***   Happy, Healthy New Year  ***

MANUFACTURING PMIs

Eurozone manufacturing sector ends 2024 in contraction

The HCOB Eurozone Manufacturing PMI posted its thirtieth successive sub-50.0 reading in December, marking two-and-a-half years of continuous decline in factory operating conditions across the single-currency market. At 45.1, the headline index dropped fractionally from 45.2 in November to a three-month low.

Of the eurozone nations covered by the HCOB PMI survey, December’s results showed considerable divergences. Countries located in the south continued to outperform, with Spain and Greece showing stronger improvements in manufacturing sector conditions. Expansions here were more than offset, however, by the big-three of Germany, France and Italy, which all posted deteriorations once again. Most notable was France, which saw its Manufacturing PMI sink to its lowest level since May 2020.

Demand for eurozone goods fell once again at the end of 2024. The rate of contraction quickened and was broadly in line with that seen on average across the current 32-month sequence of deteriorating sales. A softer decrease in new export orders implied that December’s faster drop in new business was domestically driven. Sales to international customers fell at the softest pace in four months at the end of 2024.

Production volumes continued to decrease across the eurozone manufacturing industry. In fact, December’s drop in output was the steepest since October 2023. Although, with the concurrent drop in new orders outpacing that seen in production, the latest survey data suggested that firms were able to uphold output volumes somewhat. Support came from companies’ backlogs, which declined sharply and at a faster pace when compared to the previous month.

That said, eurozone factory employment levels remained in contraction, extending the current period of job losses to just over a year-and-a-half. The extent to which workforce numbers fell eased slightly but was nevertheless marked.

Another steep monthly fall in purchasing activity was registered during the final month of 2024. Indeed, lower input buying came in tandem with another sharp drop in eurozone manufacturers’ pre-production inventories. December’s reduction in stocks was among the strongest since 2009. Volumes of finished goods held in warehouses also dropped.

Prices paid by eurozone manufacturers were unchanged on the month. This marked the first time since August 2024 that input costs had not decreased. Nevertheless, an absence of cost pressures enabled firms to discount the price of their goods further, as selling charges decreased for the fourth month in succession.

Surveyed businesses looked ahead to the future with increased optimism in December, with growth expectations for the next 12 months at their strongest in four months. However, when compared with the series average, business confidence remained subdued.

China: Manufacturing sector expansions continues at end of 2024

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 50.5 in December, down from 51.5 in November. Posting above the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved for a third consecutive month. The fall in the PMI however indicated that the pace of growth eased since November and was marginal overall.

Manufacturing production in China increased for a fourteenth successive month in December. That said, the rate of expansion decelerated to a marginal pace as new order growth slowed. While improvements in underlying demand and successful business development efforts led to incoming new orders rising for a third straight month, the rate of growth eased on the back of softening external demand. Indeed, export orders contracted after increasing at the fastest pace in seven months in November.

Meanwhile, higher new orders led to a third monthly increase in purchasing activity. Stocks of purchases rose in tandem, with anecdotal evidence highlighting intentions of safety stock building among some manufacturers. Despite higher buying activity, vendor performance improved for the first time since May (albeit only marginally). Post­production inventory also accumulated in December, rising for a seventh successive month. The rate of expansion eased, however, as production growth slowed.

Rising new orders led to another round of backlog accumulation at the end of year. The rate of accumulation eased to a marginal level, however. As a result of softening capacity pressure, manufacturing headcounts fell again in December though at the softest pace in the current four-month sequence.

Turning to prices, average selling prices declined for the first time since September. Although the rate of decline was modest, this contrasted with another increase in input prices. Panellists indicated that they had absorbed cost increases and further lowered selling prices to support sales. Export charges also declined in December.

Finally, business confidence eased in the latest survey period. Chinese manufacturers were the least upbeat since September. This was as concerns about the outlooks for growth and trade, especially amidst the US tariffs threat, challenged hopes for new product- and policy-driven sales growth in the new year.

(…) it is worth noting that prominent downward pressures remain, with tepid domestic demand and mounting unfavorable external factors. Meanwhile, employment remains sluggish and profit margins have been squeezed, leading to a decline in market optimism. In December, some of the Caixin manufacturing PMI survey’s gauges declined, suggesting more time is needed to assess the consistency and effectiveness of previous policy stimulus. (…)

ASEAN manufacturers rounded the year with another month of modest growth

The S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) has printed in expansion territory in each month since January, with a December reading of 50.7, slightly down from November’s 50.8, indicating modest sector improvement. Growth over 2024 averaged at 51.0.
Underlying components of the PMI index revealed sustained upticks in two of the five the largest segments, new orders and output. The former saw growth for a tenth straight month, as the latest uptick signalled a modest rise which was also the strongest this quarter. However, new export orders remained a drag, with a downturn in December extending the current run of contraction to 31 months.

Nonetheless, a sustained and slightly quicker intake of overall new orders fed through to a solid and historically strong rise in output. The rate of growth was broadly consistent with that seen in November. (…)

December marked a renewed easing of price pressures. Rates of both input price and output charge inflation eased from November’s slight spike. (…)

Japan: Softer deterioration in manufacturing conditions at end of 2024

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) recorded 49.6 in December, up from 49.0 in November and indicative of a slight contraction in the health of the Japanese manufacturing sector that was the softest for three months.

Latest data showed there was a softer decrease in output at the end of the year. The rate of decline was only marginal, and eased from that seen in the month prior. Firms signalled often that muted demand was behind the latest contraction, though there were some mentions of the introduction of new products. Manufacturers also indicated a softer preference for the use of existing inventories, as the rate of depletion of finished item holdings was only fractional.

There were reports that new order volumes moved closer to stabilisation during December, as the rate of reduction eased to the softest for six months. At the same time, new export demand remained muted amid evidence of low demand from key markets, most notably mainland China and the US. (…)

European Gas Rises Following Loss of Russian Flows Via Ukraine

(…) Russian gas deliveries across Ukraine halted on New Year’s Day after a transit contract between the two warring nations expired, with no alternative in place. (…) Inventories across the continent are already falling at the fastest pace since 2021, when the gas crisis was just starting to brew. (…)

While Europe is unlikely to run out of gas this winter, thanks to inventories and deliveries from other suppliers, traders may find it harder to refill storage for the next heating season. Gas prices for next summer recently surged above those for winter 2025-26, which will make it more costly to restock. (…)

With the loss of flows via Ukraine, Europe will also deepen its reliance on liquefied natural gas, including from Russia. The country shipped record volumes of LNG to the region last year, making it the largest supplier after the US, which has recently started up two new export plants. (…)

Europe as a whole will need to compete harder for LNG this year, especially in the summer when energy demand for air conditioning soars in Asia. While several new LNG plants are under construction worldwide, meaningful capacity additions won’t be ready for another couple of years. (…)

The rapid expansion of data centers powered by Artificial Intelligence (AI) technology is driving a surge in electricity demand, boosting the need for natural gas in the United States. (…) Projections suggest that electricity demand from data centers could quadruple by 2030, requiring an additional 8.5 billion cubic feet per day of natural gas to meet consumption.

Top U.S. Gas Producer EQT Sees AI as Biggest New Source of Demand

(…) AI-related electricity demand is expected to translate to between 6 billion to 13 billion cubic feet of gas a day in the short term, Toby Rice, EQT’s chief executive officer, said Tuesday. That compares with current total US consumption of just over 100 billion cubic feet a day. (…)

In the near-term, prices are likely to stay range-bound at $2 to $3 because of the oversupply that followed the mild weather last winter, according to Rice. It will take about six months to work through the glut, he said, assuming temperatures revert to normal next winter.

If prices do rally, the EQT boss warns of possible spikes similar to those seen in 2022, when futures exceeded $10 after the invasion of Ukraine sparked turmoil in global energy markets.

One reason for his view is the changing make-up of US power supply. Many power stations would previously have been able to change over to burning coal when gas prices jumped. But a lot of those facilities have made a permanent switch to gas in recent years.

That means gas prices that would have been capped at $5 can now potentially bounce from $2 to as much as $9, a level that would force factories and other industrial users to curtail operations, Rice said. Regional variations could be even more extreme, he added, with pipeline constraints pushing gas in New York or Boston to as much as $20. “Buckle up for volatility,” Rice said. (…)

The marginal cost to bring new production in the US online is about $3.50 per million BTU at the benchmark Henry Hub delivery point, according to Rice. Right now, it looks like producers may want to hold back some activity in 2025 as futures prices for next year are trading below that level, he said.

EQT’s own break-even point is $2, which Rice described as a “stress case scenario” that allows the company to cover drilling and operational costs and still generate free cash flow. He added that such a low breakeven minimizes the need to hedge.

Were U.S. domestic prices to explode, would the Trump administration attempt to curb LNG exports?

BTW: Polar vortex poised to spin into U.S., leading to frigid January

Pieces of the polar vortex are projected to swirl southward out of northern Canada and into parts of the U.S. during early and mid-January.

• Accompanying the cold will be the threat of multiple significant winter storms.

2024 Was A Roaringly Good Year For Stocks

The past two years were certainly prosperous ones for equities investors, as the S&P 500 rose 23.3% following a 24.2% gain in 2023. Those gains more than offset the 19.4% loss during 2022. On average, the S&P 500 is up 9.4% per year over the past three years, consistent with its long-run average growth rate of 7.2% (chart). Of course, accounting for dividends, returns are even higher than that performance suggests.

Three consecutive years of double-digit gains don’t happen too often. Nevertheless, that’s what we are expecting: We see the S&P 500 increasing 19.0% this year to 7000. However, we think it could be a bumpier ascent than in recent years, especially during the next couple of months. Fed officials are likely to be less dovish in the coming weeks. In addition, uncertainty about fiscal, trade, and immigration policies might continue to put upward pressure on bond yields.

Last year’s advance was heavily skewed by the Magnificent-7 stocks, which collectively soared 62.7% and currently account for a whopping 32% of the market cap of the S&P 500 (…).

However, the S&P 500 Financials and S&P 400 Utilities managed to beat the S&P 500. (…)

The bull market since October 12, 2022 has been a broad one, with plenty of stock market indexes up by more than 25%. It only seems narrow because of the significant outperformance of a handful of large-cap stocks. (…)

***   Happy, Healthy New Year  ***

Discounts on the Dealership Lot Lift Car Sales Some automakers have seen inventory jump to prepandemic levels, prompting them to spend more on promotions

(…) Car buyers received about $3,400 in discounts and other incentives on average during the busy December shopping season, up more than 25% from a year earlier, according to research firm J.D. Power. The offers have included low- and zero-percent interest rates, cash-back offers and cheap leases, especially on electric vehicles. (…)

Industrywide U.S. sales rose by about 7% in December, according to a J.D. Power forecast. Most automakers are scheduled to report their latest sales tallies Friday. (…)

For the year, U.S. vehicle sales are expected to rise 3%, to about 16 million vehicles sold, decelerating from 12% growth in 2023. (…)

The U.S. car market hasn’t returned to the 17-million-vehicle annual sales mark that held steady for several years before the pandemic disruptions. Analysts and car executives say that is partly because many shoppers remain priced out of the market, despite the recent return of promotions and discounts.

Higher interest rates have kept monthly payments elevated relative to prepandemic levels. Also, a dwindling number of smaller, cheaper cars for entry-level buyers has curbed overall sales.

Average discounts are currently about 8% of the sticker price, according to research firm Cox Automotive, up sharply from recent years but still below the 10% industry prepandemic norm. (…)

US credit card defaults jump to highest level since 2010 Consumers are ‘tapped out’ after years of high inflation and as pandemic-era savings have evaporated

That’s the front page of today’s FT, informing us that “defaults on US credit card loans have hit the highest level since the wake of the 2008 financial crisis, in a sign that lower-income consumers’ financial health is waning after years of high inflation.”

Federal Reserve data through Q3’24 show that overall delinquencies are still below pre-GFC levels except for smaller banks which mainly lure lower income consumers.

KKR shows that upticks in credit/auto defaults this cycle have been driven by younger borrowers, who saw borrowing increase at a disproportionate rate during the pandemic.

Total outstanding principal balances for consumer debt categories, including credit cards and auto loans, are running quite close to subdued pre-pandemic levels relative to disposable income.

Younger and lower-income earners are more significantly impacted by life essential expenditures (food, energy, shelter) but the squeeze has been easing a little recently. A recent Bloomberg survey revealed that approximately 45% of people ages 18 to 29 lived at home, an 80-year high.

Trump’s Tariff Threats Are Setting Off a Global Supply Chain ‘Freakout’ US and European companies are frontloading orders and weighing price hikes while Chinese factories hunt for buyers elsewhere

(…) Across the world, businesses aren’t waiting until US Inauguration Day on Jan. 20 to see which countries, products or tariff rates are announced in Trump’s widely telegraphed trade wars. The mere threat of his universal tariffs is sparking a scramble that’s leaving the global trading system prone to bottlenecks, saddled with higher costs and vulnerable to disruptions should an economic shock come along.

“We’re still in the freakout period,” said Robert Krieger, president of Los Angeles-based customs brokerage and logistics advisory firm Krieger Worldwide. “There’s about to be a king tide in the supply chain.” (…)

To get ahead of the game, some firms are frontloading orders. Others are seeking new suppliers or, if that’s not possible, renegotiating terms with existing ones. A common theme: The renewed stress comes with higher costs, in the form of bigger inventories, costlier expedited shipping, or taking a chance on untested partners. Profits will suffer and expenses will be reduced elsewhere, they said. Ultimately consumers will foot the bill. (…)

As shown by Trump’s late November threat to impose additional 10% tariffs on goods from China and 25% tariffs on all products from Mexico and Canada, both allies and adversaries are in his sights this time around. (…)

China’s ports saw double-digit growth in container throughput in the two weeks around the election and that rose further to an almost 30% gain in the second week of December. International air freight flights have increased by at least a third each week since mid-October and economists expect that’ll continue as customers rush to frontload orders.

Across the Pacific, the busiest container gateway in the US, made up of the twin ports of Los Angeles and Long Beach, is seeing a surge of inbound shipments — not unlike the wave that accompanied Trump’s first tariff volleys at China. Both ports smashed pandemic-era records in the third quarter and volumes are expected to stay elevated into next year. (…)

Jimmy Carter’s great acts: Fighting inflation by deregulation and appointing Paul Volcker

(…) In late July, 1979, Mr. Carter nominated Paul Volcker, then the hawkish president of the Federal Reserve Bank of New York, to head the central bank. While sitting on the Federal Open Market Committee, Mr. Volcker had made it clear he was in favour of more aggressive interest rate increases.

He took action in fighting inflation with increases that past Fed chairs had been too afraid to introduce, eventually raising interest rates to a peak of 21.5 per cent in 1981. Despite contributing to a significant labour market pullback that included unemployment above 10 per cent, the hikes pushed inflation, which had peaked at 14.8 per cent in 1980, to fall below 3 per cent by 1983. The episode is still cited by economists and textbooks as one of the greatest empirical examples of how raising interest rates can reduce inflation by lowering aggregate demand.

In 1983, president Ronald Reagan reappointed Mr. Volcker to a second term, beginning a long tradition of reappointing Fed chairs (even across party lines) that would last 35 years and further enshrine central bank independence. President Carter’s initial decision had important long-term consequences. (…)

Mr. Carter also played a substantial role in the deregulation of many industries in the United States in the late 20th century. In 1978, he signed the Airline Deregulation Act into law, which removed federal government control over the industry, paving the way for low-cost carriers such as Southwest Airlines.

Later that same year, he also signed into law the Energy Act, legislation that would deregulate oil and gas prices and later increase the supply of energy, lowering prices further. It also ended a period in which natural gas was blocked from entering interstate markets from producing states.

Deregulating many other industries would follow, even after the Carter administration. This practice has its critics, who say it erodes the rights of workers, but it has unquestionably resulted in further reducing prices and thus improving consumer welfare, especially for those below the median income, as inflation is historically higher for the poor.

While Mr. Reagan often gets the credit for deregulation and fighting inflation – he was in office during most of Mr. Volcker’s term at the Fed – some of the seeds of the Reagan Revolution were planted by a kind peanut farmer from Georgia named Jimmy Carter.