Note: Travelling week

MANUFACTURING PMIs

S&P Global: Employment rises amid improved business confidence

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) remained below the 50.0 no-change mark in November, but at 49.7 pointed to only a marginal worsening in the health of the sector during the month. The reading was up from 48.5 in October and the highest in the current five-month sequence of deteriorating business conditions.

Central to the near-stabilization of the sector in November was a much slower reduction in new orders, which decreased only marginally and at the slowest pace in five months. Some manufacturers indicated that domestic demand conditions had started to improve following the results of the Presidential Election.

On the other hand, new export orders decreased at a sharper pace. The rate of contraction was the fastest since June 2023 as international demand worsened.

Although the pace of reduction in total new orders eased, a further fall in new business contributed to another drop in manufacturing production, the fourth in as many months. Hurricane disruption, price increases and a partial hangover from pre-election uncertainty were also mentioned as factors leading production to fall. The pace of decline quickened from that seen in October.

While production decreased, there was a marked improvement in the outlook for output over the coming year. November saw business sentiment rise to the joint-highest in just over two-and-a-half years as almost half of respondents predicted growth.

Firms commented on hopes that the incoming administration will help strengthen the business environment, while improved economic conditions, new order growth and capacity enhancements were also factors supporting the positive outlook.

Growing confidence encouraged manufacturers to expand their workforce numbers in November, thereby ending a three-month run of job cuts.

The increase in staffing levels at a time when new orders were continuing to fall meant that firms were able to reduce their backlogs of work again midway through the final quarter of the year. Moreover, the rate of depletion in outstanding business was the fastest in 16 months. Meanwhile, stocks of finished goods increased for the fifth month running.

Purchasing activity and stocks of inputs decreased again in November. However, as was the case with new orders, both rates of decline eased and were only slight. Some firms started to purchase additional inputs in response to positive output expectations, while others did so in an effort to get ahead of the potential imposition of tariffs.

One in four companies reporting higher input purchases in November attributed the rise to tariff threats, underlying US manufacturers’ concerns over the inflationary impact of tariffs.

Manufacturers recorded a slower rise in input costs in November, and one that was only modest. The pace of input price inflation eased for the third month running to the weakest for a year.

On the other hand, the pace of output price inflation quickened slightly and remained slightly above the pre-pandemic average.

Finally, suppliers’ delivery times lengthened for the second successive month. The modest lengthening of lead times was nonetheless the most pronounced since October 2022. Respondents indicated that delivery delays reflected labor shortages at suppliers and issues with transportation logistics.

• ISM: A Five-Month High is Still Rather Low

The 48.4 print for the November ISM marks the highest reading since June but is still below the breakeven line of 50. In an era in which firms are prioritizing spending on intellectual property assets rather than equipment and physical products, manufacturing continues to struggle.

Of the five sub-components that feed into the headline, only new orders was in expansion territory in November coming in at 50.4. While this is only just above 50, it marks a jump of a little more than three points from the prior month. (…)

Whether this move in November is a reflection of stocking up in worried anticipation of tariffs or just an organic demand-driven increase remains to be seen. Note that inventories shot up 5.5 points, the largest monthly gain in today’s report, though the 48.1 reading is not yet indicative of a broadly based stockpiling effort. (…)

Canada: November sees strongest growth of manufacturing sector since early 2023

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI^®) remained above the crucial 50.0 no-change mark for a third successive month in November. With the PMI improving to 52.0, from 51.1 in October, the rate of growth also improved to its highest since February 2023.

Underpinning the PMI in November were firmer gains in both production and new orders. For output, the increase was the best in two-and-a-half years, whilst growth in new work was the steepest for 21 months.

Panellists reported that market activity was generally better, linked in part to recent reductions in interest rates. Growth was however centred on the domestic market as new export orders declined for a fifteenth successive month. Panellists reported that global manufacturing demand remained subdued. (…)

On the price front, input cost inflation picked up since October, hitting its highest level for over a year-and-a-half. There were reports that the stronger US dollar had raised the cost of imported goods, whilst panellists specifically noted higher livestock and lumber prices. In response, firms increased their output charges, with inflation hitting a three-month high albeit to a level that remained well below its historical average.

Finally, panellists are confident of a further rise in output from present levels in 12 months’ time. There are hopes that the improvement in demand and underlying market activity will be sustained. That said, optimism edged lower in November, dropping slightly to reach its lowest since July.

U.S. manufacturers’ mood improved post elections but actual demand has yet to show strength. Canadian new export orders fell again and Mexican manufacturers “commonly reported weaker demand from the US” per S&P Global’s survey.

Whatever tariffs front running there is, it only accrues to foreign producers, mainly Chinese. From yesterday’s China manufacturing PMI:

Incoming new orders placed with Chinese manufacturers increased amongst the fastest rate in three-and-a-half years. A renewed rise in export orders also supported the rise in overall new orders.Panellists revealed that better underlying demand conditions, new product launches and stockpiling following the US election were amongst the reasons for the rise in new work.

China Targets Critical Metals in Tit-for-Tat Response to US Beijing bans exports of germanium, gallium to American market

Gallium, germanium, antimony and superhard materials are no longer allowed to be shipped to America, the Ministry of Commerce said in a statement Tuesday. Beijing will also place tighter controls on sales of graphite, it added.

“The US has generalized the concept of national security, and politicized and weaponized economic, trade and tech issues,” a ministry spokesperson said in a separate statement. “It has abused export control measures and unreasonably restricted certain products’ export to China.”

On Monday, the White House slapped fresh curbs on the sale of high-bandwidth memory chips made by US and foreign companies to China. That was the latest salvo in an intensifying campaign to contain Beijing’s technological ambitions.

China’s response targets metals used in everything from semiconductors to satellites and night-vision goggles. A Chinese export ban on gallium and germanium would deliver a $3.4 billion hit to the US economy, the US Geological Survey said in a report last month. (…)

“It’s a clear signal that China is preparing to strike back more forcefully against US economic pressure than it has in the past few years.” (…)

There were zero exports of gallium and germanium to the US this year, which suggests that American industries were drawing on inventories or procuring the metal from other sources. The US accounted for only about a 10th of all China’s antimony exports.

Separately on Tuesday, three Chinese industry associations — representing the internet, semiconductor and auto sectors — urged Chinese companies to choose carefully when buying chips from US.

Fourth-Quarter GDP Growth Estimate Increased

On December 2, the GDPNow model estimate for real GDP growth in the fourth quarter of 2024 is 3.2 percent, up from 2.7 percent on November 27.

Construction Industry Braces for One-Two Punch: Tariffs and Deportations Trump’s immigration and trade policies put home builders in a vulnerable position

(…) McKinney, like the country’s other fastest-growing cities, is a town built by imported labor and home to an industry hooked on imported steel and lumber.

That leaves the construction industry particularly vulnerable to President-elect Donald Trump’s vow to deport millions of undocumented immigrants, and his threats to introduce new tariffs on Mexico and Canada.  

“We will absolutely have a labor shortage,” said George Fuller, a longtime Texas developer who is also mayor of McKinney. “Whether you want to acknowledge it or not, these industries depend on immigrant labor.” (…)

“The short-term impact, I don’t want to say devastating, but it would be a significant impact,” he said.

In Texas, California, New Jersey and the District of Columbia, immigrants make up more than half of construction trade workers, according to Riordan Frost, a senior research analyst at the Harvard Joint Center for Housing Studies. Undocumented workers make up an estimated 13% of the construction industry—more than twice that of the overall workforce, according to a recent estimate from Pew Research Center. (…)

Overall, about 7.3% of home-building materials are imported, according to the National Association of Home Builders. Softwood lumber, used to frame buildings, often comes from Canada, which now has a tariff of 14.54%. The U.S. is also the world’s top importer of the crucial housing materials iron and steel. About a quarter of America’s $43 billion in imported iron and steel came from Canada as of 2022, according to the Observatory of Economic Complexity.

Another key home-builder import from both Mexico and Canada is cement. The U.S. imported $512 million of cement from Canada and $254 million from Mexico in 2022. Gypsum, which is used to make drywall, is also imported from both countries and has already jumped nearly 50% in price since 2020, NAHB said. (…)

Michael Bellaman, president and chief executive of Associated Builders and Contractors, which endorsed Trump, said “enthusiasm is very high” because of the prospect of deregulation under the president-elect. Federal and local government regulations add more than $90,000 to the cost of a new home, according to NAHB. (…)

After more than 300,000 undocumented immigrants were deported between 2008 and 2013, Americans didn’t replace all the construction positions they previously held, according to a study by the universities of Utah and Wisconsin this year. It found the deportations caused a resulting loss of about a year’s worth of construction for the average county and raised new home prices roughly 20%. (…)

Since 2022, some 130,000 newly arrived immigrants have joined the construction industry, pushing the number of foreign-born construction workers to a record, according to the NAHB. (…)

Even with the surge in migration, roughly half of builders reported shortages earlier this year for directly employed workers and for subcontractors, according to the association’s survey of electricians, roofers, plumbers, painters and businesses in several other trades. (…)

SENTIMENT WATCH

Wall Street Short Sellers Throwing In the Towel, Citigroup Says S&P 500 futures positioning ‘completely one-sided’: Citi

Short-sellers are capitulating as the S&P 500 Index keeps hitting record highs and is set for its best year since 2021, according to Citigroup Inc. strategists.

Investor positioning in S&P 500 futures is “completely one-sided,” the strategists led by Chris Montagu wrote in a note. It’s “setting new highs for a fourth consecutive week and increasingly the hold-out shorts are capitulating,” they said.

Note: Travelling week

CHINA PMIs

Manufacturing sector expansion accelerates

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®)  rose to 51.5 in November, up from 50.3 in October. Rising further past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved for a second straight month. The pace of growth was the fastest since June and above the series average.

Central to the latest advancement in manufacturing sector conditions was greater new business inflows. Incoming new orders placed with Chinese manufacturers increased amongst the fastest rate in three-and-a-half
years. A renewed rise in export orders also supported the rise in overall new orders.

Panellists revealed that better underlying demand conditions, new product launches and stockpiling following the US election were amongst the reasons for the rise in new work.

Demand for consumer goods was particularly strong.

Production levels increased on the back of higher new work, rising at the quickest rate since June, with intermediate goods makers recording the fastest rate of growth among the monitored segments.

A second successive month of backlog accumulation was meanwhile observed in the Chinese manufacturing sector, though firms remained cautious about hiring. Headcounts declined for a third straight month in November due to resignations and redundancies. The rate of job shedding eased from October and was modest, however.

Meanwhile, purchasing activity and stocks of purchases both increased in the latest survey period. Anecdotal evidence suggested that rising production requirements led Chinese manufacturers to build safety stock. Post-production inventory also rose in November with instances of outbound shipment delays being mentioned. In contrast, lead times for the delivery of inputs stabilised after lengthening through the past five months.

Turning to prices, average input prices increased at the fastest pace in five months as raw material costs were reported to have risen. In turn, firms shared their additional cost burdens with clients, leading to the quickest gain in selling prices since October 2023.

Export charges continued to fall marginally, however, with international pricing power impacted by competition.

Finally, sentiment in the Chinese manufacturing sector improved in the penultimate month of the year. The level of confidence was the highest since March. Firms signalled hopes that better economic conditions and government policies can support sales in the year ahead.

That said, it is worth noting that the downward pressure facing the economy remains prominent, marked by continued contraction of employment, indicating the effect of economic stimulus is yet to be felt in the labor market and businesses’ confidence in expanding workforce needs to be strengthened.

While the economic downturn appears to be bottoming out, it needs further consolidation. The consistency and effectiveness of those additional stimulus measures deserves close attention. The structural and cyclical pressures facing the economy are expected to continue, coupled with the likelihood of continued accumulation of external uncertainties, which requires sufficient policy buffers.

• China’s Factory Activity Expands in Sign of Slow Recovery Official PMI rises to 50.3 in Nov. from 50.1 in Oct.

The official manufacturing purchasing managers’ index was 50.3, the National Bureau of Statistics said on Saturday, above the 50 mark that separates expansion and contraction. The median forecast of economists surveyed by Bloomberg was for a gain to 50.2, from 50.1 in October.

The non-manufacturing measure of activity in construction and services slipped to 50 in November from the October reading of 50.2. That compares with a forecast of 50.3. The composite index was unchanged at 50.8.

Goldman Sachs: “In October, both official and private measures of factory activity exceeded analyst expectations, while home sales rose for the first time this year. Infrastructure investment was steady and the urban jobless rate fell in October to the lowest in four months.”

• Asian Manufacturing PMIs Send Positive Signals But Tariff Threat Tempers Upside Asia’s export-oriented economies face risks from Trump’s potential tariffs on U.S. imports

(…) Hopes for a pickup in sales and demand bolstered South Korean firms’ 12-month outlook for output, and drove Taiwanese manufacturers’ confidence to a three-month high, the data indicated. New export orders also rose, touching a four-month peak in South Korea and climbing to the highest since February 2022 in Taiwan.

In Taiwan, “Asia, Europe and North America were all cited as sources of higher demand, which is impressive in the context of the underlying weakness presently apparent in much of the global manufacturing economy,” said Paul Smith, economics director at S&P Global Market Intelligence.

The headline S&P Global manufacturing PMI for Asean increased for the first time in six months in November, backed by a solid rise in production in Southeast Asia, the data showed.

New orders rose in China too, climbing at the quickest pace since February 2023 amid renewed export growth, while business confidence hit an eight-month high, according to the Caixin PMI compiled by S&P Global.

However, export order strength could be down to frontloading of shipments as manufacturers try to get ahead of tariffs, economists say. Trump vowed tariffs of up to 60% on Chinese goods during his campaign and has announced additional tariffs of 10% in the wake of his election win.

“We expect China’s new export orders to strengthen further in the next few months, as U.S. importers engage in stockpiling. This will spill over and boost activity among Asian manufacturers plugged into Chinese supply chains,” said Erica Tay, an economist at Maybank.

If pre-emptive stockpiling is behind the regional upturn that means current strength is borrowing from future demand, which will weigh on output in the second half of next year, Tay said.

Another source of uncertainty centers on which other Asian economies may be in the firing line.

“Trump’s protectionist rhetoric won’t be limited to China,” said analysts at BMI, a Fitch Solutions company.

They see tariff threats as a negotiating tactic that will be used on others too. Among the top candidates are Vietnam, Japan and South Korea—all major contributors to the U.S. trade deficit, a parameter BMI reckons plays a part in designating tariffs targets. (…)

Trump Weaponizing Dollar Seen as a Needless BRICS Provocation

(…) Trump on the weekend warned the so-called BRICS countries he would require a commitment that they wouldn’t create a new currency as an alternative to using the greenback, and repeated threats to levy a 100% tariff if they did. The comments, made Saturday in a post to his Truth Social network, echo those he used in his election campaign.

“The dollar remains dominant for several reasons: the USD is the most liquid currency in the world, trades freely, it is also the lending currency of the world,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “If Trump increases the pressure on BRICS, it may well accelerate a move away from the dollar.” (…)

The dollar accounted for about 88% of all trades in the $7.5 trillion-a-day foreign exchange market, based on the latest triennial survey from the Bank for International Settlements published in 2022. BRICS members control more than 40% of central-bank reserves globally and have discussed ways to reduce reliance on the greenback — including the idea of a single currency for use between them. (…)

Any attempt to dethrone the greenback is easier said than done. The size and strength of the US economy is unparalleled, Treasuries are still one of the safest ways to store money, and the greenback is still the ultimate beneficiary of haven flows.

“With regards to this specific threat, it doesn’t appear realistic and the probability is low, but serves as a good reminder that President-elect Trump wants to keep the US dollar as a reserve currency and is unlikely to proactively devalue the dollar,” said Cindy Lau, head of fixed income at Avanda Investment Management Pte. in Singapore.

“This also reaffirms our thinking that tariffs will be continually used as a threat in his term, to serve his objectives and as a powerful bargaining tool,” she said.

While there’s no immediate threat to the dollar’s supremacy, the long-term outlook is less certain.

Brazil and China had previously struck deals to settle trade in their local currencies, while India and Malaysia had inked an accord to increase usage of the rupee in cross-border business. Thailand and China’s central banks in May signed a memorandum of understanding to promote bilateral transactions in local currencies, and Trump’s latest comments may actually increase the likelihood of further such agreements.

“From today, anyone outside the US who uses the dollar for transactions will sense this as a yoke that the US is imposing on them,” said Ulrich Leuchtmann, head of foreign-exchange research at Commerzbank AG in Frankfurt. “In the long term, this cannot be a stable state of affairs. Especially since this yoke is likely to be felt all the more oppressively the more selfishly US policy acts in other areas.”

Half-point interest-rate cut back in play after meagre third-quarter Canadian GDP growth

Canadian gross domestic product grew at an annualized pace of 1 per cent in July through September, down from 2.2 per cent in the second quarter, Statistics Canada reported Friday. This was broadly in line with Bay Street estimates but below the central bank’s downwardly-revised forecast of 1.5 per cent annualized growth. On a per-capita basis, GDP contracted for the sixth consecutive quarter.

An advanced estimate for October, which showed 0.1 per cent GDP growth that month, suggests economic activity will fall short of the central bank’s forecast in the fourth quarter as well. (…)

Interest-rate swap markets, which capture investor expectations about monetary policy, now see a roughly 45-per-cent chance the central bank will lower its policy rate by half a percentage point. That’s up from 30 per cent before the GDP numbers were released, according to LSEG data. (…)

Consumer spending grew at a healthy annualized clip of 3.5 per cent in the third quarter, and residential investment grew modestly for the first time in a year. That suggests interest-rate-sensitive parts of the economy are starting to respond to the monetary policy easing cycle that began in June.

Relatively strong consumer demand, however, was offset by softer-than-expected imports and exports as well as a significant drop in business investment, with spending on non-residential structures, machinery and equipment falling 11.3 per cent in the quarter. (…)

Friday’s data contained a significant upward revision to earlier GDP numbers. Statscan raised its estimates of economic activity in 2021, 2022 and 2023, as well as the first half of 2024. Combined, these revisions left Canada’s overall GDP level about 1.5 per cent higher than previously thought.

This suggests the Canadian economy entered the current period of weakness on a stronger footing than previously thought, and that the output gap – the difference between what an economy can produce and what it is producing – may be smaller than central bankers believed. (…)

The November labour force survey numbers, out next Friday, are the last key piece of information before the December rate decision.

Weird stats:

• Real government spending increased by 4.6% after +3.8% and contributed +1.0pp to annualized real GDP growth. The release noted that the rise in government expenditure reflected an increase in spending across all levels of government.
• Real business investment declined by 3.6% after +3.3% in Q2 and subtracted 0.7pp from annualized real GDP growth.
• On a per-capita annualized basis, real consumption expenditure increased by 1.0% after having declined by 1.5% in Q2.
• Compensation of employees grew at a +8.2% annualized pace in Q3 (vs. +7.4% in Q2).
• On net, household net disposable income increased by 9.4% in Q3 (after an upwardly revised +10.3% in Q2). In real terms, real household net disposable income increased by 7.7% (after +6.0%). The household saving rate increased to 7.1% from a downwardly revised 6.2% in Q2 (it averaged 2.2% in 2019).

EARNINGS WATCH

From LSEG/IBES:

482 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.3% reported earnings above analyst expectations and 18.9% 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 7.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.

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

In aggregate, companies are reporting revenues that are 1.5% 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 9.0%. If the energy sector is excluded, the growth rate improves to 11.7%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 5.3%. If the energy sector is excluded, the growth rate improves to 6.4%.

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

Seven companies offered guidance last week, 5 negative, one positive.

Nonetheless: