely. They didn’t.
For instance, 35% of employees teleworked at some point in May 2020 because of the pandemic, during the first lockdowns, according to the U.S. Labor Department. The share has been trending lower ever since, reaching 10% in March. This points to a postpandemic normal where people shop, work and live remotely more than before the pandemic, but such activity doesn’t grow especially quickly. (…)
Amazon was on a hiring and building spree throughout the pandemic to keep up with demand, then found in the first quarter it had overhired and overinvested. “We currently have excess capacity in our fulfillment and transportation network,” Chief Financial Officer Brian Olsavsky said last month. “We hired more people and then found ourselves overstaffed when the Omicron variant subsided rather quickly.” (…)
The bigger problem is that digitization was supposed to boost productivity and efficiency throughout the economy, justifying higher wages, higher profits, and less inflation. However, when the pool of potential new customers shrinks but the labor and facilities needed to serve them keeps growing, those efficiencies fade. In the first quarter, productivity fell 1.4%, according to IHS Markit, leaving it no higher than the third quarter of 2020. Work really has changed in the past two years; it is just not a lot more productive.