THE DAILY EDGE: 21 JUNE 2019: Recession Watch, Flash PMIs

RECESSION WATCH

• U.S. Leading Economic Indicators Remain Unchanged

The Conference Board’s Composite Index of Leading Economic Indicators held steady (2.5% y/y) during May following a 0.1% April rise, revised from 0.2%. The March increase also was lessened to 0.2% from 0.3%. (…)

The unchanged level of the Leading Indicators series reflected lower readings for initial unemployment insurance claims, the ISM new orders index, and stock prices. The indexes measuring consumer expectations for business/economic conditions, building permits, nondefense capital goods orders and consumer goods orders each rose. Holding steady were the average workweek and the reading of a steeper yield spread between 10-year Treasuries and Fed Funds series.

Three-month growth in the leading index declined to 1.1% (AR), down from the high of 9.1% in December 2017.

The Index of Coincident Economic Indicators rose 0.2% (1.9% y/y) after two months of 0.1% increase. Each of the component series contributed positively to the index change, including the change in personal income less transfer payments, nonagricultural payroll employment, manufacturing & trade sales and industrial production.

Three-month growth in the coincident index of 1.5% (AR) was below 3.1% in December 2018.

The Index of Lagging Economic Indicators declined 0.2% last month (+2.0% y/y) after edging 0.1% lower in April. The average duration of unemployment, commercial & industrial loans outstanding, growth in unit labor costs, the services CPI and the business sector I/S ratio contributed negatively to the index change. The ratio of consumer credit outstanding-to-personal income contributed positively. The average prime rate charged by banks was unchanged for the fourth straight month.

Three-month growth in the lagging index fell sharply to -0.4% (AR) from +5.4% at yearend.

The ratio of coincident-to-lagging economic indicators is sometimes considered a leading indicator of economic activity. It increased to the highest level since December.

Hmmm…Unchanged in May with downward revisions in March and April.

Let’s see what Advisor Perspectives’ charts are now showing:

Pretty close to a recession warning. The 12-month change could drop fast given that the LEI is practically flat since September 2018. And this guy is also weakening:

• U.S. Jobless Claims Decreased Last Week Unemployment benefit applications fell by 6,000, a sign of a firm labor market

Still within the channel:

FLASH PMIs

U.S. output growth continues to lose momentum in June

The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index dropped to 50.6 in June from 50.9 in May, which signalled the weakest expansion of business activity for over three years. Private sector output growth has lost momentum in each month since February.

Manufacturers indicated only a fractional rise in production volumes in June, with the pace of expansion the slowest since the current phase of recovery began in mid-2016. Service providers also experienced the weakest business activity performance for around three years.

Survey respondents commented on less favorable domestic economic conditions and a tendency for greater risk aversion among some clients. That said, overall volumes of new business expanded at a slightly quicker pace than the 38-month low seen in May. As a result, backlogs of work increased in June, following stagnation in the previous month.

Employment increased at a moderate pace in June. However, the latest rise in payrolls was the weakest recorded by the survey since April 2017. Anecdotal evidence suggested that heightened economic uncertainty had acted as a brake on staff hiring. Reflecting this, survey respondents indicated the lowest degree of optimism regarding the business outlook since this index began in July 2012.

Meanwhile, inflationary pressures were relatively subdued in June. Input costs and average prices charged both increased at faster rates than May but continued to rise at much slower rates than seen at the start of 2019.

At 50.7 in June, down from 50.9 in May, the headline seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index pointed to the slowest growth of service output since the current upturn began in March 2016.

The seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 50.1 in June, down from 50.5 in May.

The latest reading was the lowest since September 2009 and only fractionally above the neutral 50.0 threshold. Weaker rates of production growth and staff hiring were the key factors weighing on the headline PMI, alongside the largest drop in stocks of purchases for almost a decade.

Chris Williamson, Chief Business Economist at IHS Markit:

Business activity edged closer to stagnation in June, expanding at the slowest rate since February 2016 and rounding off a second quarter in which the survey data point to the pace of economic expansion slipping to 1.4%.

Recent months have seen a manufacturing-led downturn increasingly infect the service sector. The strong services economy seen earlier in the year has buckled to show barely any expansion in June, recording the second-weakest monthly growth since the global financial crisis.

Business optimism has also become more subdued, with sentiment about the year ahead down to a new series low amid intensifying worries about tariffs, geopolitical risk and slower economic growth in the months ahead.

The labor market is also showing signs of weakening. The survey data for June indicate non-farm payroll growth of 140k,averaging 150k in the second quarter after a 200k signal for the first three months of the year .

Prices for goods and services meanwhile rose at a slightly increased rate in June, mainly due to tariffs. To illustrate, some two-thirds of all manufacturers attributed some or all of their raw material cost increases to tariffs during the month. However, the inflationary impact of tariffs was offset by a broader softening of demand, which reduced suppliers’ pricing power. The overall rate of input cost inflation in manufacturing eased to a two-year low, while average selling prices for goods and services showed one of the smallest rises seen since late-2016.

Eurozone flash PMI hits seven-month high but growth and sentiment remain subdued

The pace of eurozone economic growth remained subdued in June but edged up for a second successive month to reach a seven-month high. Growth was driven by the service sector, which helped offset an ongoing manufacturing downturn. Optimism about the future meanwhile dipped lower, running at its lowest since late-2014, suggesting growth will remain weak in coming months. Inflationary pressures also moderated.

The IHS Markit Eurozone Composite PMI® rose to 52.1 in June, according to the preliminary ‘flash’ estimate, up from 51.8 in May to reach its highest since last November. The reading puts growth in the second quarter up slightly on that seen in the first quarter, yet still the second-lowest since the fourth quarter of 2014.

Growth was driven by the service sector, which reported the sharpest rise in business activity since November of last year. In contrast, manufacturing remained in decline, with output falling for a fifth straight month and at a rate marginally steeper than seen in May. While the service sector’s expansion rounded off its strongest quarter since the third quarter of last year, the downturn in manufacturing completed a quarter in which production suffered the sharpest decline for six years.

The overall rise in activity was supported by the largest inflow of new business seen since last November, albeit remaining subdued compared to rates of order book growth seen this time last year. Improved inflows of new work in the service sector were countered by another steep fall in new orders for manufactured goods, which continued to deteriorate at one of the sharpest rates seen over the past six years, albeit showing some signs of easing compared to earlier in the year.

Export orders for both goods and services fell during the month, though the rate of decline moderated slightly to the weakest since January.

Despite inflows of new work rising, the overall pace of business activity exceeded that of new work received. Backlogs of work consequently fell for the sixth time in the past seven months. The rate of decline of backlogs nevertheless moderated for a third consecutive month, reflecting fewer instances of excess capacity. Backlogs in fact rose to the greatest extent for four month in services as firms sometimes struggled to meet demand. In contrast, backlogs of work continued to fall sharply in manufacturing.

Employment growth meanwhile improved marginally, albeit merely running in line with the average seen in the year to date and down on the average seen last year. Solid service sector jobs growth was accompanied by only a marginal rise in manufacturing jobs, through the latter represented an improvement on May, which had seen the first net drop in factory jobs since 2014.

Looking ahead, companies continued to rein-in their expectations of growth in the coming year, which are running at their lowest since October 2014. Sentiment deteriorated in both services and manufacturing during the month. Companies generally reported that a weaker economic outlook, uncertainty, geopolitical issues and intensifying competition would limit growth in coming months. Manufacturers reported particular concerns about slowing demand in export markets and the disruptive impact of trade wars.

Input cost inflation across the two sectors meanwhile moderated to the lowest since September 2016, in turn alleviating upward pressure on selling prices. Average prices charged for goods and services showed the smallest increase since November 2016. Prices for goods showed a particularly modest increase, in part reflecting the first fall in input costs recorded by the survey for three years. Falling raw material prices were commonly blamed on weakened global demand for commodities. (…)

Chris Williamson, Chief Business Economist at IHS Markit:

The eurozone economy picked up further momentum in June, with the headline PMI rising from the lows seen earlier in the year to hint that the worst of the current slowdown may be behind us. However, the overall rate of expansion remains weak, with the survey data indicative of eurozone growth of just over 0.2% in the second quarter.

However, growth trends between the core and the periphery have widened. Germany and France are both showing improved performances compared to earlier in the year as one-off factors (such as the political unrest in France) continue to drop out of the picture, but the data highlight a growing concern that the rest of the region is sliding closer towards stagnation.

Growth also remains very much dependent on the service sector, which in turn largely reflects the relative strength of domestic consumer demand and improving labour markets. Manufacturing, in contrast, remains in a steep downturn which is only showing tentative signs of moderating. (…)

Japan manufacturing conditions deteriorate amid sharpest fall in new orders for three years during June

• Flash Japan Manufacturing PMI® edges down to 49.5 in June, from 49.8 in May.
• Fastest drop in new orders since June 2016
• Resilient output trend in June as manufacturers reduce backlogs of work to greatest extent since January 2013

June survey data reveals a further loss of momentum across the manufacturing sector, as signalled by the headline PMI dropping to a three-month low. Softer demand in both domestic and international markets contributed to the sharpest fall in total new orders for three years. A soft patch for automotive demand and subdued client confidence in the wake of US-China trade frictions were often cited by survey respondents.

Disappointing sales volumes also led to the largest accumulation of finished goods inventories for over six-and-a-half years. At the same time, backlogs of work were depleted to the greatest extent since January 2013, which will likely act as an additional drag on production volumes in the months ahead.

EARNINGS WATCH

With 497 companies in, Q1 earnings per share were up 1.6% as stock buybacks offset the 0.8% decline in dollar profits.

Trailing EPS are now $163.98.

Negative pre-announcements are somewhat higher than in Q1 at the same time and positives are lower.

Dollar profits are expected to decline 1.7% in Q2 and 1.4% in Q3 before turning up 5.0% in Q4. On a per share basis: +0.2% (+0.3% ex-Energy), +1.1% (+2.0%) and +7.6% (+8.5%) respectively.

As such, trailing EPS should not grow much until we start getting Q4 results in mid-January. Unless inflation declines much from the current 2.0% level, the Rule of 20 Fair Value (yellow line) will flatten for a while around its 2951 current level, leaving equity markets fluctuations to the whims of sentiment swings.

Here’s SentimenTrader Smart/Dumb Money chart FYI:

TECHNICALS WATCH

The S&P 500 Index 200-d m.a. has turned positive again but is 6.3% below the Index

• The 13/34–Week EMA Trend Chart from CMG Wealth turned back upward this week::

Apple Warns of iPhone Tariff Risks as China Supply Chain Exposed

The Cupertino, California-based technology giant made the plea in a letter to U.S. trade representative Robert Lighthizer this week. Tariffs will affect nearly all major Apple products, including iPhones, iPads, MacBooks, Apple Watches, AirPods, and the iMac, the company wrote. It would also hurt lower volume products like the HomePod speaker, some Beats headphones, wireless routers, the Apple TV box, cases, and iPhone replacement parts.

“We urge you not to proceed with these tariffs,” Apple said. (…)

In its letter this week to the U.S. government, Apple said that the tariffs would weigh on its global competitiveness. It also stressed its impact on the U.S. economy. “The Chinese producers we compete with in global markets do not have a significant presence in the U.S. market, and so would not be impacted by U.S. tariffs,” Apple said. (…)

Huawei may demand more royalties from US firms that rely on its patented tech

(…) It would mark a big shift in strategy for Huawei, which typically is not seen as especially litigious in terms of intellectual property rights (IPR), even though it holds some crucial patents that underpin the world of telecommunication.

Last week, Reuters reported that Huawei had asked Verizon to pay $1 billion in royalties for more than 230 of Huawei’s patents. The Wall Street Journal reported that the patents related to Huawei range from core network equipment to so-called internet of things technology — defined as physical devices that are linked to one another over the internet. (…)

“Over the past years, we were not aggressive seeking IPR royalties to companies that use our IPR — that’s because we were busy pursuing our business growth. Once we have more time off, we may try to get some money from those companies who use our IPR,” Ren said, adding that patents would not be used as a “weapon to hinder the development of human society.”

Huawei has been effectively banned from selling telecommunications equipment in the U.S., but its technology is still being used by American firms via third parties that employ tech patented by Huawei. (…)

Huawei has been granted more than 69,000 patents globally related to everything from data transmission to network traffic management, according to data compiled for CNBC by Relecura, an intellectual property (IP) analytics platform. Another 49,379 patent applications are pending. Of those granted, over 57% are in China, while nearly 18% are in the U.S., Huawei’s second-largest market for patents.

While the Chinese firm lagged other firms somewhat in terms of SEPs when it came to 4G, it is the leader in the 5G age. Huawei has the largest portfolio of patents for 5G — about 1,554 SEPs — and is ahead of Nokia, Samsung and LG Electronics, according to IPlytics, a market intelligence firm that tracks patents. (…)

U.S. Planned Strike Against Iran but Called Off Mission After Iran shot down a U.S. reconnaissance drone, Washington was preparing to launch a retaliatory strike, but the mission was called off at the last minute, U.S. officials said.

• Trump Ordered Military Strike on Iran, Then Called It Off

(…) “I would imagine it was a general or somebody who made a mistake by shooting that drone down,” Trump said during an Oval Office meeting Thursday with Canadian Prime Minister Justin Trudeau. “I find it hard to believe it was intentional. It could have been somebody who was loose and stupid.” (…)

Geopolitical Futures reminds us that

This is not the first time Iran has targeted an American drone. In 2011, Iran brought down a U.S. RQ-170, and a year later two Iranian jets shot at a U.S. MQ-1 Predator. Just last week, the U.S. military said Iran had launched a missile at one of its drones as it was responding to the attacks on two oil tankers in the Gulf of Oman.