Memorial Day reminds me to thank donators to Edge and Odds, something I too often neglect to do, buried in my rather busy schedule, which includes self-imposed leisure time away from the laptop to keep some level of sanity.

I am embarrassed to say that this neglect seems to go back to the spring of 2022. Sincere apologies. Time does fly, even more than we think. My late mother-in-law used to say “the slower I get, the faster time goes by”. So true.

I know I will not be able to find time to personally thank all of you, so here’s my public thank you to (in no particular order):

Hopefully, I did not forget anybody for whom I have the basic info. Others I will need to contact directly (or you send me your full names to edgeandodds [at] gmail.com).

*****

Donations are truly appreciated given inflation is hitting the blog from everywhere.

I intend the blog to remain free and open to everybody, devoid of annoying ads and popups. There is no plan to create a premium subscription. You are all premium subscribers and readers to me.

But I’m very grateful to everyone who has kindly supported me, thereby helping everybody else.

There is no donation too small. Many opt for a monthly $5 or $10 donation, a feature Stripe conveniently offers.

Sincere thanks.

Denis

U.S. Flash PMI: Output grows at fastest rate for over two years in May

The headline S&P Global Flash US PMI Composite Output Index rose sharply from 51.3 in April to 54.4 in May, its highest since April 2022. The 3.1 index point rise (the largest gain for 15 months) signals a marked acceleration of growth midway through the second quarter. Output has now risen continually for 16 consecutive months, with May’s acceleration contrasting with the slowdown seen in March and April.

May’s improved performance was led by the service sector, where business activity surged higher to register the fastest growth for a year, reversing the slowdown seen over the prior three months. Services activity has now risen for 16 straight months. Inflows of new work into the service sector also picked up, having slipped into decline in April, registering one of the strongest gains seen over the past year, though demand was again subdued by a further fall in services exports.

The services sector upturn was accompanied by manufacturing output also expanding at an increased pace in May. Factory production rose for a fourth consecutive month. The latest output gain was still lower than seen earlier in the year, however, thanks to a weaker new orders performance compared to that seen at the start of the year. New orders received by factories declined for the second month running, but at only a marginal pace amid the largest export gain for two years.

Optimism about output in the year ahead lifted higher in both manufacturing and services in response to brighter business prospects, the latter in turn often linked to expansion plans, new products and increased marketing. Customers were also reported to have likewise become more optimistic.

However, although future output expectations improved from April’s five-month low, levels of confidence remained below long-run averages in both sectors. Companies continued to report uncertainty about the economic outlook given the possibility of higher-for-longer interest rates, upcoming elections, and wider geopolitical uncertainties.

Employment fell for a second successive month in May, contrasting with the continual hiring trend seen over the prior 45 months. The overall reduction in workforce numbers was only very marginal, however, and less than witnessed in April, as an upturn in manufacturing payrolls was accompanied by a slower rate of job shedding in services.

While factory jobs grew at the fastest rate for ten months in May, buoyed by rising order books and improved business prospects, services employment has now fallen for two successive months, albeit in part due to staff shortages.

Input prices continued to rise sharply in May, the rate of inflation accelerating to register the second-largest monthly increase seen over the past eight months. Manufacturers reported an especially steep increase, suffering the largest cost rise for one-and-a-half years amid reports of higher supplier prices for a wide variety of inputs, including metals, chemicals, plastics, and timber-based products, as well as higher energy and labor costs. Service sector costs also rose at an increased rate, reflecting higher staffing costs in particular.

Companies again sought to pass higher costs onto customers in the form of higher selling prices, the rate of increase of which accelerated slightly compared to April. However, although still elevated by pre-pandemic standards, the rate of inflation across both goods and services remained below the average recorded over the past year.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The US economic upturn has accelerated again after two months of slower growth, with the early PMI data signalling the fastest expansion for just over two years in May. The data put the US economy back on course for another solid GDP gain in the second quarter.

“Not only has output risen in response to renewed order book growth, but business confidence has lifted higher to signal brighter prospects for the year ahead. However, companies remain cautious with respect to the economic outlook amid uncertainty over the future path of inflation and interest rates, and continue to cite worries over geopolitical instabilities and the presidential election.

“Selling price inflation has meanwhile ticked higher and continues to signal modestly above-target inflation. What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Fed’s 2% target still seems elusive.”

Boost for World Economy as U.S., Eurozone Accelerate in Tandem Surveys point to a fresh acceleration in the U.S., even as growth in the eurozone strengthens

(…) Eurozone business activity in turn increased for the third straight month in May, and at the fastest pace in a year, the surveys suggest. The currency area’s joint composite PMI rose to 52.3 from 51.7.

The uptick was led by powerhouse economy Germany, where continued strength in services and improvement in industry drove activity to its highest level in a year. That helped the manufacturing sector in the bloc as a whole grow closer to recovery, reaching a 15-month peak. (…)

Similar surveys pointed to a further acceleration in India’s rapidly-expanding economy, and to a rebound in Japan, where the economy contracted in the first three months of the year. (…)

John Authers:

Thursday brought news that S&P Global’s version of the purchasing manager index for US combined manufacturing and services had risen to its highest level in two years. While still only at 54.4, where 50 marks the boundary between recession and expansion, this was still taken as disquieting evidence that the Fed’s monetary tightening hadn’t had much effect on the economy. (…)

Investors took a negative view thanks to the last FOMC minutes, published Wednesday afternoon. The main points were that “many” Fed officials had expressed uncertainty over the degree to which policy is restraining the economy (some disagree that the current monetary settings are restrictive), while policymakers agreed this year’s disappointing inflation data meant it “would take longer than previously anticipated for them to gain greater confidence” that it was heading for the 2% target.

This was really no different from what Fed officials had been saying publicly, but it was taken as confirmation that the central bank still expected rates to stay “higher for longer.” Sosnick commented:

Coming on the back of yesterday’s “higher for longer” Fed Minutes, bond traders were in no mood to hear about a strengthening economy. In theory, a stronger economy should be good for companies, and thus stocks, but because we are all so obsessed with the Federal Reserve and other central bank policymakers, we see most stocks trending lower as bond prices fall.

The minutes also chimed with a noticeable move toward more aggressive language by the Fed’s regional presidents. They are usually more hawkish than the central bank’s governors, who are based in Washington, but analysis by Oxford Economics shows the gap is widening:

That could mean resistance if Powell wants to cut rates later this year. It’s hard to see the latest data as truly shifting the balance of probabilities for the economy, but somehow the market is seeing it that way. And thus, fear of Jerome Powell has, at least for a day, overcome hero worship of Nvidia’s Jensen Huang.

Wondering what’s the difference between a Fed governor and a Fed president?

Federal Reserve Governors

• There are 7 members of the Board of Governors appointed by the President and confirmed by the Senate.
• They serve staggered 14-year terms to provide continuity and insulation from political pressure.
• All 7 Governors are voting members of the Federal Open Market Committee (FOMC) which sets monetary policy.
• The Chair and Vice Chair of the Board are also the Chair and Vice Chair of the FOMC.
• The Governors provide leadership and oversight for the entire Federal Reserve System.

Federal Reserve Bank Presidents

• There are 12 regional Federal Reserve Banks, each with its own president.
• The Reserve Bank presidents are not presidentially-appointed, but rather selected by each Reserve Bank’s board of directors.
• Only 5 of the 12 Reserve Bank presidents serve as voting members of the FOMC on a rotating basis each year.
• The New York Fed president is a permanent voting member due to that bank’s importance in open market operations.
• Reserve Bank presidents represent their region’s economy at FOMC meetings and provide insights that help formulate monetary policy.

In summary, the Governors provide national leadership and all vote on monetary policy, while the Reserve Bank presidents contribute regional perspectives with only some serving as voting members of the FOMC at any given time.

Central bankers should acknowledge blind spots in a less certain world, Fed’s Mester says  With the economy in flux following the COVID-19 pandemic and with uncertainty surrounding even basic aspects of how things work, precision may be an enemy.

(…) Given how much is unknown, she said the Fed should build more of that uncertainty into how it talks about policy, focusing less on a baseline or “modal” outlook and more on a handful of the most likely outcomes – or scenarios – that would help the public better focus on how policymakers would react when the economy, as will inevitably happen, does something different than expected.

“If you only communicate the modal view, you’re kind of miscommunicating your actual view about the economy to the public,” Mester said, referring to economic projections made early in the pandemic as an extreme example of how any outlook relies on sets of assumptions that she feels are becoming harder to make. (…)

How do you set yourself up so that you’re well positioned no matter how things go?” Mester said, noting how the initial assumption that rising inflation in 2021 would prove “transitory” delayed interest rate hikes that she feels could have started earlier and proceeded with less risk and drama.

Better communication about how much the Fed doesn’t know, she said, could help avoid that sort of mistake in the future by discussing, be it in each policy statement or in less frequent documents like the biannual monetary policy report to Congress, the most likely economic narratives and the “reaction function” Fed officials would use in response to them.

Getting the Fed’s disparate group of up to seven governors and 12 reserve bank presidents on the same page about that approach may be a challenge, Mester acknowledged. But in her view it would boost the central bank’s credibility to be blunt about the spread of possible outcomes rather than allow more precise public expectations to develop and then be proven wrong.

“Let’s just pick three salient scenarios. There’s going to be one that probably has a little more weight on it … This is what we think is going to happen. However, we have these alternative risks.

“That isn’t a trivial thing to do,” she said, but “that can only enhance your credibility.”

DoubleLine CEO expects imminent US recession, government debt surge

Jeffrey Gundlach, the chief executive of investment management company DoubleLine Capital, expects a U.S. recession as soon as this year, he said on Thursday, as higher interest rates pressure U.S. consumers and companies.

Signals of brewing trouble in the U.S. economy such as rising credit card delinquencies and softer retail sales data suggest the possibility of an economic contraction is more imminent than the risk of an inflationary rebound, he said. (…)

The money manager, often dubbed ‘the bond king’, said he was staying away from the riskiest parts of the corporate debt market such as triple-C rated companies’ bonds as well as private credit investments because he expects companies’ debt defaults to surge. (…)

Goldman Sachs:

We are moving our forecast of the Fed’s first rate cut back one meeting, from July to September. Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data. After the stronger May PMIs and lower jobless claims, this does not look like the most likely outcome.

The timing of the first cut remains a difficult question for a few reasons. First, we continue to see rate cuts as optional, which lessens the urgency. Second, inflation is likely to be much improved by September but hardly perfect and still at a year-on-year rate that makes cutting a less than obvious decision. Third, while the Fed leadership appears to share our relaxed view on the inflation outlook and will likely be ready to cut before too long, a number of FOMC participants still appear to be more concerned about inflation and more reluctant to cut.

Chips Ahoy!

Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy.

Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy. (Bloomberg)

TAIWAN RISK

What could happen in the event of a full-blown invasion? A Bloomberg Economics model based on countries that were invaded or occupied in the past 100 years estimates at least a 40% contraction in Taiwan’s GDP during the first year of war, while the implications for the rest of the world would be staggering:

A war over Taiwan would shock global trade and supply chains, disrupt regional trade, tank global financial markets, and likely trigger Western sanctions on China. If it led to a US-China war, we estimate a conflict would cost the world about 10% of GDP in the first year — almost twice the impact of the global financial crisis or the Covid pandemic.

Taiwan can count on US support for now. Whether it could do so under a Trump presidency is a big question. The former president is not the biggest fan of Taipei, a fact he’s made known publicly. To the power of chips, add political uncertainty in the US. (Reuters)