U.S. Services PMIs
S&P Global: Business activity growth accelerates to seven-month high in January
The seasonally adjusted final S&P Global US Services PMI Business Activity Index posted 52.5 in January, up from 51.4 in December, but slightly lower than the earlier released ‘flash’ estimate of 52.9. The latest reading signalled a modest expansion in output, with the rate of growth accelerating for the fourth month running to the fastest since June 2023. Greater business activity was commonly linked to stronger demand conditions and a faster upturn in new orders.
The key driver of faster growth was the financial services sector, where looser financial conditions tied to expectations of lower interest rates spurred greater activity in January. Households are also benefitting from loosened financial conditions,
driving renewed growth in consumer-facing services.Services firms recorded a third successive monthly increase in new business, the pace of growth quickening to the sharpest in seven months. Although slower than the series average, the expansion was attributed to fruitful advertising campaigns and greater customer activity.
In line with a rise in total new sales, new business from abroad returned to growth in January. Albeit only marginal, the rate of expansion was the steepest since August 2023 amid stronger demand conditions in key export markets.
Although new business growth strengthened, service providers reportedly sought to price competitively and some offered concessions to customers. Subsequently, the rate of charge inflation slowed to the softest in the current sequence of increase that began in June 2020. Moreover, the uptick in selling prices was only marginal overall.
Input costs continued to rise at a sharp pace in January, however. Panellists attributed higher operating expenses to greater supplier, fuel and transportation costs, alongside increased wage bills. That said, the pace of cost inflation was slower than in December and weaker than the historic trend rate.
Greater new order inflows helped support stronger business confidence among US services firms at the start of the year. Output expectations for the year ahead picked up to the highest since June 2023, with the degree of optimism in line with the historic series average. Investment in advertising campaigns and the introduction of new service lines reportedly buoyed firms’ sentiment.
Meanwhile, a renewed rise in backlogs of work spurred services companies to expand staffing numbers during January. The rise in backlogs of work was the quickest since March 2023. That said, the rate of job creation was only marginal and eased from December, as some firms reported struggles retaining employees or replacing leavers.
The final S&P Global US Composite PMI Output Index posted 52.0 at the start of the year, up from 50.9 in December, to signal a modest rise in business activity and one that was the sharpest since July 2023. An expansion in service sector output counteracted a decrease in manufacturing production.
The rise in new business was broad-based, however, as manufacturers and service providers saw a moderate increase in client demand. The rate of growth was the quickest in seven months, despite being weighed down by a second successive monthly drop in new export orders.
With bad weather having curbed some economic activity in January, February should see some further improvement in overall performance.
The ISM:
In January, the Services PMI® registered 53.4 percent, 2.9 percentage points higher than December’s seasonally adjusted reading of 50.5 percent. The composite index indicated growth in January for the 13th consecutive month after a seasonally adjusted reading of 49 percent in December 2022, which was the first contraction since May 2020 (45.4 percent).
The Business Activity Index registered 55.8 percent in January, matching the seasonally adjusted reading of 55.8 percent in December. The New Orders Index expanded in January for the 13th consecutive month after contracting in December 2022 for the first time since May 2020; the figure of 55 percent is 2.2 percentage points higher than the seasonally adjusted December reading of 52.8 percent.
The Prices Index registered 64 percent in January, a 7.3-percentage point increase from December’s seasonally adjusted reading of 56.7 percent. (…)
Ten industries reported growth in January. The Services PMI continues to indicate sustained growth — and at a faster rate in January — for the sector.
Wells Fargo: Fire is Not Out
The prices paid component jumped to 64.0 in January from 56.7 in December in what marked the largest monthly percentage gain since August 2012.
Source: Institute for Supply Management and Wells Fargo Economics
The biggest jump in prices paid in over a decade is hardly consistent with returning inflation to the Fed’s 2.0% target over time. That comes in the wake of last week’s blockbuster January jobs report which showed average hourly earnings growth of 0.6% in January, double the expected gain. It is less clear the wage-price spiral has been fully averted.
The narrative that the upward march in prices has been arrested is being called into question. Fifteen services industries reported an increase in prices paid during the month of January, led by Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Construction and other services. The only industry reporting a decrease in prices for January was Agriculture.
Taking stock of where services sector activity stands today can feel somewhat at odds with the rapid tightening campaign the Fed embarked on over the past two years. That is, despite lifting rates at the fastest pace since the 1990s, hiring has accelerated and price pressure can still be found, which emphasizes the call for patience. (…)
Data on Friday showed that employers added over 600K new jobs in the past two months alone. That’s equivalent to about a quarter of the employment gain in the past 12 months and is at odds with the slowing trend.
A sturdy labor market in itself isn’t a problem for the Fed, yet if it prevents wage growth from continuing its downward trend, it could be a hurdle for a Fed that’s gearing up to ease policy.
A respondent from the utilities’ industry, for example, made reference to a still-competitive wage environment; “The district is seeing higher-than-normal turnover as workers are being aggressively pursued by districts offering higher wages.” (…)
The service sector entered the year with a good amount of momentum. The leap in prices paid on its own won’t prevent the Fed from embarking on an easing cycle, but it throws more cold water on the idea that rate cuts are imminent. It also helps justify the Fed’s patient position.
I put more weight to S&P Global’s survey:
Input costs continued to rise at a sharp pace in January, however. Panellists attributed higher operating expenses to greater supplier, fuel and transportation costs, alongside increased wage bills. That said, the pace of cost inflation was slower than in December and weaker than the historic trend rate.
Service providers reportedly sought to price competitively and some offered concessions to customers. Subsequently, the rate of charge inflation slowed to the softest in the current sequence of increase that began in June 2020. Moreover, the uptick in selling prices was only marginal overall.
The ISM data, confirmed by the commentaries, mostly reflect the shipping disruptions in the Red Sea and the Panama canal, seemingly absorbed by service providers.
Fed Says Banks Tightened Credit Standards in Fourth Quarter
The net share of US banks that tightened standards on commercial and industrial loans for medium and large businesses compared to the prior period dropped to 14.5%, from 33.9% in the third quarter, according to a Fed survey of lending officers released Monday. That was the smallest such share since 2022.
While demand for credit remains weak, the net share of banks reporting weaker demand for C&I loans among large and mid-sized firms declined to 25%, an improvement from the third quarter [31%]. (…)
The survey, conducted between Dec. 18 and Jan. 9, also revealed that 22% of banks reported weaker demand for C&I loans from small firms, compared to 49% in the previous quarter.
Overall, still tight conditions, but less so.
First Bank of Canada Rate Cut Seen in April, Market-Participant Survey Suggests The median from 27 responses indicated the first cut of a quarter-point, to 4.75%, would come in April. By December, a median of 27 responses had the Bank of Canada’s policy rate sitting at 4%.
(…) Since the survey was conducted, data indicated that inflation accelerated in December, to 3.4% from 3.1% in the prior month, and the economy produced growth at a faster clip in the fourth quarter than the Bank of Canada had forecast. Those results prompted some economists to push back their timeline for projected rate cuts, to closer to midyear or the third quarter. (…)
The median from 26 responses suggested Canada would record growth in 2024 of 0.8%. In another question, the median response from 25 questions indicated that participants believed there was a roughly 50% probability of a recession in the first half of this year.
The Bank of Canada sets the policy rate to achieve and maintain 2% inflation. Over 40% of respondents predicted inflation would be in the 2% to 3% range at the end of this year, while over a quarter, or 26.4%, indicated it would be in the 1% to 2% range. (…)
China Property Projects Set to Receive Funding Thousands of real-estate projects in China are set to receive funding under Beijing’s new “whitelist” financing program, as policymakers intensify efforts to rescue the property sector from a deepening liquidity crisis.
Thousands of real-estate projects in China are set to receive funding under Beijing’s new “whitelist” financing program, as policymakers intensify efforts to rescue the property sector from a deepening liquidity crisis.
By the end of January, 170 cities in China’s 26 provinces had proposed their first batch of more than 3,000 favored projects to commercial banks, with a total 17.86 billion yuan ($2.48 billion) of loans already earmarked for 83 such projects, state media reported Sunday, citing official sources.
However, analysts doubt the effectiveness of the mechanism, cautioning that it would be hindered by banks’ reluctance to lend to the crisis-hit sector due to worries over developers’ profits and asset quality. Analysts also say the new funding scheme might be “too little, too late,” considering the potential funding gap for China’s unfinished presold homes. (…)
China’s 100 largest developers recorded a deep slump in new-home sales in January, according to data provider China Real Estate Information. These large developers sold homes valued at $32.83 billion, down 34% from a year earlier, marking the worst month of sales since at least July 2020, when the data provider changed how it calculates them.
Of the 3,218 projects on the whitelists, 84% are from private builders and companies with diversified ownerships, the state-run China Real Estate Business Weekly reported. These include cash-strapped Country Garden Holdings, with more than 30 projects across China included in the funding scheme, according to state-owned China Securities Journal.
(…)
I would not worry about “banks’ reluctance to lend” in China. Beijing is adept at moral suasion… And you’ve got to start somewhere, somehow, to get the ball rolling again. It’s a process.
Speaking of moral suasion:
(…) Some $7 trillion of value has been wiped off Hong Kong and China equities since their peaks in 2021 and piecemeal approaches to support the economy and stabilize markets have so far failed to lift sentiment. For policymakers, it’s important to stabilize the stock market to avoid further hurting consumer confidence as China enters the weeklong Lunar New Year holiday.
“The news that the nation’s number one is holding a meeting is an encouraging development as it shows that the plunge is getting close to punching through the authorities’ comfort level,” said Li Weiqing, fund manager at JH Investment Management Co. “It gives me the impression that they are doing everything they can, apart from calling out to the market — now is the time to buy.”
The report on the Xi meeting followed a flurry of supportive announcements earlier in the day, including a vow by Central Huijin Investment Ltd., the unit that holds Chinese government stakes in big financial institutions, to buy more exchange-traded funds. Every effort will be made to maintain stable market operations, the securities watchdog said in a follow-up comment. (…)
As the slump extends, Xi has shown signs of becoming increasingly involved in the nation’s financial and economy policies, including making an unprecedented visit to the central bank late last year. (…)
“The fact that a special meeting may have been called could indicate that things have become so bad that it needs to be reported to the top,” said Xu Dawei, fund manager at Jintong Private Fund Management in Beijing. “If there were to be a report from the state media on this, I would say with confidence that this is the pivot point, as concerted actions are also now seen.”
One of my favorite technical indicator (EMA 13,34) has not turned yet on the FTSE China H Share Index. As you can see, Chinese equities can be very volatile.
- Top Chinese Hedge Fund Banxia Slashes Stocks for ‘Survival’ in Rout Li Bei’s fund decided to ‘lose an arm’ as declines deepen
A top Chinese macro hedge fund said it slashed stock positions last month as the nation’s market rout deepened, taking losses after acknowledging mistakes betting on a rapid economic recovery. (…)
Banxia recognized its mistakes two weeks into the year, realizing it “must lose an arm for survival,” the firm, led by founder Li Bei, said in the Feb. 4 letter seen by Bloomberg, using a Chinese proverb. (…)
Other macro hedge funds have been caught out by China’s stock market slump. Veteran investor Chua Soon Hock decided to shut his Asia Genesis Macro Fund last month after wrong-way bets on Chinese and Japanese stocks inflicted “unprecedented” losses. (…)
A “vicious cycle” has developed in the market, after stock indices fell below so-called knock-in levels of “snowball” derivatives that would likely impose losses on investors, the letter said. The widening discount in stock-index futures prompted some quantitative hedge funds’ market-neutral products to unwind trades and sell small-cap stocks.
The falling small caps led to declines in the quant products, fueling redemptions and then further reductions in their exposure, according to the letter. The exit from such stocks by quants, which Banxia estimated held 1 trillion yuan at the start of the year, was “only less than 20% done.” (…)
The Banxia Macro Fund fell 7.8% in January, after a 14.7% decline last year, according to the letter. Last year it was ranked the best performer among multi-asset funds running at least 10 billion yuan for the previous five years, according to Shenzhen PaiPaiWang Investment Management Co.
The fund has lowered its risk appetite and will keep its net equity exposure below 35% unless opportunities emerge, the letter said. That compared to its target range of as much as 70% last month.
Before the economy strengthens and the property market stabilizes, “we’re prepared for a protracted war,” the letter said.
投降? (Capitulation?)
Small caps are down 68% in one year:
Remember the debate in 2009-11 about the shape of the U.S. recovery, L-shape, U shape, W shape? Happening in China now with Goldman Sachs the first to discuss it:
China real estate activity levels peaked in 2021, and recent data suggest that the downturn over the past 3 years is not showing signs of abating, despite multiple rounds of policy easing, with home prices and sales volume continuing to fall. (…)
Based on data from the Chinese National Bureau of Statistics (NBS), December 2023 nationwide property sales value was -17% yoy, and the 70-city house price data showed that the weighted average property price change was -2.4% mom annualized (seasonally adjusted by GS).
That said, despite the lack of recovery, we believe that the China property sector is on an “L-shaped” path.
As noted by our China economics team, the slowdown in property activity has probably undershot underlying demographic demand, with Gross Floor Area (GFA) sold and GFA new starts down 38% and 52% in 2023 compared with 2021 levels, respectively. These suggest that the fastest pace of decline in sales and new project starts is likely behind us.
China on cusp of next-generation chip production despite US curbs SMIC and Huawei plan to make new 5nm processor, supporting Beijing’s goal for advanced semiconductors
The FT learned that SMIC will soon be able to “use its existing stock of US and Dutch-made equipment to produce more-miniaturised 5-nanometre chips.” Not the current cutting-edge 3nm chips, yet.
According to the FT, “SMIC has increased its current 7nm production capacity to make more Kirin chips and AI GPUs. Huawei’s 7nm Ascend 910b chip is considered by analysts and industry experts to be among the most promising alternatives to Nvidia’s market-leading AI processors.”
EQUITIES
That’s about the “odds” in Edge and Odds:
Source: Mensur Pocini; Julius Baer
Momentum is one of the primary reasons why some investors give credence to calendar-based chart trends like the January barometer. The thought process here is that a bullish (or bearish) start will set the market in that direction for the rest of the year.
Based solely on the past performance of the US market, an up January has generally been bullish for stocks. Moreover, the January barometer has held true roughly 75% of the time since 1945 when January experienced market gains. Notable exceptions followed extended periods of market growth. Conversely, a down January has not been a reliable predictor of an overall weak year.
Why might up Januarys be better predictors than down ones? One reason may be the historical proclivity of stocks to rise. US stocks have finished higher in all but 18 out of 78 years since 1945. So, the fact that stocks finish higher for the year so often after both a positive and negative January may simply be the result of this directional bias.
Indeed, there is a strong correlation between positive January S&P 500 performance and positive market performance for the entire year. During only 2 years since 1945 have stocks dropped sharply (a price decline of more than 10% for the full calendar year) after a positive January, with both instances occurring at the end of powerful multiyear market advances (1966 and 2001).
