CONSUMER WATCH

From The Transcript:

• “The consumer was slowing down in late summer—we saw it. It was concerning me because I thought it was slowing down to the point where it may be underneath what would imply a stable 2% (plus or minus) growth economy with lower inflation. The good news is, as we came into September and October if you look at the two months together—particularly October—it looks like it’s leveling out. The expectations of our consumers to spend more in the holiday season are up by 7%, which is good” – Bank of America ($BAC ) CEO Brian Moynihan
• “I think that confidence has come up. You saw it rise when the Fed announced they were going to cut rates—even before they actually cut them—consumer confidence moved up a little” – Bank of America ($BAC ) CEO Brian Moynihan
• “Households remain in pretty good shape. And unemployment is extremely low. There has been some real wage gains. Inflation has largely abated. And consumer household debt levels are relatively low by historic standards” – TransUnion ($TRU ) President, CEO & Director Christopher A. Cartwright
• “If you look at consumers’ liquidity position, this is retail consumer, they’re indexing 120 to pre-Covid. So they have good liquidity… If you look at some of the things that’s happening with their savings, they’re saving 100 bps more than they were saving last year. And so that’s putting the consumer in a really, really good place” – Truist Financial ($TFC ) Senior EVP Dontá Wilson

BTW: Walmart Q3 US SSS were +5.3% vs consensus of +3.9%. Traffic +3.1% and average ticket +2.1%. Gross margin increased +42 bps YoY. Q3 EPS: $0.58 (+11.5% YoY) vs consensus $0.53. WMT raised FY24 guidance to an adj. EPS of $2.42-2.47, compared to prior guidance of $2.35-2.43. Net sales growth: +4.8-5.1% vs. +3.75-4.75% prior. Operating income: +8.5-9.25% vs +6.5-8.0% prior.

FYI: WMT EPS up 11.5% during a very good year for consumer spending. P/E is 33x, highest since 2002.

Things Are Quiet in Consumer Credit. Too Quiet. Credit-card delinquencies seem to have peaked, for now

(…) For the first time since 2021, the rate at which new delinquencies were forming actually declined in the third quarter from the prior quarter, according to the Federal Reserve Bank of New York. The four-quarter moving sum of the percentage of balances becoming 30-plus-days past due fell 0.26 percentage point from the second quarter to the third, to 8.79%.

Early data show the trend continuing into the fourth quarter. Jefferies analysts’ tracking of monthly reports on card loans shows that in October, delinquencies were still rising year-over-year, but at a slower pace than the prior month. This is a trend that needs to continue “in order to revert back to historical [delinquency] levels,” the analysts wrote.

Yet there is a missing ingredient, and that is borrowers. By many measures, Americans are hardly gorging on debt right now, as they are often thought to be doing. Moody’s Ratings pointed out that household debt in the third quarter grew slower than nominal gross-domestic product, at 3.8% debt growth from a year earlier versus 4.9% nominal GDP growth.

On an inflation-adjusted basis, total household debt remains more than a trillion dollars below the record high hit at the end of 2008, according to figures calculated by WalletHub. With population growth factored in, it is even relatively lower. Credit-card debt for the average household, for example, is almost 13% off its peak level.

And in the October survey of senior loan officers at banks by the Federal Reserve, banks mostly reported that seasonally adjusted demand for individual or household card loans had remained about the same over the prior three months. One bank even said it saw substantially less demand. (…)

US state payrolls numbers confirm the cooling jobs narrative

(…) Today’s numbers show that Florida employment fell 38k in October relative to its six-month trend growth of 13k. This allows us to approximate that the hurricane effect depressed Florida payrolls by around 51k.

There is the hint of some minor impacts in the Carolinas and Virginia so we can perhaps round that to a 60-65k impact from the hurricane. We also know that strike activity, predominantly at Boeing, subtracted 44k so if we add the hurricane and strike activity to the 12k number that was published as the official non-farm payrolls number for October, we get a figure of 121k (12k+44k+65k).

At first glance you may say that is above the 100k consensus forecast at the time, but that is misleading as economists factored in hurricane and strike activity into their forecasts. Economists also didn’t expect the 112k of downward revisions to August and September payrolls – so the October jobs report was an unambiguously weak report.

Moreover, the data shows 29 states reported negative payrolls growth in October and we certainly didn’t have 29 states impacted by the hurricane and strikes. Only 14 states reported a negative monthly change in payrolls in September so the October state data hints at broader weakness.

What today’s data means is that we have to have 109k as a base for December before we consider any actually payrolls growth – because the 44k striking workers have now returned to work and the approximately 65k people who weren’t counted in October because of the hurricane will be there in the November data.

The current consensus for the 6 December jobs report is for payrolls to increase 175k. It is incredibly early and there are barely a handful of submissions so far, but given 109k of this is the technical rebound, it implies “true” payrolls growth of just 66k (175k-109k). If that is correct the Federal Reserve is likely to cut interest rates again in December.

Personally I am looking at something of the order of 200-225k for the headline figure, which would give a “true” payrolls increase of just over 100k, which I think would still be enough for the Fed to cut rates at the December FOMC meeting before signalling a likely pause in January. Something above a “true” 175k, implying a headline of 284k would be when the Fed says pause at December. Anywhere in between would leave it as a coin toss with the November CPI report then the focus, released on 11 December.

The chart below shows that Indeed job postings recovered a little from the late October hurricane-impacted low (last datapoint is Nov. 14)

American Companies Are Stocking Up to Get Ahead of Trump’s China Tariffs Businesses plan to stockpile, raise prices and accelerate shift to manufacturing elsewhere

(…) When Trump began his trade war against China in 2018, U.S. businesses scrambled to front-load imports before tariffs were implemented, according to an International Monetary Fund analysis. As a result, the U.S.’s trade deficit with China—how much imports exceed exports—rose in 2018 before falling in 2019.

Already, exports from China surged last month, which some economists think could have been driven at least in part by front-loading amid uncertainty around election results. Outbound shipments from China rose nearly 13% in October from a year earlier, well above consensus expectations and up sharply from 2.4% growth in September. (…)

Though China’s share of U.S. imports has declined to roughly 14% in 2023, from 22% in 2017, rising tariffs between the U.S. and China have done little to curb the overall U.S. trade deficit in global trade or China’s overall trade surplus. (…)

U.S. firms have boosted their share of imports from places such as Vietnam, while China has increased exports to regions including Southeast Asia.

Tariffs aren’t paid by exporters, but rather by businesses that import products. Economists say those businesses usually pass on the bulk of the cost to consumers by raising prices.

Some economists doubt the U.S. will succeed in raising tariffs to 60% across the board on Chinese products. Economists at Goldman Sachs predict additional duties on China could average out to a 20 percentage-point increase in the effective tariff rate.

In addition to duties on Chinese goods, Trump proposed tariffs of 10% to 20% on imports from all countries. (…)

A 2024 survey by Bain & Company found that 69% of chief executives and chief operating officers plan to reduce their company’s dependence on China, up from 55% in 2022. (…)

China has developed infrastructure, communication and transaction channels that make doing business easy for Western companies, while those systems are still being developed in other countries, he said. Plus, it is hard for manufacturers in other countries to beat Chinese suppliers’ low prices. (…)

Front-loading is much easier for larger companies which can more easily secure larger production runs from their suppliers and which have the cashflows to finance the additional inventories.

BTW: “The Port of Long Beach inbound traffic is up almost 30% year-over-year for the last four months as importers are apparently rush to stockpile goods prior to the implementation of the new tariffs.  The Port of Los Angeles has seen a similar surge in imports.” (CalculatedRisk)

Import prices post biggest increase in six months and add to U.S. inflation

Beware of the leads and lags…

Canada: Inflation rebound in October does not worry us too much

CPI data were slightly hotter than expected in October, contributing to an acceleration in annual inflation from 1.6% to 2.0%, the acceleration being mainly due to gasoline.

The shelter component continues to be a source of inflation in Canada, rising at a pace of 4.8% in October (vs. 5.0% in September). No fewer than three of the housing sub-components were among the top five contributors to annual inflation: mortgage interest costs (1st), rents (2nd) and property taxes (5th). True, rents have moderated recently, but the monthly increase in October was still well above the historical average.

Inflation for the other two components can be traced back to the central bank for mortgage interest costs and local governments for property taxes. The latter of which rose at a pace not seen since 1992.

Excluding shelter, inflation in Canada remained extremely low at just 0.9% in October, indicating an economy in excess supply.

Looking at the underlying measures of inflation, October saw an acceleration in the central bank’s preferred indicators, both of which rose at a monthly rate of 0.3% (3.8% annualized), above the central bank’s target. Although the trend over the last three months has been weaker (2.8% annualized), it is still too high in the eyes of the central bank.

Does this call into question our view that rates should be brought back to neutral quickly? No. It is perfectly normal for inflation to progress in a non-linear fashion and, more importantly, for inflation to react to the economic environment with some lag.

In this respect, the economy has been cooling steadily since 2022, as evidenced by the output gap, which is now well below potential GDP, in contrast to the situation in the United States. The labour market has also deteriorating rapidly, as evidenced by the continuous decline in the employment rate over the past six months, and surveys do not point to any improvement in the medium term.

The rise in bond yields in the United States, due to revised expectations of rate cuts in the wake of the Republican sweep in the presidential election, is being reflected in interest rates in Canada, which we see as another argument in favour of easing the short end of the yield curve through a lower overnight rate in order to stabilize the Canadian economy.

Core CPI rose 0.2% in October, same as September. It was up 0.3% in the USA in each of the last 3 months.

China Consumers Remain Cautious Despite Stimulus, BCG Says

Chinese consumers remain cautious on spending as the government’s recent stimulus measures haven’t yet yielded a substantive boost to their shaken confidence, Boston Consulting Group said.

A recovery in confidence will be significantly influenced by economic and geopolitical concerns, the consultancy said in the report on a study launched by BCG in mid-October, covering multiple-tier cities and spanning more than 30 consumption categories.

“Consumer confidence remains neutral to slightly negative,” BCG wrote, adding that the stimulus package still hasn’t meaningfully improved consumers’ income. (…)

Consumers who once splashed out on luxury bags and trips are also now padding their savings as a way to cope with future uncertainties, the report said, a trend that could potentially stand in the way of a long-lasting recovery for consumption. There’s been a 27% drop in the share of people seeing a rise in income growth, negatively impacting consumers’ income expectations over the next six months, BCG said. (…)

Euro-Zone Wage Growth Surges in Test for ECB Rate Cuts Negotiated pay rose 5.4% from a year ago in third quarter

Third-quarter negotiated pay rose 5.4% from a year ago, the ECB said Wednesday. That’s up from 3.5% in the previous three months and was largely driven by Germany. (…)

Source: ECB

The ECB forecasts a sharp slowdown in pay increases in 2025 and 2026, helping to return inflation sustainably to the 2% target.

In Germany, negotiated wages, including ancillary agreements, rose 8.8% from a year ago in the third quarter — the quickest rate since 1993, the Bundesbank reported on Tuesday.

But it also said the period may have marked the peak for wage increases, so that pace is unlikely to last.

Last week’s IG Metall key settlement for the manufacturing sector already locked in relatively moderate pay growth for the next two years. (…)

The WSJ says that “The large IG Metall labor union has this month concluded agreements with employers in the metals and electrical industries that see wages rising by 2% from April 2025, and a further 3.1% from April 2026.”

• VW Labor Leaders Offer €1.5 Billion in Cuts Ahead of Talks Union says VW targeting about €17 billion in overall savings

Labor leaders at Volkswagen AG offered €1.5 billion ($1.6 billion) in additional cost cuts as management pushes for broad savings to steady the beleaguered carmaker.

VW’s works council chief Daniela Cavallo on Wednesday called for lowering shareholder dividends and suspending portions of bonuses for workers, executives and board members as part of the proposal. She said management is currently targeting about €17 billion in overall cost reductions, of which labor is a small part.

Cavallo, speaking at a press conference a day before labor leaders sit down with VW management for a third round of negotiations, acknowledged the need for staff reductions but insisted that factory closures could be avoided under labor’s proposals. In offering the additional cuts, Cavallo said management needs to reinstate job security agreements and keep factories open.

The two sides remain divided over how to cope with a slump in demand for electric vehicles, high operation costs and increasing competition from Chinese manufacturers. VW management is pushing for unprecedented cuts at its namesake brand in Germany, including the closure of three plants, tens of thousands of layoffs, wage cuts, a two-year pay freeze and redrawing union pay tables.

VW, following Cavallo’s remarks on Wednesday, reiterated that factory closures can’t be ruled out. (…)

If VW sticks to its demands including shuttering plants, then it needs to brace for “an industrial dispute over locations like this country hasn’t seen in decades,” Thorsten Gröger, the lead negotiator for the labor side, said at the same event.

Warning strikes are expected for early December if no agreement is reached by then.

• Low growth and high debt risk Eurozone crisis, ECB warns Investor worries have recently risen over debt in countries such as France.
• BOE Hits the Pause Button Until February An October inflation spike confirms the central bank’s go-slow approach to lowering borrowing costs.

@financialtimes 

Antitrust Enforcers Prepare Final Blitz Against Big Tech Justice Department considers divestiture of some Google products while FTC prepares Microsoft probe

The Biden administration’s top antitrust officials plan to take more shots at the tech industry before leaving office, in a race to cap four years of aggressive enforcement.

No action looms larger than the Justice Department’s next move in the antitrust case it won challenging Google’s efforts to maintain a monopoly in search. In a court filing due Wednesday, the department is preparing to ask a judge to consider structural changes to Google’s business. Google would have to divest its Chrome browser or Android mobile operating system if it doesn’t limit how it ties its ubiquitous mobile products to the use of its search engine, according to a document seen by The Wall Street Journal.

It also would be forced to stop paying partners such as Apple billions of dollars a year to make Google’s search engine the default on web browsers, the document shows.

Google has said that spinning off Chrome and Android would harm those products, which are offered free to users. “The government putting its thumb on the scale in these ways would harm consumers, developers and American technological leadership,” said Lee-Anne Mulholland, Google’s vice president of regulatory affairs.

The department’s antitrust division also is preparing a possible legal challenge to Hewlett Packard Enterprise’s $14 billion bid for Juniper Networks, people familiar with the matter said. The division held a meeting with top company officials last week to lay out the government’s concerns, the people said. Such meetings are typically a company’s final chance to try to head off a lawsuit. No final decision has been made. (…)

Just down Pennsylvania Avenue, the Federal Trade Commission, which shares antitrust authority with the department, is laying the groundwork to open an investigation into Microsoft’s cloud business and other practices, according to another person familiar with the matter. The probe among other things will examine whether Microsoft’s agreements prevent cloud customers from considering alternatives. (…)

It isn’t clear how much of the new activity will be embraced once Donald Trump returns to the White House. The next administration is likely to retreat from the most controversial elements of the liberal approach, especially on merger enforcement, though bipartisan angst against tech and healthcare companies could mean those industries continue to face heavy scrutiny. (…)

All of the monopoly cases will be inherited by Trump’s team. It is possible many of them could survive. The first Trump administration originally brought the search case against Google, and it ran out of time before it could file a second case that Kanter later brought challenging the company’s practices in brokering digital ads. Visa and Ticketmaster likewise drew scrutiny during the earlier Trump term. (…)

• DOJ Will Push Google to Sell Chrome to Break Search Monopoly Antitrust officials also to seek data licensing, AI measures

Top Justice Department antitrust officials have decided to ask a judge to force Alphabet Inc.’s Google to sell off its Chrome browser in what would be a historic crackdown on one of the world’s biggest tech companies.

The department will ask the judge, who ruled in August that Google illegally monopolized the search market, to require measures related to artificial intelligence and its Android smartphone operating system, according to people familiar with the plans. (…)

If Mehta accepts the proposals, they have the potential to reshape the online search market and the burgeoning AI industry. The case was filed under the first Trump administration and continued under President Joe Biden. It marks the most aggressive effort to rein in a technology company since Washington unsuccessfully sought to break up Microsoft Corp. two decades ago.

Owning the world’s most popular web browser is key for Google’s ads business. The company is able to see activity from signed-in users, and use that data to more effectively target promotions, which generate the bulk of its revenue. Google has also been using Chrome to direct users to its flagship AI product, Gemini, which has the potential to evolve from an answer-bot to an assistant that follows users around the web. (…)

The antitrust officials pulled back from a more severe option that would have forced Google to sell off Android, the people said. (…)

The antitrust enforcers are set to propose that Google uncouple its Android smartphone operating system from its other products, including search and its Google Play mobile app store, which are now sold as a bundle, the people said. They are also prepared to seek a requirement that Google share more information with advertisers and give them more control over where their ads appear. (…)

A forced spin-off, if it happens, would also hinge on finding an interested buyer. Those who could afford and might want the property, like Amazon.com Inc., are also facing antitrust scrutiny that may prevent such a mega-deal.

“My view is this is extremely unlikely,” Mandeep Singh, a Bloomberg Intelligence analyst, said in an email. But, he added, he could see a buyer like OpenAI, the maker of artificial intelligence chatbot ChatGPT. “That would give it both distribution and an ads business to complement its consumer chatbot subscriptions.” (…)

Forcing Google to syndicate its search results would allow rival search engines and AI startups to quickly improve their quality, while the data feed would allow others to build their own search index.

FYI:

The fluoride debate The nuance you may be looking for

EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated podcast on the day’s post courtesy of Google’s NotebookLM): November 18, 2024

A Solid October for Retail Sales & Upward Revisions

Giddy up Jingle-horse, retailers reported another better-than-expected month in October even as September’s sales numbers were revised sharply higher. An otherwise lackluster year for retailers is gaining some last-minute momentum just as Holiday Sales get underway in November and December.

The initially reported September increase of 0.4% was lifted to 0.8% in the revision. The 0.7% gain in September control group sales, a proxy for personal spending in the GDP report, was revised to a 1.2% surge. That makes September the strongest month of 2024 for core spending and notches the biggest monthly pop since January 2023.

On that basis, the scant 0.1% giveback in control group sales is not terribly disconcerting. (…)

This is the last retail sales report before the official start to the holiday shopping season. Our definition of holiday sales includes total retail sales less sales at auto dealers, gasoline stations and restaurants in November and December. We learned today that through October those categories are up 2.8% year-to-date.

We forecast holiday sales to increase 3.3% through year-end which, if realized, would be the smallest annual gain of the past five years. Today’s retail sales data place holiday sales growth almost perfectly on pace to reach our forecast.

There is a missing tailwind this year: sales momentum is as modest as it has been in several years. With already reported data for the first ten months of the year, we know that consumers are coming into this year’s holiday season in pretty average shape. Despite broader spending continuing at a robust clip, the retailers we include in our holiday sales measure have seen sales rise at a very slow pace. Since our forecast compares November and December sales to last year’s levels, the low base so far this year makes for lower year-ago comparisons.

We expect current conditions to allow for a decent holiday sales season for retailers, but we are still likely to see the slowest pace of annual sales growth since ahead of the pandemic, and we remain cautious on the prospects for spending in the new year. We will provide updates to our holiday sales estimates as the retail sales data come in and keep you apprised on how the holiday sales season evolves.

I don’t know how Wells Fargo can say there is only “modest sales momentum” unless one simplistically looks at nominal sales. Their own real sales metric shows real retail sales up 4.0% YoY.

My proxy for real sales deflates nominal sales using .35 x CPI-Durables + .65x CPI-Nondurables. A good way to test the proxy is to compare my real sales data with real consumer expenditures-Goods; the fit is almost perfect:

Here’s the close-up over the past 24 months:

2024 sales started soft after a strong 2023 finish but momentum has built up continuously since.

Wells Fargo is also way off saying that “consumers are coming into this year’s holiday season in pretty average shape”.

Aggregate weekly payrolls are up 5.3% YoY in October, up from 4.8% in July and way ahead of inflation (2.1%). They also have a reasonably high savings rate (4.6%) and debt service payments of 5.6%, at the low end of the historical range while interest rates are declining.

Revisions to September sales data were significant and will boost Q3 GDP:

• September headline retail sales: +0.8% vs +0.4% originally reported
• Ex-autos: +1.0% vs +0.5%.
• Control Group: +1.2% vs +0.7%.

BTW: (From Bank of America Institute)

On another positive note, by the last week of October, average card spending per household recovered in the states affected by hurricanes Helene and Milton by the last week of October, up 2% YoY after declining nearly 8% YoY during the third week of October. Meanwhile, spending growth was positive throughout the month for the rest of the United States.

When we look by category, spending on necessity goods such as gasoline has been weak over the last three months, reflecting recent deflation in this category. Additionally, spending on groceries has been modest, reflecting slowing inflation for food consumed at home.

It could be that the slowing of the pace of inflation has left more room in consumer budgets for discretionary services like restaurants, which has had three consecutive months of strengthening. This could also explain the growing contribution of discretionary services spending to overall aggregate card spending growth in the past few months.

While most consumer goods in the U.S. are imported, some are domestically manufactured. Is this the first green shoot in manufacturing?

Empire State Manufacturing Survey

Manufacturing activity grew substantially in New York State, according to the November survey. The general business conditions index climbed forty-three points to 31.2, its highest reading since December 2021.

The new orders index climbed thirty-eight points to 28.0, and the shipments index rose thirty-five points to 32.5, pointing to sharp increases in both orders and shipments. (…)

Labor market conditions were stable. The index for number of employees edged down to 0.9, indicating that employment levels were little changed, and the average workweek index edged up to 6.1, pointing to a modest increase in hours worked.

Price increases remained steady and modest: the prices paid index came in at 27.8, and the prices received index was 12.4.

We sure need to see green shoots. Friday also saw Industrial Production data for October:

The strike at Boeing and hurricanes that disrupted activity, but the fact of the matter is the slump in industrial production is bigger than these one-off factors and output is not yet seeing relief from lower interest rates. In fact, a supplemental note in today’s release clocked the drag from hurricanes as a drag of just 0.1 percent. (…)

The Federal Reserve’s base year for industrial production is 2017 and output set such that 2017=100 for the index. The October reading is 102.3. In the years since 2017, total industrial production has grown less than 3%.

For manufacturing production, the backdrop is worse. The October reading there is 98.5, meaning output is actually down since 2017. The weakness here transcends politics; at its zenith during the past 15 years, manufacturing output never exceeded a reading of 102. Manufacturing production fell again in October just as it has in three out of the past four months. (…)

Source: Federal Reserve Board, Institute for Supply Management and Wells Fargo Economics

Production at factories making consumer goods was little changed. Among consumer goods, the production of durables decreased 1.4 percent, while the index for non-durables increased 0.4 percent. (…)

The massive spend that has already occurred in the building of factories which produce computer and electronics products (particularly semi-conductors and microchips) means plenty of fresh capacity will be coming on-line in the near future. (Wells Fargo)

WHAT IF?

What if this buoyant consumer, nearly 70% of GDP, coupled with recent and coming policies, triggers a U.S. manufacturing revival boosting its contribution above its current 10-11% of GDP?

Manufacturing employment is down 0.5% since the end of 2022 while total employment is up 3.2%. Had manufacturing employment kept pace, the U.S. would have more than 450k additional workers earning good salaries.

According to the Alliance for Automotive Innovation, the automotive ecosystem drives $1 trillion into the U.S. economy each year, about 3.7% of GDP. “Every direct job in vehicle manufacturing supports 10.5 additional American jobs and every $1 spent in vehicle manufacturing creates additional $3.45 in economic value.”

Manufacturing production (black) has been flat since 2012 and is 7.5% lower than in 2007. That’s almost than 2 lost decades.

What if vehicle demand and production start to contribute to growth?

• The average age of light weight vehicles in the U.S. is now 12.6 years. It accelerated sharply during the pandemic as availability declined and prices skyrocketed.

• New vehicle affordability is improving. U.S. households needed 37.4 weeks of income to purchase the average new car in June. Still, vehicle affordability remains markedly down compared to 2019, with prices and interest rates much higher than they were before the pandemic. The typical monthly payment is peaking at $743.

COX AUTOMOTIVE/MOODY’S ANALYTICS VEHICLE AFFORDABILITY INDEX
JUNE 2024

Weeks of Income Needed to Purchase a New Light Vehicle

• Car prices have stalled while labor income keeps rising thanks to steady employment and solid real wage gains. Interest rates are also declining. Affordability could improve meaningfully in 2025.

    

• Since the pandemic, manufacturers managed their margins installing scarce parts on the more profitable SUVs and light trucks. Sales of less expensive sedans declined to the point where the average age of regular cars shot up to 14 years.
• According to Hedges & Company, about 23% of all light vehicles on the road today are 20 years old or older. That’s 66M vehicles! Another 57M are 15-19 years old. Total: 123M cars are more than 15 years old. Hedges and Co. informs us that “the nation with the oldest average age of vehicles in the world is Bolivia, where vehicles are an average of 18.8 years old. The nation in the European Union with the oldest passenger cars is Greece, at 17.3 years.”
• Production seems to be accelerating as supply issues are now largely behind us. Wards Intelligence: “In a reversal of recent trends there was an increase in North America production to the current-quarter outlook in the Wards Intelligence North America Production Tracker, and output in the most recent month [September] finished above expectations.”
• Sales have not increased much yet but rising available inventories will draw more buyers off the sidelines.
• Actually, retail sales of motor vehicle and parts dealers jumped 1.6% MoM in October while prices declined 0.2%. Wards says that “Demand in the retail sector accelerated more than expected at the end of the month, putting October’s final raw volume roughly 15,000 units above the forecast.”

The stage seems set for stronger light vehicle sales and production in 2025, fueling the one third of the U.S. manufacturing industry that’s been essentially idle since 2019.

U.S. based manufacturers sure needs it:

Not that this is a reason to invest in U.S. based manufacturers. Bloomberg’s David Flickling understands what’s going on:

• America Got the World Driving. Now It’s Going Home Detroit’s car industry is turning inward and China will inherit the Earth.

Germany’s Carl Benz might have invented the automobile, but it’s the United States that got us to drive them.

The relentless export of American cars and car culture put the world on the road in the 20th century. By the 1960s, Ford Motor Co. had plants in almost every major European country, as well as Argentina, Brazil, Egypt, India, Israel, Peru, Pakistan, South Africa, Turkey, and Zimbabwe.

Right now, it’s passing that baton to China with barely a fight. The US car industry that emerges will be smaller, less influential — and, eventually, less profitable and financially sustainable. (…)

Prospects of synergies and cooperation on innovation between the China and US businesses have also never been worse. Chinese-made cars or components that transmit data have been banned from the US market under rules introduced by President Joe Biden in September.

His successor Donald Trump has mooted 60% tariffs on Chinese imports, and retaliation from Beijing is likely to focus on US-made cars, still one of the biggest trade flows in the opposite direction. Even as it electrifies, GM’s core North American business of hulking SUVs and pickups is also just very different from Wuling’s locally successful range of microcars, minivans and small delivery trucks. (…)

When Detroit had its last brush with death in 2009, about two-thirds of GM and Ford’s combined sales were outside the US. With China sales dwindling, we’re approaching the point where two-thirds will be in the US, instead. The American car industry is turning inward again for the first time in a century. Detroit got the world on the road. BYD will inherit the earth.

And Americans, draped in tariffs, will pay a premium for their transport needs.

Xi Seizes Role as Global Defender of Free Trade Against Trump Warns against ‘going back in history’ with new trade barriers

China’s leader warned on Friday that the global economy was fracturing as protectionism spreads, leading to “severe challenges.” The world, he declared, had “entered a new period of turbulence and change.”

“Dividing an interdependent world is going back in history,” Xi said in a speech at the APEC CEO Summit in Peru read on stage by one of his ministers. (…)

As he prepares to take office again in January, Trump is now threatening to impose 60% tariffs on China — and, just as crucially, 10% to 20% on the rest of the world.

That universal tariff threat is giving Xi a fresh opening to improve ties with a range of governments bracing for tough negotiations with Trump. On Friday, Xi met one-on-one with the leaders of Thailand, Singapore, Chile, South Korea, Japan and New Zealand — all important US allies and security partners in the Asia-Pacific.

“We’re very invested in making sure we have a rules-based system, not a power-based system,” New Zealand Prime Minister Christopher Luxon said at the APEC CEO Summit. “There has been a shift from rules to power, and that’s something we advocate very strongly for: That irrespective of your size, we want countries to be able to navigate their way in the world through the international rules-based order.”

The fact that it’s unclear whether he’s referring to China or the US, long known as the leader of the free world and champion of globalization, shows just how much global geopolitics has shifted in the past two weeks. The Biden administration has frequently blasted China for failing to follow a rules-based order, with Secretary of State Antony Blinken often leading the charge.

In a speech wrapping up the APEC CEO Summit on Friday, however, Blinken didn’t talk about the rules-based order at all in reeling off a range of accomplishments over the past four years — emblematic of an administration with one foot out the door. (…)

EARNINGS WATCH

From Refinitiv IBES:

460 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.3% reported earnings above analyst expectations and 19.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 7.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.

Of these companies, 60.6% reported revenue above analyst expectations and 39.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenues that are 1.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.

The estimated earnings growth rate for the S&P 500 for 24Q3 is 8.8%. If the energy sector is excluded, the growth rate improves to 11.4%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 5.3%. If the energy sector is excluded, the growth rate improves to 6.3%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 9.8%. If the energy sector is excluded, the growth rate improves to 12.5%.

Trailing EPS are now $237.12. Full year 2024: $243.49e. Forward EPS: $263.01e. 2025: $274.23.

Guidance has become more cautious:

Analysts not:

This has been a remarkable rise:

SENTIMENT WATCH

Animal spirits! (via Callum Thomas)

• Sentix Survey:  The pullback likely also involves an element of digestion or correction of excess bullishness, for example the Sentix survey (8-9 Nov data) on US equities reached an all-time high last week (data goes back to 2001).

Source:  @sentixsurvey

• Investment Manager Index:  Similarly, the IMI survey (5-7 Nov data) surged to one of its highest readings ever; and strongest since the booming 2021 stimulus frenzy.

Source:  Investment Manager Index

• Fund Manager Survey:  Likewise, the BofA fund manager survey (1-7 Nov), also saw a surge; not quite to all time highs on this one, but a clear bullish shift among these larger real money investors.

Source:  @Callum_Thomas

• Consumer Confidence in the Stockmarket:  It also echoes the October reading of the Conference Board survey of consumers (23 Oct cut-off), which reported a record high percentage of respondents expecting higher stock prices in 12-months’ time (n.b. the breakdown was: 51.4% saying higher, 25% same, 23.6% lower). As previously noted on this series, it doesn’t have great predictive value, but does provide a read on the overall mood.

Source:  Topdown Charts

• Market Sentiment — Risk Pricing:  As another alternative measure of sentiment, the VIX has calmed back toward the low end of the range, while high yield (junk bond) credit spreads have dropped to 17-year lows (high confidence/complacency, very little credit risk premium priced-in here).

Source:  Topdown Charts Professional see also: Chart of the Week – Credit Spreads

Ed Yardeni feeds the animal spirits with economic proteins:

(…) we believe that Trump 2.0 represents a major regime change from Biden 1.0 (or was that Obama 3.0?). The corporate tax rate will be lowered from 21% to 15%. Personal income from tips, overtime, and Social Security might not be taxed. Many onerous regulations on business will be eliminated. This was already set to happen when the Supreme Court ruled earlier this year that businesses could challenge regulatory overreach in court. (…)

We expect that better economic growth will boost federal government revenues and that Elon Musk will succeed in slowing the growth in federal government spending. GDP growth might actually keep pace with mounting government debt. (…)

We’ve updated our YRI Earnings Outlook, which is posted on our website, to reflect our increasing confidence that our Roaring 2020s scenario remains on track and might be on a faster track:

Revenues per share for the S&P 500 companies in aggregate should total $1,950 this year, we estimate, up 4.2% from last year’s level. We are expecting increases of 5.1% next year and 4.9% in 2026. That’s a fairly conventional outlook as long as the global economy continues to grow, with strength in the US offsetting weakness elsewhere in the world, especially China and Europe.

(…) we expect that Trump 2.0 will boost earnings over the next two years. So we are raising our 2025 EPS projection from $275 to $285 (up 18.8%) and our 2026 EPS estimate from $300 to $320 (up 12.3%).

(…) we are now more confident that the profit margin will rise to new record highs of 13.9% in 2025 and 14.9% in 2026. Tax cuts, deregulation, and faster productivity growth should make that happen.

We expect that the percent of S&P 500 companies with positive 12-month percent changes in forward earnings will increase sharply from the current 77.1% reading as analysts adjust their spreadsheets for Trump 2.0’s corporate tax cut.

Since the start of 2023, almost all of the increase in S&P 500 aggregate forward earnings has been attributable to rising estimates for the Magnificent-7’s earnings.

We expect to see a broadening of the companies and industries for which analysts raise their sights in 2025.

  

We are raising our projected S&P 500 forward P/E range through the end of 2026 to 18-22 from 16-21. The October 28 Morning Briefing was titled “Valuation In A Resilient Economy.” We argued that stock valuation multiples are driven by investors’ expectations for the longevity of economic expansions.

As they became less fearful of a Fed-led recession during the past three years, multiples rose. Multiples may stay elevated if investors conclude that a recession is less likely over the rest of the decade now that monetary policy is easing while fiscal policy remains stimulative.

Multiplying our forward EPS estimates by our projected forward P/E ratios yields the following bullish year-end projections for the S&P 500 stock price index: 6100 in 2024, 7000 in 2025, and 8000 in 2026.

The Rule of 20 P/E is 28.1. Yardeni’s P/E range of 18-22 is 21-23 on the R20 scale assuming inflation of 3.0%. The lowest it has been since the pandemic is 22.5 in September 2022 when the conventional P/E was 16.2 and inflation 6.3%.

Note how extreme equity valuations started to correct in December 2000 right when the Rule of 20 Fair Value Index (yellow line) turned down. Inflation was stable around 2.5% then but earnings peaked right at that time.

Biden’s big shift on Ukraine

US President Joe Biden has authorised Ukraine to launch limited strikes into Russia using US-made long-range missiles

Biden is shifting his stance in response to the deployment of thousands of North Korean troops to support Moscow’s war effort and after a barrage of Russian strikes on Ukrainian cities at the weekend. (…)

“Even if limited to the Kursk region, ATACMS [Army Tactical Missile System] missiles put at risk high value Russian systems, assembly areas, logistics, command and control,” said Michael Kofman, senior fellow at the Carnegie Endowment for International Peace think-tank. “They may enable Ukraine to hold on to Kursk for longer and raise the costs to North Korea for its involvement in the war.”

Bill Taylor, former US ambassador to Ukraine, said Biden’s decision made “Ukraine stronger and increases the odds of a just end to the war” and “may also unlock British and French missiles. Possibly even German”. (FT)