HSBC China Composite PMI™ data (which covers both manufacturing and services) signalled a contraction of private sector output in China, following a six-month sequence of growth. That said, the rate of reduction was fractional overall, as signalled by the HSBC Composite Output Index posting at 49.8 in February, down from 50.8 in January.
Latest data signalled divergent trends across China’s manufacturing and service sectors. Output declined at goods producers for the first time since July 2013, while service providers saw a further increase of business activity. The rate of activity growth edged up slightly from January’s 29-month low, but remained marginal overall. This was signalled by the HSBC China Services Business Activity Index posting at 51.0 in February, up from 50.7 in January.
As was the case with output, manufacturers saw a renewed reduction of new business during February, while service providers signalled a further expansion of new order books. That said, growth was moderate and remained weaker than the historical average. At the composite level, total new business decreased, albeit fractionally.
Staffing levels declined at manufacturing companies again in February and at the quickest rate in nearly five years. In contrast, service sector firms expanded their payroll numbers for the sixth month running. However, service sector firms were more cautious towards taking on more staff, as the rate of job creation eased to a five-month low. Consequently, employment levels fell modestly at the composite level.
Backlogs of work decreased across both the manufacturing and service sectors in February. Though only slight, it was the first reduction of work-in-hand at goods producers since July 2013. Meanwhile, outstanding business at service providers fell at a moderate pace that was the quickest in a year. As a result, unfinished business declined marginally at the composite level.
Average input costs in China’s manufacturing sector fell for the second successive month in February, amid reports of weaker demand for inputs. In contrast, cost burdens continued to increase at service providers. That said, the rate of input price inflation was the weakest since June 2013. At the composite level, total input costs fell slightly over the month.
Manufacturers cut their output charges at a marked pace in February, as part of efforts to stimulate client demand. Meanwhile service providers raised their selling prices, albeit fractionally, following a reduction in January. Although growth of output and new orders remained weaker than their historical averages, service sector firms were optimistic with regard to the 12-month business outlook in February. Confidence in the sector was linked to forecasts of improving market conditions and company expansion plans.
NEW$ & VIEW$ (4 MARCH 2014)
Americans Open Wallets in January
Personal consumption, the government’s official tally of spending on everything from restaurants to cars, climbed a seasonally adjusted 0.4% in January from a month earlier after a weak December gain, the Commerce Department said Monday.
The increase was driven by a 0.9% surge in spending on services—the largest since October 2001—due to greater consumption of health care and utilities. Unusually cold weather likely was behind the higher outlays on utilities. Purchases of goods fell for the second straight month.
The report showed Americans’ incomes climbed 0.3% in January. About three-quarters of that gain was due to new provisions of the Affordable Care Act, including expanded Medicaid benefits and health insurance subsidies that count as income in the official tally. In turn, newly insured Americans likely scheduled doctors’ appointments they may have postponed before, some analysts said.
The Commerce Department warned that it based its latest estimates on preliminary data, including enrollments via health-insurance exchanges.
The Federal Reserve’s preferred inflation gauge, the price index for personal consumption expenditures, rose 1.2% in January from a year earlier. Excluding food and energy, prices rose 1.1%.
A separate inflation measure reported last month, the consumer-price index, showed prices rose 1.6% in January from last year, the strongest year-over-year gain in six months.
The good news is that January numbers were generally good. The bad news is that they may well be revised lower, as were the late 2013 numbers, as I expected (HARD PATCH COMING?). November and December 2013 real expenditures, originally estimated up 0.8%, were revised to +0.3%. Adding January’s +0.3% estimated growth, the annualized growth rate over the last 3 months is 2.4%, still above what is suggested by retail sales.
The same applies to real disposable income which declined at a 1.2% annualized rate between October and December but bounced back +0.3% (+3.7% a.r.) in January. Many special factors were noted in January. Excluding government transfers, real personal income was unchanged in January, as was the case in the 3 months previous.
The WSJ shows irrational exuberance in its headline today (Americans Open Wallets in January) for wallets were only opened to pay for Obamacare and sharply higher utility bills. Real expenditures on goods dropped 0.6% in January following –0.2% in December.
Weekly chain store sales rose 0.3% last week and the 4-wk m.a. is up for the 3rd consecutive week, up 1.9% YoY.
U.S. Vehicle Sales Remain Under Pressure
Unit sales of light motor vehicles edged up a scant 0.7% to 15.34 million (SAAR) during February, unchanged year-to-year according to the Autodata Corporation. Sales have fallen 6.5% from the recovery high of 16.41 million in November.
Last month, auto purchases edged up 0.6% to a 7.34 million annual rate (-5.6% y/y). Sales of domestic autos improved 1.4% to 5.19 million (-5.6% y/y). Sales of imports declined 1.3% to 2.15 million (-5.5% y/y).
Sales of light trucks increased 0.7% m/m to 8.00 million (5.8% y/y). Sales of imported light truck sales rebounded 6.9% to 1.01 million (0.2% y/y). Domestic light truck sales, in contrast, slipped 0.1% to 6.99 million (+6.6 y/y).
CalculatedRisk’s charts tell the story. the short-term trend is weak, giving more credence to my thesis that we may well have reached the cyclical peak.
U.S. ISM Index Begins to Recover
The Composite Index of Manufacturing Sector Activity from the Institute for Supply Management improved to 53.2 during February from 51.3 in January.
Recoveries in inventories (52.5) and supplier deliveries (slower) prompted the improvement in last month’s factory sector. New orders also rose slightly (54.5). Offsetting these gains was a sharply lower reading for production (48.2) and an unchanged employment figure (52.3). The new export orders index fell to 53.5, the lowest reading since September and the imports index was unchanged at 53.5, the lowest reading since January of last year.
Student Loans Used for More Than School Some Americans are lining up for federal student aid, not for education but for the chance to take out low-cost loans, sometimes with little intention of getting a degree.
(…) borrowing thousands in low-rate student loans—which cover tuition, textbooks and a vague category known as living expenses, a figure determined by each individual school—also can be easier than getting a bank loan. The government performs no credit checks for most student loans. (…)
The Education Department’s inspector general warned last month that the rise of online education has led more students to borrow excessively for personal expenses. Its report said that among online programs at eight universities and colleges, non-education expenses such as rent, transportation and “miscellaneous” items made up more than half the costs covered by student aid.
The report also found the schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn’t log any credits at the time. The report pointed to possible factors such as fraud in addition to cases of people enrolling without serious intentions of getting a degree. (…)
G-20 Inflation Eased Again in January The rise in consumer prices slowed across the world’s largest economies for a second month, driven by falling inflation rates in several developing economies.
The Organization for Economic Cooperation and Development said Tuesday the annual rate of inflation in its 34 developed-country members rose to 1.7% from 1.6% in December, while in the Group of 20 leading industrial and developing nations it fell to 2.6% from 2.9%.
Weaker global price rises were the result of declines in the annual rate of inflation in India, Indonesia, Russia and Brazil. The annual rate of inflation was steady in China and increased in South Africa.
UKRAINE: THE POKER GAME BEGINS
Ukraine matters: Barron’s piece yesterday was pretty weak:
What the Ukraine Crisis Means for U.S. Stocks?
(…) Writing for Fortune magazine, Mohamed El-Erian, the outgoing chief executive officer of Pimco, points out that while Ukraine is only a tiny part of the global economy, the political fallout is far from contained and could potentially deepen the pain for U.S. investors.
“Absent overwhelming outside military intervention (whose outcomes would be far from certain, and its chaos would be considerable and inevitable), it is hard to argue that any single side is in a position to prevail decisively in the next few weeks,” writes El-Erian.
“Russia does not have sufficient influence with enough of Ukraine to pull the whole country back into its orbit; and it cannot do so by force. For their part, the European Union and the United States do not have the means to decisively pull all of Ukraine the other way. And the reality of these external anchors means that a partly fragmented Ukrainian society is unlikely to resolve the tensions internally any time soon.”
Meanwhile, a round-up of opinions on Wall Street by Fortune’s sister website,CNNMoney suggests that the crisis in Ukraine could be resolved without inflicting much more harm on U.S. stocks.
The article quotes John De Clue, international investment strategist at U.S. Bank Wealth Management of Minneapolis, who concedes that geopolitical risks could weigh on stocks in the short-term. but said that “it’s hard to construct a scenario for trouble.” (…)
It’s been awfully cold in Minneapolis lately so we’ll excuse him for his lack of imagination. John Mauldin generously offers some clues, the scariest being from Gavekal:
(…) What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Vladimir Putin will “see sense,” or at least be deterred by the threat of US and EU sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” overcoming dictatorship and military bullying.
(…) Russia’s annexation of Crimea is the most dangerous geopolitical event of the post- Cold War era, and perhaps since the Cuban Missile crisis. It can result in only two possible outcomes, either of which will be damaging to European stability in the long-term. Either Russia will quickly prevail and thereby win the right to redraw borders and exercise veto powers over the governments of its neighbouring countries. Or the Western-backed Ukrainian government will fight back and Europe’s second-largest country by area will descend into a Yugoslav-style civil war that will ultimately draw in Poland, NATO and therefore the US.
No other outcome is possible because it is literally inconceivable that Putin will ever withdraw from Crimea. To give up Crimea now would mean the end of Putin’s presidency, since the Russian public, not to mention the military and security apparatus, believe almost unanimously that Crimea still belongs to Russia, since it was only administratively transferred to Ukraine, almost by accident, in 1954. In fact, many Russians believe, rightly or wrongly, that most of Ukraine “belongs” to them. (The very name of the country in Russian means “at the border” and certainly not “beyond the border”). Under these circumstances, the idea that Putin would respond to Western diplomatic or economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking. Putin’s decision to back himself into this corner has been derided by the Western media as a strategic blunder but it is actually a textbook example of realpolitik. Putin has created a situation where the West’s only alternative to acquiescing in the Russian takeover of Crimea is all-out war.
And since a NATO military attack on Russian forces is even more inconceivable than Putin’s withdrawal, it seems that Russia has won this round of the confrontation. The only question now is whether the new Ukrainian government will accept the loss of Crimea quietly or try to retaliate against Russian speakers in Ukraine—offering Putin a pretext for invasion, and thereby precipitating an all-out civil war.
That is the key question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity, or a last chance to bail out of risk-assets before it is too late. The balance of probabilities in such situations is usually tilted towards a peaceful solution—in this case, Western acquiescence in the Russian annexation of Crimea and the creation of a new national unity government in Kiev acceptable to Putin. The trouble is that the alternative of a full-scale war, while far less probable, would have much greater impact—on the European and global economies, on energy prices and on the prices of equities and other risk- assets that are already quite highly valued. At present, therefore, it makes sense to stand back and prepare for either outcome by maintaining balanced portfolios of the kind recommended by Charles, with equal weightings of equities and very long-duration US bonds.
Looking back through history at comparable episodes of severe geopolitical confrontation, investors have usually done well to wait for the confrontation to reach some kind of climax before putting on more risk. In the 1962 Cuban Missile Crisis, the S&P 500 fell -6.5% between October 16, when the confrontation started, and October 23, the worst day of the crisis, when President Kennedy issued his nuclear ultimatum to Nikita Khrushchev. The market steadied then, but did not rebound in earnest until four days later, when it became clear that Khrushchev would back down; it went on to gain 30% in the next six months. Similarly in the 1991 Gulf War, it was not until the bombing of Baghdad actually started and a quick US victory looked certain, that equities bounced back, gaining 25% by the summer. Thus investors did well to buy at the sound of gunfire, but lost nothing by waiting six months after Saddam Hussein’s initial invasion of Kuwait in August, 1990. Even in the worst-case scenario to which the invasion of Crimea has been compared over the weekend—the German annexation of Sudetenland in June 1938—Wall Street only rebounded in earnest, gaining 24% within one month, on September 29, 1938. That was the day before Neville Chamberlain returned from Munich, brandishing his infamous note from Hitler and declaring “peace in our time”. The ultimate triumph of hope over experience.
Another view?
Don’t listen to Obama’s Ukraine critics: he’s not ‘losing’ – and it’s not his fight
Chips being thrown out:
But this is not the first time Russia has used gas exports to put pressure on its neighbour – and “gas wars” between the two countries tend to be felt far beyond their borders. Russia, after all, still supplies around 30% of Europe’s gas.(…)
Europe accounts for around a third of Gazprom’s total gas sales, and around half of Russia’s total budget revenue comes from oil and gas. Moscow needs that source of revenue, and whatever Vladimir Putin’s geo-political ambitions, most energy analysts seem to agree he will think twice about jeopardising it. Short of an actual war, the consensus appears to be, Europe’s gas supplies are unlikely to be seriously threatened.
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Gazprom to raise Ukraine gas prices Move is because country failed to repay debts, CEO says
The move is likely to heap further pressure on Ukraine’s struggling economy. Ukraine paid Gazprom about $400 per thousand cubic metres in 2013, a price that was cut to $268.50 under the deal struck in December. Many analysts and investors believe that Ukraine will not be able to avoid a debt restructuring. (…)
Elsewhere:
Japan wages show first rise in two years
The preliminary figures released on Tuesday were not entirely reassuring, however: even as base pay edged up 0.1 per cent, the first rise in 22 months, overtime and bonuses went into reverse, offsetting the gain and dragging total take-home earnings down 0.2 per cent.
Tuesday’s data showed that rising wages for relatively low-paid part-time workers accounted for the increase in base earnings in January.
Such workers make up a growing share of the labour force, but with unemployment at 3.7 per cent they are in short supply.
Permanent workers – a group that includes white collar “salarymen” but also many factory workers – continued to experience pay declines in January, the data showed. Their wages are typically set annually in negotiations with employers which are expected to wrap up in the next several weeks.