Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.
SERVICES PMIs
USA: Activity rises markedly again in July
The seasonally adjusted S&P Global US Services PMI® Business Activity Index posted well above the 50.0 no-change mark again in July, dipping only slightly from 55.3 in June to 55.0. The reading signalled a marked monthly expansion in services activity, extending the current sequence of growth to 18 months.
Where output increased, companies often linked this to higher new orders. New business rose for the third consecutive month and at a solid pace, albeit with the rate of expansion easing slightly from that seen in June. According to respondents, customer referrals had played a role in them being able to secure new business during the month.
New business from abroad increased for the first time in six months, albeit only marginally and to a much lesser extent than total new orders.
Service providers remained optimistic that business activity will rise over the coming year, although confidence eased to an eight-month low. A greater focus on marketing and sales efforts is predicted to bear fruit. Meanwhile, a reduction in interest rates and an improvement in demand following the Presidential Election were also factors supporting confidence.
Positive projections for the coming year, allied with solid new order growth in the latest survey period, encouraged companies to take on additional staff as the second half of the year got underway. Employment increased for the second month running, albeit modestly and to a lesser extent than in June.
The modest increase in employment was not sufficient to fully keep up with new order growth in July, resulting in a second consecutive monthly rise in backlogs of work. The rate of accumulation in outstanding business was only slight, however.
Service providers signalled a further sharp rise in input costs, with the rate of inflation quickening to a four-month high. The latest increase was also sharper than the series average. Respondents indicated that higher wage and transportation costs had been the main factors pushing up input prices.
While a number of companies responded to higher input costs by increasing their selling prices accordingly, there were other reports that competitive pressures led some firms to lower their charges. The rate of output price inflation was solid, but eased for the second month running to the slowest since January.
The S&P Global US Composite PMI Output Index* registered 54.3 in July, down slightly from 54.8 in June but still signaling a solid monthly expansion in private sector business activity in the US at the start of the third quarter of the year. Growth was led by the service sector, while manufacturing output rose only marginally.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:
“The PMI surveys bring encouraging news of a welcome combination of solid economic growth and cooler selling price inflation in July.
“Another strong expansion of business activity in the service sector, which over the past two months has enjoyed its best growth spell for over two years, contrasts with the deteriorating picture seen in the manufacturing sector, where output came close to stalling in July.
“While manufacturers are reporting reduced demand for goods, this in part reflects a further switching of spending from consumers towards services such as travel and recreation. However, healthcare and financial services are also reporting buoyant growth, fueling a wide divergence between the manufacturing and service economies.
“Thanks to the relatively larger size of the service sector, the July PMI surveys are indicative of the economy continuing to grow at the start of the third quarter at a rate comparable to GDP rising at a solid annualized 2.2% pace.
“A further cooling of selling price inflation in the service sector meanwhile brings encouraging news for the Fed. Combined with a near-stalling of price increases in the manufacturing sector, the latest survey data point to average prices charged for goods and services rising at a rate which is indicative of consumer price inflation moving closer to the 2% target. However, the surveys saw some upward pressures on costs, especially in the service sector, which policymakers will likely be eager to see soften before being confident of inflation falling sustainably to target.”
The ISM:
Economic activity in the services sector expanded in July, a trend that has been interrupted only three times — though twice in the last four months — since early in the coronavirus pandemic, say the nation’s purchasing and supply executives in the latest Services ISM Report On Business. The Services PMI registered 51.4 percent, indicating sector expansion for the 47th time in 50 months.
“In July, the Services PMI registered 51.4 percent, 2.6 percentage points higher than June’s figure of 48.8 percent. (…)
The Business Activity Index registered 54.5 percent in July, which is 4.9 percentage points higher than the 49.6 percent recorded in June and a return to expansion after one month of contraction.
The New Orders Index expanded to 52.4 percent in July, 5.1 percentage points higher than June’s figure of 47.3 percent; however, the index’s current reading is its fourth-lowest since early in the pandemic. The Employment Index expanded for just the second time in 2024; the reading of 51.1 percent is a 5-percentage point increase compared to the 46.1 percent recorded in June.
“The Supplier Deliveries Index registered 47.6 percent, 4.6 percentage points lower than the 52.2 percent recorded in June. The index returned to contraction territory — indicating faster supplier delivery performance — in July after two months in ‘slower’ territory. (Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.)
“The Prices Index registered 57 percent in July, a 0.7-percentage point increase from June’s reading of 56.3 percent. The Inventories Index contracted for the second consecutive month in July, registering 49.8 percent, an increase of 6.9 percentage points from June’s figure of 42.9 percent. The Inventory Sentiment Index (63.2 percent, down 0.9 percentage point from June’s reading of 64.1 percent) expanded for the 15th consecutive month. The Backlog of Orders Index returned to expansion territory for the fifth time in 2024, registering 50.6 percent in July, a 6.6-percentage point increase compared to the June reading of 44 percent.
“Ten industries reported growth in July. The Services PMI® has expanded in 17 of the last 19 months dating back to January 2023, and the July reading is only 0.9 percentage point lower than the average of 52.3 percent over that period of time. Also, the PMI® has not recorded back-to-back months in contraction since April and May 2020, another indication of sustained growth for the sector.”
Miller continues, “The increase in the composite index in July is a result of an average increase of 5 percentage points for the Business Activity, New Orders, and Employment indexes, offset by the 4.6-point drop in the Supplier Deliveries Index. The last time Supplier Deliveries was in contraction (faster) territory while the other three indexes registered expansion was in November 2023. Survey respondents again reported that increased costs are impacting their businesses, with generally positive commentary on business activity being flat or expanding gradually. Comments continued to express a wait-and-see attitude regarding the upcoming presidential election, with one respondent expressing concern over potential increases in tariffs. Many panelists noted a return to more stable supply chain performance, albeit with higher costs.”
Wells Fargo agrees with me that consumer spending is not about to take the economy in recession (baring an explosion in oil prices, see below):
(…) Renewed attention on the labor market notwithstanding, we think that an under-appreciated factor amid all the worry about the health of the economy is that households just keep finding ways to sustain spending. The labor market may be losing momentum, but in the latest personal income and spending report we learned that real services outlays grew 0.2% in June, the fastest pace in four months. While most of the spending on services goes toward non-discretionary categories such as healthcare and housing, consumers are still spending in other categories too. Real services spending less healthcare and housing rose more than broad services, up 0.24%.
Recall that S&P Global’s own Services PMI surveys never weakened like the ISM’s. On July 1, S&P wrote: “Total new business expanded for the second month running, and at a solid pace that was the fastest for a year.” That solid pace continued in July.
Corrections, particularly from all-time highs, happen from time to time. The S&P 500 is still just 8.5% below its record high of 5,667 on July 16. On that date, the S&P 500 exceeded its 200-day moving average by 15%, an overbought level that has often been followed by selloffs. [Yesterday], that spread was down to 3.5%. (Ed Yardeni)
THE YEN CARRY TRADE
The yen carry trade involves borrowing money in a low-interest-rate currency (yen) and invest that money in higher-yielding assets, or fast rising equities, denominated in another currency. The risk is if the yen appreciates significantly against the dollar.
That strategy has been helped by the significant depreciation of the yen in recent years. The yen was 103 per 1 USD in January 2021; it reached a 34-year low on June 27, 2024, at 160.49 Yen per 1 USD.
The yen has been appreciating since, closing at 150.76 per 1 USD on August 1.
A major relative monetary policy shift (Fed vs. BoJ) is now underway as the BoJ shifted policy last week. Not only did the BoJ raise interest rates to levels unseen in 15 years, Governor Ueda said in the press conference that ‘neutral is some way off’ (i.e. more hikes coming).
BoJ hiking while Fed loosening.
That relative policy switch is happening against elevated yen short positioning. The jump in the yen has forced traders to rush to unwind their shorts.
Bye bye the ‘risk-on’ trade, hello risk off!
BTW, some of these hedge (!) funds used the carry trade to get long techs.
FYI, pay attention!
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Wall Street Journal: Iran has rejected requests from the United States and Arab countries to “show restraint” after the killing of Hamas leader Ismail Haniyeh. Tehran says it doesn’t care whether its strike on Israel leads to a major war or not.
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An underground bunker in the Jerusalem mountains has been prepared for Netanyahu and other Israeli officials in the event of an Iranian attack, The Times of Israel reports, citing the Walla news site. This bunker, also known as the National Control Center, was built almost 20 years ago. It has not yet been used during the current war with Hamas and the massive shelling by Iran in April.
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Sergei Shoigu (Secretary of the Security Council of the Russian Federation) arrived on a visit to Iran, where he will meet with the president, the secretary of the Supreme National Security Council and the head of the General Staff, the Russian Security Council reports.
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“Retaliation against Israel for the assassination of Haniyeh will be through a new scenario that will be implemented suddenly” says an advisor to the Commander of the Iranian Revolutionary Guard — Al Jazeera
FYI, pay attention!
- “I’m for electric cars. I have to be because, you know, Elon endorsed me very strongly,” Trump told the crowd. “So, I have no choice.”
- “Christians, get out and vote, just this time. “You won’t have to do it anymore. Four more years, you know what, it will be fixed, it will be fine, you won’t have to vote anymore, my beautiful Christians.” (Donald Trump)