Eurozone flash PMI hits 21 year high as economy reopens
Eurozone business activity grew at the fastest rate for 21 years in July as the economy continued to re-open from COVID-19 restrictions. The strongest rise in service sector activity for 15 years was tempered, however, by a slowing in manufacturing output growth, linked in many cases to worsening supply lines.
Prices charged for goods and services meanwhile rose at a pace unseen prior to June as demand again outstripped supply. Backlogs of work rose at a joint-survey record rate amid capacity constraints.
Business confidence meanwhile took a hit from rising concerns over the delta variant, pushing sentiment for the year ahead to a five-month low. The headline IHS Markit Eurozone Composite PMI® rose from a 15-year high of 59.5 in June to 60.6 in July, its highest since July 2000, according to the preliminary ‘flash’ reading*.
The July reading indicated a fourth consecutive month of accelerating business activity. This acceleration of growth has coincided with a steady easing of COVID-19 restrictions from a peak in April to the lowest since the pandemic began in July.
A further increase in demand was also recorded, boding well for the strong upturn to be sustained into August, as new order growth measured across both manufacturing and services accelerated to the fastest since May 2000.
However, the recent surge in demand continued to put pressure on operating capacity to a degree unprecedented in the survey’s history. The resulting steep rise in backlogs of uncompleted work matched the record increase seen in June.
Firms hired additional staff for a sixth straight month to meet the upturn in demand. The net gain in employment was the second-steepest since January 2018, and among the largest recorded over the last two decades, though moderated compared to June.
The overall improvement on June’s performance was led by the service sector, where growth accelerated to the fastest since June 2006, marking a fourth successive month of rising output. The removal of some pandemic-related travel restrictions notably led to the largest rise in services exports since comparable data were first collected in 2014.
While manufacturing reported a thirteenth successive month of output growth, the rate of expansion slipped to the lowest since February. In many cases, notably in Germany, output was constrained by shortages of inputs.
Average selling prices for goods and services meanwhile rose at a near survey record pace in July, primarily reflecting constrained supply at a time of rapid demand growth.
Supplier delivery times – a key barometer of supply chain delays – continued to lengthen at one of the sharpest rates ever recorded by the survey, playing a key role in driving input costs higher. Manufacturers’ input prices rose to a degree unsurpassed since survey data were available in 1997. Service sector input cost inflation eased modestly, but remained the second-highest in 13 years.
Within the eurozone, Germany led the upturn, reporting the strongest monthly expansion since comparable data were first available in January 1998. An unprecedented service sector expansion was accompanied by even stronger – though cooling – manufacturing output growth.
The rate of expansion moderated to a three-month low in France, thanks mainly to slower service sector growth, though remaining among the strongest seen over the past three years. Growth in the rest of the eurozone as a whole meanwhile accelerated to the sharpest since June 2000.
Finally, while July’s growth surge was commonly linked to the further easing of virus restrictions, business optimism for the outlook was stifled by growing worries about the delta variant. Expectations for output in the year ahead slipped from June’s record peak to the lowest since February, with lower optimism recorded across the board but slipping most notably in services and in France.
U.S. Initial Unemployment Insurance Claims Unexpectedly Jumped
Initial claims for unemployment insurance unexpectedly rose to 419,000 in the week ended July 17 from an upwardly revised 368,000 (originally 360,000) in the previous week. The Action Economics Forecast Survey expected 350,000 initial claims. The four-week moving average edged up to 385,250 from 384,500. Initial claims are typically volatile in the summer owing to plant shutdowns and school closings.
Initial claims for the federal Pandemic Unemployment Assistance (PUA) program rose to 110,257 in the week ended July 17 from a slightly downwardly revised 96,287 in the previous week. The PUA program provides benefits to individuals who are not eligible for regular state unemployment insurance benefits, such as the self-employed. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.
Continuing claims for regular state unemployment insurance in the week ended July 10 fell to 3.236 million, the lowest since the week ended March 21, 2020, from 3.265 million in the prior week. The insured rate of unemployment held at 2.4%, a post-pandemic low. The rate reached a high of 15.9% in the week of May 9, 2020.
Continued claims for PUA fell to 5.134 million in the week ended July 3, the lowest since the week ended April 25, 2020, from 5.687 million in the prior week. Continued PEUC claims again fell sharply to 4.135 million in the week ended July 3 from 4.710 million in the previous week. The Pandemic Emergency Unemployment Compensation (PEUC) program covers people who have exhausted their state unemployment insurance benefits.
In the week ended July 3, the total number of all state, federal, PUA and PEUC continuing claims declined to 12.574 million, the lowest level since the last week of March 2020 and a decrease of 1.263 million from the previous week. The level is down from a high of 33.228 million in the third week of June 2020. These figures are not seasonally adjusted.
Are these 1.26 million now looking for a job?
COVID-19
Another wave of COVID-19 cases in the U.S. will likely have less economic cost. This assessment is based on the experience in the U.K. to date. The Google Mobility
measure of consumer activity in the U.K. in retail and recreation has declined modestly since the cases began to increase rapidly. In the U.K., the Google Mobility measure of consumer activity also remains well above that seen at the beginning of the year. For the U.S., a number of the high-frequency measures that we monitor have softened a little, but nothing that raises a red flag. According to YouGov, in neither the U.K. or U.S. has social distancing—avoiding going to shops or to public gatherings—changed significantly over the past several weeks. (Moody’s)
- Republicans urge supporters to embrace vaccines in abrupt shift of tone Strategists say party fears being blamed for surge of infections in red states
- Pfizer Inc.’s vaccine was just 39% effective in preventing people from being infected by the delta variant in Israel in recent weeks, according to the country’s health ministry, though it protected strongly against hospitalization and severe illness. Los Angeles County’s top health official said fully vaccinated people made up one-in-five Covid-19 infections in June and warned that the figure may rise in July with a higher level of community transmission. (Bloomberg)
INFLATION!?
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How Much More Will Your Oreos Cost? Companies Test Price Increases Faced with higher costs for materials, transportation and workers, U.S. companies are charging more for products from groceries to industrial goods. A test will come later this year when buyers will have to choose whether or not to absorb additional increases.
This WSJ article adds to my yesterday’s Daily Edge.
(…) Of about a dozen large U.S. companies examined by The Wall Street Journal, most said they have succeeded in raising at least some prices but are unsure whether they can continue to do so. Several said they plan or hope to push additional price increases through.
“I don’t think anyone knows what the word transitory is really going to turn out to mean,” said Julien Mininberg, who heads consumer-products company Helen of Troy Ltd. (…)
In a poll of 606 U.S. businesses across industries, 33% said they are raising prices, while just 4% said they are cutting them, according to 451 Research, a unit of financial data firm S&P Global Market Intelligence. Retail and manufacturing businesses led the way, with 44% and 41%, respectively, increasing prices. (…)
The company’s primary response to inflation is to become more efficient, General Mills spokeswoman Kelsey Roemhildt said. But inflation is so high right now that productivity alone won’t solve it, she added. “Given the level of inflation that we forecast for the fiscal year, we will be using all tools in our pricing tool kit, including…list price increases where needed,” she said. (…)
- Tin Prices Reach Records as Delta Variant Disrupts Supply Prices are at all-time highs, lifted by wagers that coronavirus disruptions in Southeast Asia will fuel shortages of the industrial metal.
(…) The price of tin to be delivered in three months has soared to about $34,000 a metric ton on the London Metal Exchange in recent days, piercing its previous record from a decade ago. Prices are up about 9% this month and nearly 70% for the year. (…)
Tin is used to produce solder, a melted metal that connects computer chips to circuit boards, so demand has skyrocketed alongside purchases of consumer electronics during the pandemic. (…)
- Intel CEO Says Chip Shortage Could Stretch Into 2023 It could take one or two years to get back to a reasonable supply-and-demand balance in the semiconductor industry, Pat Gelsinger said in an interview after Intel posted largely flat second-quarter sales and profit.
- Thermal coal prices soar as demand for electricity rebounds Popularity of fossil fuel as a stopgap to generate power reveals difficulties of clean energy transition
U.S. Existing Home Sales Turn Up in June
The National Association of Realtors (NAR) reported that sales of existing homes rose 1.4% (+22.9% y/y) in June to 5.860 million (SAAR) after decreasing 1.2% in May to 5.780 million, revised from 5.800 million initially reported. These sales had in fact fallen for four consecutive months from 6.660 million in January. The Action Economics Forecast Survey expected sales of 5.940 million in June. These data are compiled when existing home sales close.
The June sales increase took place in three of the four regions of the U.S. The largest was 3.1% in the Midwest (+18.8% y/y), as sales there rose to 1.330 million from 1.290 million. In the Northeast, they rose 2.8% (45.1% y/y) to 740,000 from 720,000, and they rose 1.7% (23.7% y/y) in the West to 1.200 million from 1.180 million. Sales were unchanged in South at 2.590 million (+19.4% y/y)
The median price of an existing home increased 3.7% (23.4% y/y) to yet another record, $363,300. The median home price was highest in the West, where it rose 0.4% (17.6% y/y) to $507,000. Prices elsewhere were less high, but rose more vigorously in June. In the Northeast, the median price was $412,800, up 7.4% in the month, 23.6% y/y. The median home price in the South rose 4.2% (21.3% y/y) to $311,600. In the Midwest, prices increased 3.6% (18.5% y/y) to $278,750. The average sales price of all existing homes rose 2.7% last month (16.1% y/y) to $381,800. The price data are not seasonally adjusted.
The number of existing homes on the market rose 3.3% (NSA) during June, reaching 1.25 million at month end. This number was still down year-on-year, 18.8% for June, and still remained near the record low of 1.03 million units in January and February. These figures date back to January 1999. The months’ supply of homes on the market rose slightly for a fifth month to 2.6 months but remained well below its recent high of 4.6 months in May of last year.
Sales of existing single-family homes rose 1.4% (+19.3% y/y) in June to 5.140 million units (SAAR), the first month-to-month increase this year. Sales of condos and co-ops rose 1.4% (56.5% y/y) to 720,000.
- U.S. Median Home Price Hit New High in June Median price rose to $363,300 as sales increased 1.4% on strong demand
- BTW:
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Lumber Rises as Canada Wildfires Snarl Production, Shipments
Electric-Vehicle Sales Growth Outpaces Broader Auto Industry New plug-in models from Tesla, Ford, VW and others helped to boost demand, while hurdles still remain for the technology.
While still a sliver of the overall market, sales of plug-in vehicles more than doubled in the first half of 2021 compared with last year, when the pandemic sapped sales. That far outpaced the 29% rise for total vehicle sales, according to research firm Wards Intelligence.
(…) Tesla’s U.S. sales rose 78% through June this year, according to an estimate from research firm Motor Intelligence. The increase was helped by Tesla’s Model Y crossover SUV, which has quickly become the company’s top seller since being introduced last year. (…)
Auto companies collectively are spending $330 billion over the next five years to bring more plug-in models to showrooms, according to consulting firm AlixPartners LLP. (…)
“The EV shift is picking up speed, especially in the luxury segment,” Ola Källenius, CEO of Mercedes owner Daimler AG, said in a statement. “The tipping point is getting closer and we will be ready as markets switch to electric-only.” (…)
Results from a consumer survey released in June by UBS showed 37% of U.S. respondents said they were likely to consider an electric vehicle, up from 22% a year earlier. (…)
Goldman Sachs just raised its EV sales forecast for the next 20 years by 20%: “We now expect global EV sales volume to rise from 2mn vehicles in 2020 to 32mn in 2030 (previously 26mn), and 74mn in 2040 (62mn).”
- EV Batteries: The Next Victim of High Commodity Prices? Batteries have gotten a lot cheaper due to economies of scale, but rising commodity prices could upend that trend
Prices of lithium carbonate, used in cathodes, have doubled year-to-date, according to research firm Benchmark Mineral Intelligence. Prices for cobalt hydroxide, which boosts energy density and battery life, have risen more than 40%.
The pandemic has brought disruption, but the real problem is more fundamental, especially in lithium. “The oversupply that crashed prices from mid-2018 to mid-2020 caused multiple projects to be put on care and maintenance with other newer projects stalled,” says Scott Yarham, who leads battery-metals pricing at S&P Global Platts.
Benchmark Mineral Intelligence expects most battery raw-material markets to remain tight this decade. And it forecasts that the lithium market will fall into deficit in 2022. Most supply-chain contracts are “cost pass through,” which means EV manufacturers have to bear cost increases, says Caspar Rawles, head of price and data assessments at Benchmark. But battery makers still face margin pressure. Auto makers will push back when they can by playing different battery suppliers off one another. (…)
Raw materials now account for most of the cost of a battery: Cathode materials such as lithium, nickel and cobalt make up around 30% to 45% of the total, according to S&P Global Platts.
(…) China dominates the processing of chemical materials that go into batteries. It accounts for 65% of the production of anode materials and electrolytes and 42% of cathode materials, according to Goldman Sachs. (…)
Is shrinkflation transitory?
Whether it’s Family Size Cheerios in two different sizes, one fewer bag of M&Ms in a multipack, smaller Scott Shop towels or shrinking salads at Walmart, the shrinkflation subreddit is filled with recent posts complaining about camouflaged price changes. (…)
“The majority of the portfolio has been through the changes,” General Mills spokesperson Kelsey Roemhildt told Axios in response to a query about its products shrinking in size. (…) (Axios)
The Mouse Print web site displays products that are “shrinking inconspicuously right in front of your eyes”
TECHNICALS WATCH
Deviation from Trend Matches 2000 Tech Bubble High
The trend is not always your best friend…CMG Wealth’s Steve Blumenthal shares this NDR chart showing deviations in the real S&P 500 index from its +2.9% long-term trend:
We all know the valuation excesses of the late 1990s, P/E of 27 and Rule of 20 P/E of 30. The dot.com bubble finally burst and the S&P 500 cratered 46%.
The 1960s were more pernicious. There was a first peak in January 1966 (P/E of 18.3 and R20 P/E of 19.8), an 18% baby bear, and a second peak in November 1968 P/E of 19.2 and R20 P/E of 24.5) followed by a 33% mama bear. The complete Jan. ‘66 to June ‘70 roller coaster trip was only -5%, but considering that inflation totalled 23.6% during the period, the setback in real terms was almost 30%.
Core inflation, below 2.0% for 5 years, started to accelerate in 1966, stabilized in the 3.0-3.5% range for about a year, and then took a life of its own reaching 6.6% at the end of 1970. The economy kept growing, profits rose 13% during the period, but P/E multiples deflated to 13x at the June 1970 low when inflation was 6.5% (Rule of 20 P/E of 19.5). If you wish to see if there were any similarities with the present: THE INFLATION DEBATE: JFK, LBJ, JOE AND JAY
The Case for Stablecoins Being the New Shadow Banks
The value of the top four stablecoins has surpassed $100 billion in the space of four years, and the coins — which trade on a blockchain but attempt to maintain a one-for-one peg with fiat currencies — now form an integral part of the crypto ecosystem, often acting as the collateral behind DeFi and enabling transfers between crypto exchanges. (…)
This is the reason why JPMorgan Chase & Co. strategist Josh Younger describes stablecoins as being “the primary interaction point between the crypto-native and traditional financial systems through their reserve funds.” The suggestion is that if stablecoins were to experience disruption, it could reverberate into financial markets through the commercial paper channel, again depending on what issuers hold:
“While there is not much direct linkage between events in cryptocurrency markets and the traditional financial system, reserves backing stablecoins may have some overlap. As noted previously, disclosures from Tether indicate significant holdings of commercial paper (i.e., 50% of their reserves portfolio or roughly $30bn), presumably denominated in USD. Assuming no significant changes to these allocations, the rapid growth of USDT would suggest that they could become one of the largest holders of USCP – if indeed that’s what is included in the disclosed holdings. Furthermore, while other stablecoin issuers have not made the same detailed disclosures, assuming their reserves are similarly allocated, the overall exposure of stablecoins to USCP could be comparable to that of U.S. prime MMFs. But by no means are stablecoin issuers a dominant player in the USCP market. Indeed, while prime funds are easy to identify as active market participants, stablecoin related activity is difficult to spot. (…)
This isn’t a problem as long as the stablecoin market avoids huge bouts of redemptions. So far that has been the case, even in the sharp crypto sell-off in May. That’s somewhat surprising given that — by Younger’s calculations — the top four coins have ‘broken the buck’ (i.e. dipped below their peg) with some regularity; having spent the past 30% to 40% of the past three months trading below par. (…)
For more on that: THE GRANT WILLIAMS PODCAST: BENNETT TOMLIN & GEORGE NOBLE