THE “GOOD AND EASY TO WIN” WAR
The European Union is preparing punitive tariffs on iconic U.S. brands produced in key Republican constituencies, raising political pressure on President Donald Trump to ditch his plans for taxing steel and aluminum imports.
Targeting 2.8 billion euros ($3.5 billion) of American goods, the EU aims to apply a 25 percent tit-for-tat levy on a range of consumer, agricultural and steel products imported from the U.S. if Trump follows through on his tariff threat, according to a list drawn up by the European Commission and obtained by Bloomberg News. The list of targeted U.S. goods — including motorcycles, jeans and bourbon whiskey — sends a political message to Washington about the potential domestic economic costs of making good on the president’s threat. (…)
Goldman Sachs Group Inc. delivered a comprehensive critique of Donald Trump’s planned metal tariffs, saying they risk damaging the world’s biggest economy by raising costs just as price pressures build, hurting allies more than others, and creating a two-tier global market.
“Import tariffs make the U.S. less competitive by raising the prices of raw materials,” the New York-based bank said in a report received on Tuesday. It added: “By imposing across-the-board tariffs to all steel and aluminum imports, the larger economic impact is on Canada, Mexico and the EU, and it ironically eases the economic impact to China and Russia.” (…)
(…) Although contractual mechanisms will help many manufacturers, we expect that even well-protected companies will have to contend with a lag between the time that input costs rise and customer prices can be reset. During this brief period, margins will tighten, particularly among companies using last-in-first-out inventory reporting.
Cash flow also will decline because of an increase in working capital deployment for more expensive inventory. We expect that the new tariffs, if implemented as planned, will have the greatest effect on operating performance in the second and third quarters of 2018. Companies will need to hold more expensive inventory because of higher steel prices, resulting in higher working capital usage.
Moreover, US companies that had expected to be more competitive in export markets in industries will be hurt as they are forced to raise prices, reducing their ability to compete with foreign rivals. (…)
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Stocks Rise as Trump Tariff Plan Faces Opposition Global stocks extended gains following signs of opposition in Washington to planned U.S. tariffs on steel and aluminum.
(…) House Speaker Paul Ryan broke with President Donald Trump over his decision to impose tariffs on imported aluminum and steel products and the top Republicans overseeing trade policy are circulating a letter warning that tariffs are a bad idea. (…)
Europe’s auto sector led gains on Tuesday, climbing 1.9%. The sector generates roughly 23% of revenue in the U.S., according to FactSet, making the country its biggest source of revenue. (…)
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Trump Says He Won’t Back Down After Ryan Breaks With Him on Tariffs
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Cohn Tries to Head Off Trump Tariffs With White House Summit
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David Rosenberg:
Heavy-Duty Truck Orders Soared 76% in February
North American fleet owners last month ordered 40,200 Class 8 trucks, the vehicles used to haul goods long distances, a 76% jump compared to the same month in 2017, according to preliminary figures from freight analysts FTR. (…)
Although February orders fell back about 15% from January, order levels remained higher than in any month last year from October to December, the season when big fleets typically place the bulk of their orders. Last month was the eighth-best order month on record, according to ACT Research, which reported similar figures.
The orders are spread across fleets of all sizes, as carriers big and small move to take advantage of a forecast 4% increase in truckload freight in 2018, said Don Ake, FTR’s vice president of commercial vehicles. The firm has raised its 2018 production forecast to 330,000 vehicles, up from 320,000. (…)
WAGES, INFLATION WATCH
Source: The Pain Report, Bloomberg (via The Daily Shot)
THE COMPOSITE PMIs
Business activity across the U.S. service sector expanded sharply in February, according to the latest PMI data. The upturn in output accelerated to the fastest since August 2017. In addition, greater client demand led to a steep rise in new business, which rose at the strongest pace in almost three years. Capacity pressures intensified as a result of the upswing in demand, with backlogs of work accumulating to the greatest extent since March 2015.
Meanwhile, rates of both input and output price inflation accelerated, with the former reaching the fastest since June 2015.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 55.9 in February, up from 53.3 in January. Following a nine-month low in the previous survey period, the rate of expansion in business activity picked up to the fastest since August 2017. Service providers generally attributed the sharp rise in output to greater client demand.
More favourable demand conditions drove the latest rise in new business, with panellists linking the upturn to the acquisition of new clients and investment in new facilities. Moreover, the rate of growth accelerated for the second consecutive month to the quickest in almost three years.
On the prices front, cost burdens faced by service providers continued to rise in February. The rate of input price inflation accelerated to the fastest since June 2015. Where higher input costs were reported, panellists commonly linked this to higher fuel and raw material prices.
Meanwhile, amid larger cost burdens and greater client demand, average charges also rose further as firms protected margins. Moreover, the pace of inflation quickened to the sharpest for five months.
In line with expansions in output and new business, firms stepped up their hiring in February. Higher employment levels were commonly attributed to greater capacity requirements, with the latest increase in payroll numbers reaching a six-month high.
Capacity pressures were also reflected in a solid rise in the level of outstanding business. The rate of order book accumulation strengthened for the third successive month to reach the highest in almost three years.
The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index rose to 55.8 in February, from 53.8 in January. Despite the manufacturing sector registering a slightly slower output expansion, private sector growth was driven by service providers who signalled a sharp upturn in business activity.
So far, the two PMI surveys point to the economy expanding at a steady 2.5% annualised rate in the first quarter.
With growth of new orders across the two sectors collectively growing at the fastest rate for three years, March could also prove to be a good month for business activity, rounding off a solid opening quarter or the year.
Capacity is clearly being strained by the upturn in demand, as indicated by the largest build-up of uncompleted orders for nearly three years and reports of increasingly stretched supply chains.
Encouragingly, business optimism about the year ahead has risen to one of the highest seen over the past three years, suggesting firms will remain in expansion mode to take advantage of the upturn.
Hiring and business investment should therefore continue to rise in coming months.
The concern is that prices continue to rise as demand outstrips supply. Average prices charged for goods and services showed the largest monthly rise since September 2014, which is likely to feed through to higher consumer price inflation.
The final IHS Markit Eurozone PMI® Composite Output Index posted 57.1 in February, down from January’s near 12-year high of 58.8, but well above the series average of 53.0.
The manufacturing sector again registered stronger output growth than services. Both sectors also continued to enjoy the best periods of expansion for seven years, despite seeing rates of increase in output and new orders easing across the board in February.
By country, rates of output growth were solid despite mostly slowing since January. Germany (three-month low) topped the rankings, followed by France (five-month low) and then Spain (eight month high). Rates of expansion in Ireland and Italy slipped to four- and three-month lows respectively.
The level of new business in the euro area economy expanded solidly in February. Backlogs of work subsequently rose, indicating that firms on balance continued to lack sufficient capacity to meet demand. However, rates of increase in new and outstanding business both eased to six-month lows. (… )
Staffing levels increased to one of the greatest extents over the past seven years, albeit less so than in January. Employment rose across the nations covered, with accelerations in France and Spain.
Price pressures remained elevated in February, despite rates of increase in costs and output charges both moderating. All of the nations covered saw both input costs and selling prices continue to rise.
The final IHS Markit Eurozone PMI® Services Business Activity Index posted a three-month low of 56.2, down from January’s near ten-and-a-half year high of 58.0 and the flash estimate of 56.7. (…)
The increase in new business at euro area service providers also remained solid, albeit the weakest in six months. (…)
The eurozone economy looks to have hit a speed bump in February after a stellar start to the year. It’s too early to read too much into the February fall in the PMI, and some pull-back from January’s high was always on the cards. It’s more appropriate to look at the elevated levels still being recorded by the surveys. So far this year, the PMI is indicating that the eurozone is on course for the strongest quarterly expansion for 12 years, consistent with GDP rising at a buoyant quarterly rate of 0.8-0.9%.
Inflationary pressures are more varied, however, with Germany seeing an especially strong upward trend in prices while France and Italy are notable in seeing companies report greater difficulties in passing higher costs on to customers.
The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a further strong rise in overall Chinese business activity in February, despite the pace of expansion softening since January. At 53.3 in February, the Composite Output Index fell only slightly from a seven-year record of 53.7 at the start of the year.
Activity continued to expand across both the manufacturing and service sectors in China during February, albeit at weaker rates than recorded at the beginning of the year. Nonetheless, growth in services activity held close to January’s 68-month record and remained solid overall, as shown by the seasonally adjusted Caixin China General Services Business Activity Index declining only slightly from 54.7 to 54.2 in February. Meanwhile, manufacturing output increased at a pace that, though modest, was the second-fastest seen in the past year.
While manufacturers registered a slightly stronger increase in new orders midway through the first quarter, growth in new business placed at services companies softened slightly. Nonetheless, sales rose solidly across the service sector overall, with a number of firms commenting that greater efforts to secure new clients and new projects had lifted sales. At the composite level, however, growth in new work edged down for the second month in a row.
Sustained job creation at service providers largely offset a decline in manufacturing headcounts during February, leaving overall employment little-changed from the previous month. Employment rose modestly at services companies, amid reports that rising business requirements had led firms to hire additional workers. In contrast, goods producers cut their payrolls for the fifty-second month running, albeit only slightly. (…)
Chinese companies continued to report higher input costs in the latest survey period. The rate of input price inflation registered at manufacturing companies was sharp overall, despite softening to a seven-month low. Meanwhile, service providers saw a solid rise in cost burdens despite the pace of inflation easing from January’s 69-month record. Higher input prices were generally linked to greater costs for food, fuel, raw materials and salaries. However, softer rises across both sectors led composite input prices to increase at the slowest rate for six months.
Although cost burdens continued to rise strongly, services companies raised their charges at a modest pace that was only slightly stronger than that recorded in January. Manufacturers meanwhile increased their selling prices at a marginally quicker, albeit still modest, rate. The pace of composite output charge inflation therefore accelerated slightly in February, but was moderate overall.
TECHNICALS WATCH
According to Lowry’s Research, yesterday was an 80% Up Day which, unlike a 90% Up Day or consecutive 80% Up Days, “is likely not enough to suggest the emergence of the strong Demand needed for a sustained rally.”
Merrill Lynch still sees US investors as being too bullish.
Source: BofAML (via The Daily Shot)
North Korea willing to denuclearise in exchange for security guarantee