U.S., China Move Closer to Trade Deal Despite Harsh Rhetoric
(…) U.S. negotiators expect a phase-one deal with China to be completed before American tariffs are set to rise on Dec. 15, the people said. Outstanding issues in the talks include how to guarantee China’s purchases of U.S. agricultural goods and exactly which tariffs to roll back, they added. (…)
COMPOSITE PMIs
November’s final IHS Markit Eurozone PMI®
Composite Output Index continued to signal
marginal growth of the euro area’s private sector.
Posting 50.6, unchanged on October and slightly
better than the earlier flash reading of 50.3, the
index remained amongst the lowest levels in the
past six-and-a-half years.
The services economy again remained the primary
driver of overall growth, despite its positive
contribution waning slightly since October. In
contrast, manufacturing output fell again, extending
the current period of contraction to ten months.
However, the drag on overall economic activity from
manufacturing continued to ease as goods
producers indicated their slowest fall in production
since August. (…)
Levels of incoming new work to euro area private
sector companies were unchanged during
November, following two successive months of
decline. Weakness again emanated from foreign
demand sources, with latest data showing that new
export business was down for a fourteenth
successive month. Although the rate of contraction
softened to its lowest since June, it nonetheless
remained marked.With no change in overall new work enabled
companies to again comfortably keep on top of
existing workloads. Levels of work outstanding
were reduced in November for a ninth successive
month, albeit modestly.An increase in capacity via another round of
employment growth was also reported by
companies. Payroll numbers have now increased continuously for over five years, with all countries
registering a rise in employment since October.Prices data indicated another increase in operating
expenses, although with ongoing falls in
manufacturing input costs signalled, the rate of
inflation was close to September’s three-year low.
Competitive pressures meanwhile weighed on
company pricing power, with November’s survey
data again signaling only a marginal increase in
prices charged.Finally, confidence about the future improved
during November to its highest level since July,
though remained well below par. With the exception
of Italy, sentiment was higher across the eurozone.The IHS Markit Eurozone PMI® Services
Business Activity Index moved slightly lower in
November, posting 51.9, compared to 52.2 in the
previous month. The latest reading was the second lowest
recorded by the survey since January,
although all nations covered recorded some
expansion of activity.Modest growth of the service sector was
underpinned by a similarly muted increase in new
business volumes. Gains in new work continued to
be undermined by ongoing falls in services exports.
Job creation was sustained in November at a solid
rate that was the fastest since August. This
additional capacity again enabled companies to
keep on top of their existing workloads, as indicated
by a fourth successive monthly decline in work
outstanding.Additional employment helped explain another rise
in company operating expenses, which increased at
a notable pace in November. Output charges in
contrast continued to rise only modestly.Looking ahead to the coming 12 months, service
providers were on balance confident of an increase
in activity from present levels. Sentiment was at its
highest level since July, though remained well down
on the historical series average.Chris Williamson, Chief Business Economist at IHS
Markit“The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread. (…)“The near-stalling of the economy has been
accompanied by some of the weakest price
pressures we’ve seen in recent years, which
threatens to keep inflation well below the ECB’s
target in coming months and adds to the likelihood
of further policy stimulus early next year.”
The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a solid increase in total business activity across China in November. The Composite Output Index rose from 52.0 in October to 53.2, to indicate the steepest rate of growth for 21 months.
The upturn was driven by strong performances across both the manufacturing and service sectors. Notably, service providers registered a solid and accelerated increase in activity midway through the final quarter of 2019. This was highlighted by the seasonally adjusted Chinese Services Business Activity Index rising from 51.1 October to a seven-month high of 53.5 in November. Companies widely commented on planned company expansions, new projects and an improvement in overall demand conditions. At the same time, goods producers noted a marked increase in production, with the rate of growth little-changed from October’s recent high.
The stronger increase in composite business activity reflected a further marked rise in new orders received by Chinese companies in November. In the service sector, new business expanded solidly overall, with the rate of growth picking up since October. A steep increase in new work was also seen across the manufacturing sector, albeit one that was softer than seen in the previous month. At the composite level, new orders expanded at the fastest rate since February 2018.
The amount of new work received from abroad continued to increase across China during November. Service providers recorded a steep and accelerated rise in new export sales, with the pace of expansion picking up to a four-month high. Manufacturing firms meanwhile registered a further marginal rise in new business from overseas. Measured across both monitored sectors, the amount of new work received from foreign clients rose at a modest pace that was identical to that seen in October.
After a modest drop in October, manufacturing firms saw staffing levels broadly stabilise in November. In the service sector, workforce numbers rose marginally, with the rate of job creation edging down to a four-month low. Employment at the composite level nonetheless increased slightly midway through the fourth quarter, offsetting a fractional decline in October.
Sector data for outstanding workloads showed divergent trends, with backlogs rising at manufacturers but falling at services companies. In the manufacturing sector, the rate of accumulation was solid overall, despite easing to a three-month low. In contrast, service providers registered the first decline in unfinished business since August, albeit only slight. Consequently, composite outstanding business rose at a marginal pace that was the weakest for three months.
The rate of input price inflation remained more marked across the service sector than the manufacturing sector in November. Services companies saw a solid increase in operating expenses overall, despite the pace of inflation easing for the second month in a row. Goods producers meanwhile registered only a slight increase in costs. Input prices at the composite level therefore rose at only a modest pace.
Prices charged by service providers rose modestly in November, with the rate of increase little-changed from the prior three months. At the same time, manufacturing firms recorded a fractional decline in selling prices amid reports of a general drop in market prices. As a result, output charges at the composite level rose only slightly for the third successive month.
Business confidence across China regarding output over the next year remained subdued in November, with the overall level of positive sentiment edging down since October. Weaker optimism was driven by the manufacturing sector, which saw expectations soften to a five-month low. Although services companies expressed a stronger level of confidence compared to October, sentiment was still notably softer than the historical trend.
NARRATIVES
The divergence between the ISM and Markit manufacturing PMIs has been much wider than normal for 3 years now. Throughout 2017-18, the ISM continually clocked much above Markit, before falling well below recently as Markit’s has bounced back in positive territory.
Here’s the close-up with November data, courtesy of Horan Capital Advisors:
Key differences between these 2 surveys:
- “IHS Markit surveys just under 800 manufacturing companies (approximately double the size of the ISM panel size) from which an 80% response rate is typically received. However, unlike IHS Markit, ISM does not disclose actual numbers of questionnaires received.”
- “ISM data are based only on ISM members, and as such are likely to only reflect business conditions in larger companies, with small and medium-sized firms under-represented. In contrast, IHS Markit’s survey includes an appropriate mix of companies of all sizes (based on official data showing the true composition of manufacturing output).”
- “Survey responses may relate to different markets: ISM also does not ask respondents to confine their reporting to US facilities/factories whereas IHS Markit specifies that all responses must relate only to metrics from US factories. ISM data could therefore be more heavily influenced by conditions of US-owned factories in China, for example, than the IHS Markit data.”
Another factor might also relate to ISM’s larger exposure to companies operating in the U.S. Midwest., creating a kind of perfect storm for this indicator: larger companies, more impacted by the economies in the U.S. Midwest (farming, automotive) and potentially influenced by weak manufacturing in Europe and China.
Obviously, anyone’s narrative on the economy or financial markets can pick the survey better fitting his viewpoint or his book. David Rosenberg did just that yesterday:
All those projections of a “bottoming out” in U.S. manufacturing activity were blown out of the water by the November ISM report. (…) That the equity market could even contemplate hitting new highs in such a moribund economic backdrop is just further evidence that there is absolutely nothing fundamental about this latest leg of the rally. (…)
It looks like Mr. Market is currently more inclined to focus on the ISM. But the reality is that Markit has proven to be more accurate, long, mid and short term.
Where David might prove right is that the larger cap manufacturing segment of the market could be in for a tough time. Trends in ISM New Orders are as weak as they get outside of recessions. They declined from 49.1 in October to 47.2 in November. New export orders dropped from 50.4 to 47.9. Backlogs are at 43.0 from 44.1 in October and 45.1 in September.
SENTIMENT WATCH
TrimTabs Research @TrimTabsIR Dec 2
Corporate insiders still dumping their own #stocks while buying back huge sums with shareholder #cash. #Insiderselling tops $100 billion for the first time in a calendar year since 2007.
#Buybacks disappoint in #earnings season, averaging just $2.2 billion daily. Volume is second-lowest in last eight earnings seasons.
Trump Risks Further Isolation as Macron Relationship Sours The deterioration of President Trump’s relationship with his French counterpart risks leaving the U.S. leader further isolated.
(…) He has also struggled to forge lasting personal partnerships with the leaders of the U.K. and Germany. (…) Mr. Trump, who frequently refers to Chinese President Xi Jinping as a friend, noted on Tuesday that “he doesn’t like me as much lately, but that’s OK. He’ll be back.” (…)