January data signalled a deterioration of operating conditions in China’s manufacturing sector for the first time in six months. The deterioration of the headline PMI largely reflected weaker expansions of both output and new business over the month. Firms also cut their staffing levels at the quickest pace since March 2009. On the price front, average production costs declined at a marked rate, while firms lowered their output charges for the second successive month.
After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) posted at 49.5 in January, down fractionally from the earlier flash reading of 49.6, and down from 50.5 in December. This
signalled the first deterioration of operating conditions in China’s manufacturing sector since July.Production levels continued to increase in January, extending the current sequence of expansion to six months. However, the rate of growth eased to a marginal pace. While greater volumes of new work boosted production at some firms, others reduced their output amid reports of relatively subdued client demand that stemmed from fragile economic conditions.
Consequently, total new business was relatively unchanged from the previous month, following a five month sequence of growth. Meanwhile, new export orders declined for the second month running in January, with surveyed firms mentioning weaker demand in a number of key export markets.
Employment levels at Chinese manufacturers fell for the third consecutive month in January. Moreover, it was the quickest reduction of payroll numbers since March 2009. Job shedding was generally attributed by panellists to the non-replacement of voluntary leavers
as well as reduced output requirements. Despite the marked reduction of headcounts, the level of unfinished business at goods producers rose only fractionally over the month.Purchasing activity increased for the sixth successive month. That said, the degree to which input buying increased eased to a marginal pace that was the weakest since September. Stocks of purchases and finished goods also rose slightly in January, and for the first time in three months in both cases. A number of panellists linked higher inventories to slower output growth and weaker-than-expected client demand.
Production costs declined for the first time since July 2013 in January. Moreover, the rate of input price deflation was marked overall, amid reports of lower raw material costs. Reduced cost burdens were passed on to clients in the form of lower output charges in January and marked the
second consecutive month of discounting.
NEW$ & VIEW$ (30 JANUARY 2014)
BLAME THE FED GAME
Investors Seek Safer Options as Ground Shifts
Just one month into 2014, investors from Illinois to Istanbul are finding the tide going out fast for stocks and other riskier investments.
(…) After years of unprecedented monetary stimulus propping up the world’s financial markets, investors are now confronting the reality of an end to the Federal Reserve’s bond-buying program, which, as expected, the central bank reduced by another $10 billion on Wednesday. (…)
Some even argue that the long-simmering troubles in emerging markets will draw global investors to U.S. stocks.
But the landscape seems to have shifted from one where unprecedented central-bank stimulus enabled markets to steamroll past issues that might have otherwise spooked investors. (…)
No Respite for Emerging Markets
The pullback from emerging-market currencies showed no signs of a pause, with the Hungarian forint and Russian ruble bearing the brunt of selling pressure.
Meanwhile:
The Federal Reserve—unfazed by recent selloffs in emerging markets or disappointing U.S. job gains in December—said it would scale back its bond-buying program for the second time in six weeks, pressing ahead with a strategy to wind down the purchases in small and steady steps.
The Fed said it would cut its purchases of Treasury bonds and mortgage-backed securities to $65 billion a month, from $75 billion, and officials suggested they would continue reducing the purchases in $10 billion increments in the months ahead. The first cut, from $85 billion, was announced in December and made in January. (…)
Though they have been watching developments in emerging markets closely, Fed officials made no mention of these trends in the statement released Wednesday after their two-day policy meeting.
U.S. economic growth “picked up” in recent months and was expected to continue at a “moderate pace,” the Fed said. Though job-market indicators were mixed, “on balance” the labor market “showed further improvement,” the Fed said. (…)
“MIND YOUR OWN BIZâ€: Citigroup summarizing the Fed statement:
From the viewpoint of domestic US economic conditions the Statement is completely anodyne. From the point of view of EM, the Fed has just said “hasta la vista, baby“
FED UP?
Confused? Here’s a great read that puts things into their proper perspective: Emerging Markets – Emerging Crisis or Media Hysteria?
Here’s the conclusion but the whole post is well worth reading:
Currently the financial press is working investors into a hysteria surrounding building stress in emerging markets. Stress in emerging markets is nothing new and pops up in specific countries on a yearly basis; however, there is always a risk that country-specific stress can spill over into a global contagion similar to what occurred in 1997-1998. The best way to determine when the risk spills over into something more dangerous is to monitor CDS readings globally as well as the price action in gold. If CDS readings remain muted then we are dealing with country-specific flare ups, but if they spike to levels higher than what has occurred over the last few years and gold surges we need to become more defensive.
With all that said, there is a bright side to the weakness in emerging markets and commodities for developed markets: a disinflationary stimulus similar to what occurred in the late 1990s and, more recently, since 2011…with the caveat that contagion does not result.
Dr. Ed explains the disinflationary stimulus:
The Fed, the Dollar, and Deflation
The woes of emerging economies could temper the Fed’s tapering in coming months by strengthening the dollar, which could push US inflation closer to zero. The JP Morgan Trade-Weighted Dollar Index has been trending higher since mid-2011. A strong dollar tends to depress inflation.
Indeed, the US import price index excluding petroleum has been falling over the past 10 months on a y/y basis through December, when it was down 1.3%. A stronger dollar would be bad news for commodity producers, especially in the emerging economies. When the dollar is rising, commodity prices tend to fall. Weak commodity prices have depressed the currencies of commodity-producers Canada and Australia over the past year.
The latest FOMC statement noted that near-zero inflation could be a problem for the US economy: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.â€
The emerging markets crisis, strength in the dollar, and weakness in commodity prices could frustrate the Fed’s expectations that inflation will rise back closer to 2%.
WHAT NOW?
The S&P 500 hast retreated 4% and is now right on its 100 day m.a. from which it has bounced back three times since June 2013 and which is still rising. If that fails to hold, the next major support is the 200 day m.a. at 1705, another 4% decline.
The Rule of 20 P/E is back into undervalue territory but, at 18.2, is not screaming “buyâ€. At the 200 day m.a., it would be 17.6, right in the middle of the range between “deep undervalue (15) and fair value (20). This is all about shifting sentiment. Let’s wait for the earnings season to end in a couple of weeks. We also might have a better view of a possible soft patch.
HOUSING WATCH: BEAZER HOMES FEELS THE HOUSING SLOWDOWN IN ITS LAST QUARTER
Total home closings were flat at 1,038 closings, with the average sales price from closings up 19%. New orders dropped 4%.
The 4-week average of the purchase index is now down about 12% from a year ago. (CalculatedRisk)
In its preliminary GDP estimate for the quarter, statistics institute INE said Thursday that Spain’s GDP rose 0.3% in the fourth quarter from the third. This is in line with a previous estimate by the country’s central bank, and statements made by Finance Minister Luis de Guindos.
GDP was down 0.1% in the fourth quarter from the same period of 2012, INE said, with a better contribution from internal demand offset by a smaller contribution from the export sector.
For the whole of 2013, the Spanish economy—the euro zone’s fourth-largest—contracted 1.2%, INE added.
The fourth-quarter reading compares with 0.1% growth in the third quarter from the second, and a 1.1% contraction in the third quarter from the same quarter of 2012.
THE (MIDDLE) CLASS OF 2001 VS THE (NOT SO MIDDLE) CLASS OF 2011
From BloombergBriefs: The latest tax data from the IRS (2011) illustrates the fairly grim reality the American middle class faces.
And this telling, and warning, chart:
 President Obama: If You Like Your Retirement Plan, You Can Keep It