EDGE AND ODDS’ Almost DaiLY CHAT (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 4, 2024

Awful Jobs Report Aside, the Economy Is Still Strong Despite a jobs report scare, the overall picture is of steady growth

(…) There were multiple distortions bringing it down, including a strike at Boeing and two major hurricanes. These affected not only the number of people working but also the survey collection methods of the Bureau of Labor Statistics. Attempting to divine from this figure how the economy is performing at a macro level would be foolhardy.

Perhaps more worrying would be the downward revisions in estimates for job growth in August and September, by a combined 112,000. (…)

Doubts about the reliability of the October jobs report should lead interested observers to look at other indications of the economy’s health. An obvious one is gross domestic product. Data released on Wednesday showed that it grew at a respectable 2.8% annual rate in the third quarter, adjusted for seasonality and inflation, down only slightly from 3% the prior quarter. (…)

During JPMorgan Chase’s quarterly earnings conference call, Chief Financial Officer Jeremy Barnum said the bank’s analysis of its own clients’ spending patterns suggest consumers have cut back some of the splurging they did on vacations and cruises after the pandemic ended. But he added that other discretionary categories like retail spending haven’t slowed. This is partly why the bank’s “central case” expectation for the economy isn’t so much a soft landing but a “no landing scenario” whereby strong growth continues, he said. (…)

The most likely scenario, according to Fed funds futures markets, is now that the Fed’s target rate will be a full percentage point lower by its meeting in June 2025 compared with now, according to the CME FedWatch tool. One month ago, bets centered around 1.5 to 1.75 percentage points of cuts by then. If the economy keeps its recent performance, there may be no need for any rate cuts at all next year. (…)

There is not much sense analyzing October’s job numbers other than the unemployment rate based on the household survey which was steady at 4.1% from 4.3% in July.

The unemployment rate is based on a separate survey of households. Respondents who say they had jobs but weren’t at work because of bad weather are still counted as employed. The same goes for workers with jobs who are on strike.

Based on the household survey, the Labor Department estimated there were 512,000 people with jobs who didn’t work as a result of bad weather, though many of those, such as salaried workers, would still be paid and therefore still be included in the jobs tally. Over the previous 20 years, the number of people out of work because of bad weather during October averaged 69,000.

Weekly unemployment claims were 222k for the week ended October 30, down from 242k at the August 7 pre-hurricanes peak. WARN notices point to lower claims ahead.

(Apollo)

USA: Manufacturing production continues to fall, but at slowest pace in three months

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) posted 48.5 in October, up from 47.3 in September but below the 50.0 no-change mark for a fourth consecutive month. The latest reading indicated that business conditions deteriorated modestly, albeit to the least extent since July.

New orders decreased for the fourth month running in October, and at a solid pace. Respondents indicated that uncertainty around the Presidential Election had been a common cause of a drop in new orders as customers hesitated before committing to new projects.

New export orders were also down, albeit only slightly and to a much lesser degree than total new business. Demand weakness was especially evident in Europe.

Falling sales led manufacturers to reduce output for the third consecutive month, but the rate of contraction was the weakest in this sequence and only slight.

There was increasing confidence that output will expand over the coming year, with sentiment rising for the second month running to the highest since May. In a number of cases, optimism reflected expectations that business would revive following the Presidential Election. Higher sales and falling interest rates also supported confidence.

While business sentiment strengthened, current muted demand conditions meant that firms continued to lower their staffing levels and purchasing activity at the start of the final quarter of the year.

Employment was down for the third month in a row, albeit only modestly. Meanwhile, the rate of contraction in purchasing activity accelerated to a marked pace that was the steepest since June 2023. The latest fall in purchasing was linked to lower new orders and efforts to cut inventories accordingly. Indeed, stocks of inputs were reduced to the largest extent in 14 months.

Firms purchasing inputs during the month were faced with lengthening supplier lead times for the first time in three months. Delivery delays in part reflected the impact of recent hurricanes, but also capacity issues at suppliers and issues with freight.

Some firms also reported delays in shipping finished products to clients, contributing to a further build-up in post-production inventories. Manufacturers continued to deplete outstanding business, however, given ongoing reductions in new orders.

The rate of input cost inflation slowed for the second month running and was the weakest since last November. Where input prices increased, panellists reported higher costs for raw materials such as cardboard, metals and packaging. Rising prices for freight were also mentioned.

Similarly, output prices increased at a slower pace in October, after inflation had hit a five-month high in the previous month.

The “solid” decline in new orders is said to stem from the uncertainty on the U.S. elections. We shall see if they rebound next month.

Regarding the high “confidence that output will expand over the coming year”, why lower staffing levels and cut purchases and inventories at the steepest pace since mid-2023.

• ISM Manufacturing: Still Weak but Future May Be Bright

The ISM manufacturing index pulled back to 46.5 in October, the lowest reading in over a year. A decline in current production and inventories triggered the drop, but it wasn’t all bad as there was a slight gain in new orders. (…)

Source: Institute for Supply Management and Wells Fargo Economics

Canada: Stronger growth of manufacturing sector signalled in October

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI^®) signalled a second successive monthly improvement in operating conditions during October. Moreover, growth was firmer, as signalled by the headline PMI improving to 51.1. That was up from 50.4 in September and a 20-month high.

Underpinning growth in October was a solid rise in manufacturing production. It was the first time since July 2023 that output has increased, and the uplift was the best registered by the survey in over a year-and-a-half. Some panellists reported that market demand had improved, leading to a net increase in total new orders. Growth was however marginal and centred on the domestic market: new export business continued to fall during October, extending the current downturn to 14 months.

With output rising at a noticeably faster pace than new work manufacturers added to their stocks of finished goods. Growth reflected a mixture of positive expectations for orders, but also some delays in shipping from warehouses. It was the fifth time in the past six months that a rise in inventories has been recorded. (…)

Workforce numbers rose in October for the second month in a row, with growth the best since April 2023. Extra workers were also hired in anticipation of increased production in the coming months. Although confidence was a little down since September it remained comfortably above trend. An improvement in sales and market demand, supported by the release of new products, should underpin growth in the year ahead.

On the price front, input cost inflation softened during October, though was still marked amid reports of higher prices for metals and related products. Vendor performance also deteriorated again marginally. Ocean freight delays were commonly reported, linked to a mixture of poor weather and disruption in the Panama and Suez canals.

Finally, output charges were raised in October, but only marginally and to the slowest extent for five months. Whilst firms sought to pass on higher input costs to clients, competitive market pressures tended to limit pricing power.

Eurozone manufacturing slump eases slightly in October

The HCOB Eurozone Manufacturing PMI increased to 46.0 in October, from 45.0 in September. Albeit still below the 50.0 threshold which separates growth from contraction, the uptick in the headline index indicated an easing of the deterioration in the euro area’s manufacturing industry. The overall pace of decline was also the slowest since May.

The eurozone manufacturing sector continued to be weighed down heavily by its two largest economies – Germany and France – where contractions remained sharp. (…) Moderate deteriorations were seen in Italy and the Netherlands, although a renewed improvement at Irish factories was recorded. (…) The top performer was once again Spain, which posted its fastest improvement in industrial conditions since February 2022.

Factory output levels continued to decrease across the euro area in October. Although the rate of contraction cooled since September, it was solid and broadly in line with the average seen over the current 19-month sequence of decline. Production lines were once again squeezed by a lack of incoming new work, including from abroad. Total new order inflows shrank at the start of the fourth quarter, although the extent of the fall was the softest since June. (…)

Employment was cut further at the start of the fourth quarter. Despite easing, the rate of job shedding held close to September’s 49-month record. (…) eurozone manufacturers’ growth expectations were at their weakest in a year.

Meanwhile, as was also the case in the previous survey period, costs faced by eurozone manufacturing companies decreased in October. The reduction was modest, but the fastest since March. Survey respondents opted to share lower input prices with their clients as charges for goods leaving the factory gate were discounted to the greatest extent in six months.

Big Oil Dials Up Output Growth Just as OPEC Mulls Supply Boost

Exxon Mobil Corp. and Chevron Corp. capped Big Oil earnings season by revealing blockbuster increases in fossil fuel production — just as OPEC and its allies are preparing to increase the supply of crude into the global market.

The US oil majors’ increases were fueled by pumping record amounts of crude from the Permian Basin, which continues to surprise analysts with year-over-year growth and efficiency gains. (…)

The US companies weren’t alone. Shell Plc and BP Plc hiked production 4% and 2% respectively, even despite net zero targets that are more aggressive than their American rivals. (…)

Chevron is pumping 27% more oil and gas than a decade ago despite cutting capital expenditure in half. Much of that is because the company was spending heavily on Australian gas projects that are now operational, but it’s also down to efficiency gains and a pivot toward the Permian. Chevron has doubled its production in the basin in the last five years and is now returning records amounts of cash to shareholders.

“We’re getting more efficient in everything we’re doing,” Chevron CEO Mike Wirth said in an interview. “We’re getting more for every dollar we spend.”

The growth in US production — currently about 50% higher than Saudi Arabia — is helping to keep millions of OPEC barrels off the market. These barrels, combined with fresh supply from Guyana, Brazil and elsewhere, could mean that 5 million barrels a day of productive capacity “will be available in 2025 that is not currently producing today,” Macquarie analysts said in a report. That’s agains the backdrop of “relatively weak” demand growth, they said. (…)

Exxon projects in Guyana and the Permian, which now make up about a quarter of overall production, can pump crude for less than $35 a barrel, meaning they should remain profitable during a potential downturn.

• Oil Was Written Off. Now It’s the Most Productive US Industry Oil and gas extraction has seen the fastest labor productivity gains of any sector in the past decade.

(…) “It’s astounding, really,” says Matador Chief Executive Officer Joseph Foran. “You give people a target, and they’ll find out better ways, better equipment, better techniques.” The U-turn, or horseshoe well, is an example of the small improvements that together have pushed oil and gas producers to the biggest labor productivity gains of any US sector over the past decade—including even tech-related industries, which have historically ranked first. The nation’s crude output has risen to a record 13.3 million barrels a day, 48% more than Saudi Arabia. All with less than a third of the rigs and far fewer workers than were needed 10 years ago. (…)

US oil production will grow by 600,000 barrels a day in 2025, about 50% more than this year’s growth, due to higher well productivity, according to BloombergNEF. (…)

Over the past decade, however, the oil boom has helped the American economy grow at a faster pace than those of other rich nations and kept demand for workers high. Even though the shale revolution is now 15 years old, its success has yet to be replicated outside the US, where geology, property rights and available capital combine to make it possible. Higher levels of productivity across all sectors could add $10 trillion to US gross domestic product from 2023 to 2030, according to a McKinsey Global Institute analysis.

Productivity in the oil and gas extraction sector almost tripled in the 10 years ending in 2022, compared with a near-doubling in some tech-driven industries. (…)

Operators continue to improve the fracking process. That includes drilling longer wells and releasing the water at half the rate, reducing friction that can slow the process and waste horsepower. Explorers are now drilling 4-mile (6.4-kilometer) wells horizontally through layers of shale, up from 3 miles only a year or two ago. Industry consolidation is aiding the trend. Producers, by buying companies with neighboring acreage, are gaining access to larger swaths of land into which they can drill lengthier wells. (…)

Back in 2014, Permian operators needed crude prices above $70 a barrel to make a profit. But about a decade later, they can make money in the $40-a-barrel range, even as they expand to less favorable geologic formations, according to S&P Global Commodity Insights. (…)

“If you go back to 2012, there were books written about how shale is going to be a flash in the pan, it’s going to go away, and here we are 11 to 12 years later, and it hasn’t gone away—it still keeps growing.” (…)

Meanwhile, Saudi Arabia reportedly needs $80/bbl to balance its budget.

In September, OPEC+ said it would extend voluntary production cuts of 2.2 million barrels per day to the end of November, and would gradually phase out these cuts on a monthly basis starting Dec. 1. The group’s next committee meeting and full ministerial gathering are also scheduled for Dec. 1.

If OPEC+ phases in the amount it currently plans, oil prices are likely to drop well below the base-case forecast from S&P Global Commodity Insights, to as low as some $40 a barrel in March, said Wu. (MarketWatch)

• Oil prices rise after Iranian commanders vow response to Israeli attack

BTW:

Canadian oil production and exports continue to boom. Canadian crude oil production hit an all-time record in 2023, at 5.1 million b/d, as companies ramped up in anticipation of the Trans Mountain expansion’s startup. Analysts have suggested that total could increase by as much as 500,000 b/d on average this year.

Crude exports from Canada reached a record high of four million b/d in 2023, according to Statistics Canada, and continue to climb. According to figures from the U.S. Energy Information Administration released this week, Canadian crude exports to the United States hit a record 4.3 million b/d in July, 2024, following the startup of the Trans Mountain project. (Globe & Mail)

So the U.S. and Canada combined are producing more than 19M b/d, about 55% more than OPEC+ current production.

• Next year, global oil production is expected to exceed demand by an average of 1.2 million barrels per day, according to the World Bank’s annual Commodity Markets outlook. That supply-demand mismatch has rarely been exceeded. (Axios)

Data: World Bank. Chart: Thomas Oide/Axios

• The World Bank modeled what might happen if the conflict in the Middle-East escalated and reduced the global oil supply by 2 million barrels per day by the end of 2024 — similar to the disruption seen during the Iraq War in 2003.
  In that case, the researchers say oil prices might initially surge, but that spike might be short-lived: Other countries unaffected by the conflict would step in and boost production.

Iran Tells Region ‘Strong and Complex’ Attack Coming on Israel Tehran has warned diplomats that it is planning to use more powerful warheads and other weapons

China Isn’t Planning a ‘Bazooka’ Stimulus—at Least Not This Year Investors’ hopes for bold moves are wishful thinking, no matter who wins U.S. vote

(…) Beijing is discussing how the U.S. election’s potential impact will affect market sentiment in China. They say that authorities are planning on signaling after the legislative session that more steps to support growth are in the pipeline and that a package of incremental measures can be expanded depending on an assessment of risks to the Chinese economy.

For instance, these people say, if Trump wins the election and goes ahead with his promised tariff hikes, China could try to boost what Beijing describes as “effective demand” at home by increasing government spending in high-end manufacturing and other projects seen by the Xi leadership as crucial to the country’s competitiveness. (…)

If Harris is elected and her policies mirror Biden’s tough but more targeted and predictable approach on China, that would likely be the lesser of two evils in Chinese leaders’ views. (…)

Many economists have urged China’s leadership to shift its focus away from factories and toward getting more money into the pockets of Chinese consumers. Such a strategic change in economic policy, the people say, isn’t in the cards, at least for the foreseeable future. (…)

(Bloomberg)

LVMH’s Empty Chinese Megastore Signals Deepening Luxury Crash Upmarket brands are scrambling to adjust strategy after being wrongfooted by the rapid downturn in Chinese spending.

(…) After years of heady growth, China’s luxury market is expected to shrink as much as 15% this year, according to consultancy Digital Luxury Group.

The downturn is partly cyclical, with China’s economy struggling to recover from a nationwide housing crisis. But even more concerning for Europe’s luxury giants are indications of a permanent shift in demand. President Xi Jinping’s campaigns to crack down on corrupt government officials and promote a more equal distribution of income have made displays of wealth not just passe, but potentially dangerous.

“The big watches, the bags, the visible items, put them aside to preserve social unity. And that’s a change in behavior. How long will it last, I don’t know but we have to take this into account.”

Meanwhile, younger Chinese consumers are increasingly spending their money on experiences like travel rather than status symbols. (…)

Kering warned that its annual profit will fall to the lowest level since 2016 after comparable sales at Gucci, the French fashion group’s biggest label, tumbled 25% in the third quarter due to China’s slowdown. LVMH reported a 16% slump in the region that includes China in the same quarter, wider than its 14% drop in the previous three months. (…)

Luxury goods in China are being “deprioritized, especially for middle-income earners,” said Jonathan Siboni, CEO of consultancy Luxurynsight, adding that his company’s data shows a quarter of Chinese consumers find Western brands less appealing than 12 months ago. (…)

Foot traffic at major malls across China during the weeklong holiday at the start of October was 18% lower than a year earlier, according to Baidu Inc. (…)

EARNINGS WATCH

From LSEG IBES:

349 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 77.1% reported earnings above analyst expectations and 17.5% 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 7.8% 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, 59.1% reported revenue above analyst expectations and 40.9% 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 1.3% 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 8.4%. If the energy sector is excluded, the growth rate improves to 11.2%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.8%. If the energy sector is excluded, the growth rate improves to 5.9%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 10.7%. If the energy sector is excluded, the growth rate improves to 13.2%

Revisions have turned broadly positive:

NOVEMBER! DOES IT MATTER?

The legendary Yale Hirsch, founder of the Stock Traders Almanac, first popularized the “Best Six Months of the Year” phenomenon, which purportedly extends from the close of October 31^st each year through the close of April 30^th of the following year.

Is there really anything to it? And if so, how much does it matter today? Let’s examine the history. We will analyze the performance of the S&P 500 Index during the post-WWII era, i.e., starting in late 1945.

The chart below displays the hypothetical growth of $1 in the S&P 500 only during November through April every year starting in 1945. $1 grew to $125.63.

A “quick-and-dirty” analysis might label this performance as “Very good, but far from perfect.” Key things to note are the 76% Win Rate, the 10.1% Median Return, and the lopsided 16 to 2 skew in periods showing a gain or loss of 15% or more.

However, to fully appreciate the results above, we must compare it to the “other” six months – May through October. The chart below displays the hypothetical growth of $1 in the S&P 500 only from the end of April through the end of October every year starting in 1946.

Whereas $1 invested only in Nov-May grew to more than $125, $1 invested only during the other six months grew to just $2.75. Note the inconsistent nature of returns in the chart below and the fact that May-Oct has shown a gain in ten of the last twelve years.

The table below summarizes S&P 500 performance for all November through April periods versus all May through October periods.

Some key things to note:

• It is incorrect to categorize Nov-April as “bullish” and May-Oct as “bearish”
• It IS more accurate to state that Nov-Apr is much more consistently favorable than May-Oct (Nov-Apr up 76% of the time versus only 66% for May-Oct, Median Gain of +6.6% for Nov-Apr versus +2.9% of May-Oct, and Nov-Apr outperformed May-Oct 71% of the time)

This is playing the odds smartly. Let’s see if we can find a fundamental edge to further improve those odds:

During the November-April periods:

• valuations, inflation and profit trends had no clear impact;
• 8 of 16 declining periods were before or during recessions with fed funds rates peaking or declining;
• in 7 of the 8 non-recessionary declines, fed funds were rising.

During the May-October periods:

• no clearly discernible patterns…
• equities still rise 66% of the time but provide lower returns on average, mainly because of some very bad September-October setbacks.

Stan Druckenmiller says that “it’s liquidity that moves market”. Look how equities typically draw so much more new money between November and April than between May and October. Supply/demand does matter.

@SethCL

My take:

• equity exposure should be on the higher side of one’s long-term range at the end of October…
• …unless recession odds are high or the Fed is openly restrictive.
• May to October: careful with valuations. Some dry powder can prove very profitable.
• Recessions are never good. They are generally Fed-induced to fight inflation.

How these new funds are invested is also relevant.

During the past decade, passive equity mutual funds and ETFs have seen $2.8 trillion of inflows compared with $3.0 trillion of cumulative outflows from actively-managed funds. Alongside passive equity inflows, the share of passive ownership for the typical S&P 500 firm has also increased, rising from 18% two decades ago to 26% today.

This trend appears to be accelerating, as passive funds experienced $1.6 trillion of inflows during the past 5 years vs. $1 trillion over the previous 5-year period. Although actively managed mutual funds have experienced consistent outflows during the past decade, active ETFs have attracted $246 billion of inflows over the past decade. (Goldman Sachs)

But even passive funds need to become more active as Almost Daily Grant’s explains:

Big tech’s bull stampede is spurring high-class headaches for some investors, as the Financial Times reports that funds managed by the likes of Fidelity and T. Rowe price are “are being forced to offload shares” in Silicon Valley mainstays to stay on the right side of the taxman.

Internal Revenue Service rules bar any “regulated investment company” – i.e., most mutual funds and ETFs – from allocating more than 50% of its assets to large companies, defined as positions weighted at more than 5%. (…)

Fidelity’s Blue Chip Growth Fund and BlackRock’s Long-Term U.S. Equity ETF each allocated 52% to such large holdings as of Sept. 30 according to Morningstar, while T. Rowe Price’s Blue Chip Growth Fund has been offsides in six of the past nine months.

Watch end of months/quarters…

Speaking of odds:

Everybody’s got a take on Tuesday (from Bruce Mehlman):

• The Economist’s model says Harris is 52% likely to win. 
• Nate Silver’s puts Trump at 51.5% likely. 
• The New York Times’ polling average sees Harris +1%. 
• Real Clear Politics’ average: Trump +0.3%.
• Voter enthusiasm favors Dems, Right track/Wrong track the GOP.
• Net favorability: advantage Harris;
• more trusted on the #1 issue (economy): advantage Trump. 

In reality, nobody knows nothin about nothin.

If history proves anything, it’s that “it’s tough to make predictions, especially about the future.” (Yogi Berra)

EDGE AND ODDS’ Almost DaiLY CHAT (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 1, 2024

Consumer Spending Intact, but So Too is Core Inflation

Broad personal spending rose 0.5% last month amid upward revisions to prior data. In real, or inflation-adjusted terms, spending was up a solid 0.4%.

The details reveal that households continued to spend broadly. Spending on autos was solid. Real spending in that category advanced 1.5%, somewhat reversing the August decline. At a time when financial markets are trying to better gauge where consumers are in terms of discretionary vs. non-discretionary outlays, spending at restaurants rose the most in a year and helped drive services consumption higher last month. (…)

Consumer purchases of nonessentials (i.e, “wants”) were up 3.3% year-over-year, a bit more than the 2.9% pace registered by non-discretionary purchases (i.e., “needs”).

Households have less to rely on now that household purchasing power has shifted away from pandemic-era sources such as excess savings and credit reliance. Income growth is the primary driver now. That makes the continued resilience of spending more reliant on the health of the labor when considering that durability.

The jobs market has certainly moderated, but income is still supportive of spending.

Households have also saved somewhat less to keep spending. Spending outpaced income growth (+0.3%) last month, which drove the saving rate down to 4.6%, the lowest in nearly a year and the third consecutive monthly drop. But as households continue to spend at a brisk clip, it’s difficult to imagine an environment where businesses let go of a large swath of workers. Indeed, separate data this morning showed initial claims for unemployment benefits remained in-check through late October. (…)

The PCE deflator, the Fed’s preferred inflation gauge, rose 0.2% in September, and improved on a year-ago basis, falling to 2.1%. Yet when excluding food and energy, the core PCE deflator rose a stiff 0.3%, the fastest pace in five months and is flat at 2.7% over the past year signaling stickiness in inflation.

Goods prices have contributed heavily to the decline in inflation so far this year, with prices down 1.2% on a year-ago basis, whereas services prices on the other hand continue to be stickier, up 3.7%.

While still an improvement, it is clear that services inflation will need to slow for the Fed to successfully hit its 2% target. Financial markets may have shifted their focus to the labor market, but the Fed is still keeping its eye on inflation progress as it thinks about the pace of monetary easing. (…)

Solid consumer:

• Wages and salaries rose 0.5% as in August, +5.7% annualized in Q3;
• PCE inflation rose 0.2% after +0.1% in August, +2.0% in Q3;
• Core PCE rose 0.3% after +0.2% in August, +2.8% in Q3;
• “Supercore” inflation (core services less housing) rose 0.3% and remained sticky at 3.2% YoY;
• Real expenditures rose 0.4% after +0.2% in August, +4.1% in Q3;
• Real Durable Goods rose 0.4% after –0.2% in August, +7.4& in Q3;
• Real Services rose 0.2% after +0.3% in August, +2.8% in Q3.

BTW: Initial jobless claims fell 11,000 to 216,000 in the week ended October 26. Normalizing after the hurricanes and strike-related layoffs by Boeing and Stellantis.

Happy Holidays!

Employment Cost Growth: The Sweet Spot

The latest reading on employment costs should boost policymakers’ confidence that the labor market is no longer a threat to returning inflation to 2%. The Employment Cost Index advanced at a 3.2% annualized rate in the third quarter, bringing the one-year change in wages & salaries and benefit costs down to 3.9%. Amid a pickup in productivity growth this cycle, that leaves labor compensation rising at pace consistent with both the Fed’s inflation goal and solid real earnings for workers.

The Employment Cost Index (ECI) grew 0.8% in the third quarter, bringing the year-over-year rate to 3.9%. That still leaves compensation costs rising faster than the high-water mark of the past cycle. However, accounting for productivity growth, which has trended higher this cycle, the ECI’s current run rate looks consistent with the Fed’s inflation goal, as productivity gains allow businesses to raise compensation faster than prices.

On an annualized basis, employment costs rose 3.2% in the third quarter, pointing to a further slowdown ahead in the year-over-year rate.

The ECI is the Fed’s preferred gauge of labor costs since it controls for compositional shifts in the economy’s jobs and is broader in scope than other measures. The ECI includes benefit costs in addition to wages & salaries; it also reflects compensation changes for public sector workers along with private sector workers.

Thus, the latest ECI print is likely to boost policymakers’ confidence that wages are not re-accelerating after average hourly earnings growth strengthened to a 4.0% annualized rate in Q3. Other measures also point to an ongoing slide in labor costs, including the Atlanta Fed’s Wage Growth Tracker and the share of small businesses raising compensation both slipping last quarter to levels last seen in 2021.

  

Source: U.S. Department of Labor and Wells Fargo Economics

Within the ECI, there was widespread cooling last quarter. Compensation among private sector workers increased 0.7%—the smallest quarterly gain since spring of 2021—amid a slight easing in wage & salary gains and a more pronounced step-down in benefits growth.

An array of new union contracts have pushed compensation growth for unionized workers over the past year up faster than that of non-unionized workers, who were able to more quickly capture the benefits of the exceptionally tight jobs market coming out of the pandemic. While strike activity still remains elevated relative to the past decade, there are some signs of upward pressures fading, with compensation growth for union workers also easing on a year-ago basis in the third quarter.

Labor costs for public sector workers, which has lagged private sector’s this cycle, also moderated over the quarter for both the wages & salaries and benefits components. (…)

MANUFACTURING PMIs

Note: the U.S. and Canada PMIs are out later today. The Eurozone is out Monday.

China: Manufacturing sector expansion resumes in October

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) rose to 50.3 in October, up from 49.3 in September. Rising past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved following a brief deterioration in September.

Central to the latest advancement in manufacturing sector conditions was renewed new business growth. Incoming new orders placed with Chinese manufacturers increased at the quickest pace in four months, attributed to better underlying demand conditions and successive new business development endeavours. Export orders remained in decline, however, but saw the rate of reduction ease in the latest survey period.

As a result of higher new work inflows, manufacturing production expanded at an accelerated pace. Confidence about future output also improved among Chinese manufacturers, as optimism levels climbed from September’s low to the highest level in five months. Firms were generally hopeful that better economic conditions and R&D efforts can help to support sales in the year ahead.

Purchasing activity meanwhile rose in response to the uptick in new work, which led to further accumulation of stocks of purchases. Post-production inventory holdings had also increased in tandem as production expanded. Anecdotal evidence suggested that some firms started to rebuild safety stock in October, anticipating higher future demand.

Caution was extended towards hiring, however, with the non-replacement of job leavers resulting in the quickest fall in employment levels in nearly one-and-a-half years. In turn, the level of unfinished work rose in October amid the reduction in workforce capacity.

Turning to prices, average input costs rose for the first time in three months, albeit only fractionally. Higher input material costs, such as for metals, and energy prices were often mentioned by panellists as reasons for renewed inflation.

As a result, average selling prices increased for the first time since June as firms passed on higher input costs. Export charges continued to fall, however, as exporters faced higher competition. Furthermore, freight costs reportedly fell for some exports despite average lead times lengthening again in October.

Japan: Operating conditions deteriorate at sharpest rate forthree months

Posting at 49.2 in October, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) fell from 49.7 in September to indicate a sharper deterioration in the health of the sector. (…)

Overall new orders fell for the seventeenth month in a row in October, and at moderate pace. Demand retrenchment was cited as a key factor behind the fall, notably in the automotive and semiconductor sectors. International demand was also subdued, as manufacturers noted the sharpest fall in new export business since March, with particular emphasis on weak demand from the US and mainland China. (…)

China Home Sales See First Monthly Rise in 2024 on Stimulus Value of new-home sales from biggest developers rose 7.1%

The value of new-home sales from the 100 biggest real estate companies rose 7.1% from a year earlier to 435.5 billion yuan ($61.2 billion), reversing from a 37.7% slump in September, according to preliminary data from China Real Estate Information Corp. Sales surged 73% from a month earlier.

The improvement came after China unleashed its strongest package of measures, including cutting borrowing costs on existing mortgages, relaxing buying curbs in big cities and easing downpayment requirements. That said, the recovery was lopsided, with state developer benefiting the most from the stimulus.

Home sales of six state-owned enterprises tracked by Bloomberg Intelligence rose an average 26%, while falling 24% for 13 private developers. This uneven recovery underscores how transactions are skewed toward secondhand homes and those developed by state-owned companies due to the lack of fiscal support, Bloomberg Intelligence analyst Kristy Hung said in a note on Friday.

In late September, the trading hub of Guangzhou became the first tier-1 city to remove all restrictions buying residential property. The other top-tier cities Beijing, Shanghai and Shenzhen allowed more people to purchase residences in suburban areas, while letting some others to buy more homes.

The People’s Bank of China also greenlit the refinancing of as much as $5.3 trillion of existing mortgages for millions of families.

Cash-strapped developers are counting on a sales revival to persuade debt holders. China Vanke Co. suffered another hefty loss in the third quarter, with its contract sales down 35% in the first nine months from the same period a year earlier. Country Garden Holdings Co. also won bondholder approval to extend onshore bond payments after failing to secure enough cash.

AI CORNER

Tech Giants See AI Bets Starting to Pay Off Microsoft, Google and Amazon report strong growth in cloud revenue, but warn of increased spending

Revenue from cloud businesses at Amazon, Microsoft and Google reached a total of $62.9 billion last quarter. That figure is up 22.2% from the same period last year and marked at least the fourth straight quarter in which their combined growth rate has increased.

Accelerating growth in cloud computing is the surest sign yet that spending by AI customers is beginning to justify the huge investments tech giants are making in infrastructure to power the technology.

“Demand continues to be higher than our available capacity,” Microsoft chief financial officer Amy Hood said on a call with analysts.  (…)

Amazon, Microsoft and Google parent Alphabet disclosed this week that they spent a total of $50.6 billion on property and equipment last quarter, compared with $30.5 billion in the same period last year. Much of that money went to data centers used to power AI.

All three companies warned Wall Street that their spending will go higher in the coming months, as did Meta Platforms, which invests in the infrastructure for its own AI applications on Instagram, WhatsApp and Facebook.

Meta plowed $8.3 billion into new property and equipment last quarter, up from $6.5 billion in the same quarter a year ago, as it seeks to build the world’s most-used AI assistant.

“Our AI investments continue to require serious infrastructure, and I expect to continue investing significantly there,” CEO Mark Zuckerberg said.

Skeptics say it remains unclear whether the current excitement over AI will sustain long-term growth that pays for all of the spending.

Nonetheless, investors saw some signs for hope this week in the robust growth at big cloud businesses, which rent computing storage and processing power in data centers to business customers. (…)

Google, which has long been in third place among cloud providers, reported its revenue from that business revenue grew 35% in the third quarter, well ahead of Wall Street’s expectations.

Amazon Chief Executive Andy Jassy said his company’s cloud AI business was on pace to draw billions of dollars in annual revenue and was growing at a triple-digit rate, faster than the overall Amazon Web Services business. (…)

Microsoft said that in the current quarter, sales of AI products and cloud services will surpass $10 billion on an annualized basis for the first time.

Microsoft, Amazon and Google are moving fast to develop their own AI products for consumers and businesses, such as Google’s Gemini and Microsoft’s Copilot. But their cloud businesses represent their primary efforts to profit from the technology’s adoption in the near term. (…)

Microsoft said usage of a service selling access to OpenAI’s technology through the cloud had doubled over the past six months, citing customers such as the AI startups Grammarly and Harvey.

Oracle, the fourth-largest U.S. cloud provider, is also spending heavily to capitalize on growing demand for AI infrastructure that the big three can’t meet. Oracle’s fiscal quarter ends in November, and it is expected to report earnings in December.

Strain on resources

On Sept. 23, I wrote Power Play to highlight the huge increase in energy demand stemming from AI.

Consulting Bain & Co. yesterday released its 2024 Technology Report squarely focused on AI. Some excerpts:

• Bain estimates that the total addressable market for AI-related hardware and software will grow between 40% and 55% annually for at least the next three years, reaching between $780 billion and $990 billion by 2027.

• The power demands and price tags of these large data centers will impose limits on how many can be
  built and how quickly. The scramble to acquire AI resources is already creating extreme competition for resources at the high end of the market, and growing data center requirements will further strain capabilities.
  Power consumption is one critical example. Utilities are already fielding requests from hyperscaler customers to significantly expand electrical capacity over the next five years. Their needs will compete with rising demand from electric vehicles and re-shoring of manufacturing, stressing the electric grid.
• Infrastructure providers and technology supply chains, including networking, memory, and storage, are also investing to meet the demands for high-performance compute from hyperscalers, digital service companies, and enterprises. Large data centers will push the limits and unleash innovation in physical design, advanced liquid cooling, silicon architecture, and highly efficient hardware and software co-design to support the rise of AI.
• Demand for construction and specialized laborers—as many as 6,000 to 7,000 workers at peak levels—will strain the labor pool. Labor shortages in electrical and cooling may be particularly acute. Many projects occurring at once will stress the entire supply chain, from laying cables to installing backup generators.
• Another issue is how to move more computing power closer to the edge for AI in environments with low tolerance for latency, like autonomous driving. The rise of smaller models and specialized compute capable of running these models at the edge are important steps in this direction. Meanwhile, the industry is rapidly developing new form factors for the edge, including edge AI servers, AI PCs, robots, speakers, and wearables.
• Accelerating adoption of AI across industries will pressure the supply of graphics processing units (GPUs) for data centers, as a seemingly insatiable demand for computing resources to train and operate large language models (LLMs) collides with supply chain constraints. In addition, the coming proliferation of AI-enabled devices appears poised to jumpstart a wave of purchases of new personal computers (PCs) and smartphones, which has major implications for the broader semiconductor supply chain.
• The semiconductor supply chain is incredibly complex, and a demand increase of about 20% or more has a high likelihood of upsetting the equilibrium and causing a chip shortage. The AI explosion across the confluence of the large end markets could easily surpass that threshold, creating vulnerable chokepoints throughout the supply chain.

If you missed it, you should really watch Jensen Huang’s interview with 2 tech savvy investors: https://www.youtube.com/watch?v=bUrCR4jQQg8

AI Models Replace Real People in Mango’s Fast-Fashion Ads Technology is being used to generate content more quickly

The Spanish fast-fashion chain Mango is eliminating some human models and using AI-generated avatars to create advertising campaigns more quickly, Chief Executive Officer Toni Ruiz said in an interview. The garments these AI models are wearing are real and available to customers for purchase. (…)

Some imagery appears on the Mango website with a disclaimer that AI was used to create the visuals. (…)

Mango joins other retail brands, such as Levi Strauss & Co., Louis Vuitton and Nike Inc. that have already teamed up with AI modeling companies. The financial benefits are clear, with AI models typically costing a fraction of the price of a human model. (…)

Mango’s use of AI goes beyond marketing and advertising. AI is also helping the company design collections, providing inspiration for fabrics and more. A bot is now capable of creating clothing that conforms to the Mango design aesthetic, Ruiz said. (…)