Note: Travelling week
CHINA PMIs
Manufacturing sector expansion accelerates
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) rose to 51.5 in November, up from 50.3 in October. Rising further past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved for a second straight month. The pace of growth was the fastest since June and above the series average.
Central to the latest advancement in manufacturing sector conditions was greater new business inflows. Incoming new orders placed with Chinese manufacturers increased amongst the fastest rate in three-and-a-half
years. A renewed rise in export orders also supported the rise in overall new orders.Panellists revealed that better underlying demand conditions, new product launches and stockpiling following the US election were amongst the reasons for the rise in new work.
Demand for consumer goods was particularly strong.
Production levels increased on the back of higher new work, rising at the quickest rate since June, with intermediate goods makers recording the fastest rate of growth among the monitored segments.
A second successive month of backlog accumulation was meanwhile observed in the Chinese manufacturing sector, though firms remained cautious about hiring. Headcounts declined for a third straight month in November due to resignations and redundancies. The rate of job shedding eased from October and was modest, however.
Meanwhile, purchasing activity and stocks of purchases both increased in the latest survey period. Anecdotal evidence suggested that rising production requirements led Chinese manufacturers to build safety stock. Post-production inventory also rose in November with instances of outbound shipment delays being mentioned. In contrast, lead times for the delivery of inputs stabilised after lengthening through the past five months.
Turning to prices, average input prices increased at the fastest pace in five months as raw material costs were reported to have risen. In turn, firms shared their additional cost burdens with clients, leading to the quickest gain in selling prices since October 2023.
Export charges continued to fall marginally, however, with international pricing power impacted by competition.
Finally, sentiment in the Chinese manufacturing sector improved in the penultimate month of the year. The level of confidence was the highest since March. Firms signalled hopes that better economic conditions and government policies can support sales in the year ahead.
That said, it is worth noting that the downward pressure facing the economy remains prominent, marked by continued contraction of employment, indicating the effect of economic stimulus is yet to be felt in the labor market and businesses’ confidence in expanding workforce needs to be strengthened.
While the economic downturn appears to be bottoming out, it needs further consolidation. The consistency and effectiveness of those additional stimulus measures deserves close attention. The structural and cyclical pressures facing the economy are expected to continue, coupled with the likelihood of continued accumulation of external uncertainties, which requires sufficient policy buffers.
- China’s Factory Activity Expands in Sign of Slow Recovery Official PMI rises to 50.3 in Nov. from 50.1 in Oct.
The official manufacturing purchasing managers’ index was 50.3, the National Bureau of Statistics said on Saturday, above the 50 mark that separates expansion and contraction. The median forecast of economists surveyed by Bloomberg was for a gain to 50.2, from 50.1 in October.
The non-manufacturing measure of activity in construction and services slipped to 50 in November from the October reading of 50.2. That compares with a forecast of 50.3. The composite index was unchanged at 50.8.
Goldman Sachs: “In October, both official and private measures of factory activity exceeded analyst expectations, while home sales rose for the first time this year. Infrastructure investment was steady and the urban jobless rate fell in October to the lowest in four months.”
- Asian Manufacturing PMIs Send Positive Signals But Tariff Threat Tempers Upside Asia’s export-oriented economies face risks from Trump’s potential tariffs on U.S. imports
(…) Hopes for a pickup in sales and demand bolstered South Korean firms’ 12-month outlook for output, and drove Taiwanese manufacturers’ confidence to a three-month high, the data indicated. New export orders also rose, touching a four-month peak in South Korea and climbing to the highest since February 2022 in Taiwan.
In Taiwan, “Asia, Europe and North America were all cited as sources of higher demand, which is impressive in the context of the underlying weakness presently apparent in much of the global manufacturing economy,” said Paul Smith, economics director at S&P Global Market Intelligence.
The headline S&P Global manufacturing PMI for Asean increased for the first time in six months in November, backed by a solid rise in production in Southeast Asia, the data showed.
New orders rose in China too, climbing at the quickest pace since February 2023 amid renewed export growth, while business confidence hit an eight-month high, according to the Caixin PMI compiled by S&P Global.
However, export order strength could be down to frontloading of shipments as manufacturers try to get ahead of tariffs, economists say. Trump vowed tariffs of up to 60% on Chinese goods during his campaign and has announced additional tariffs of 10% in the wake of his election win.
“We expect China’s new export orders to strengthen further in the next few months, as U.S. importers engage in stockpiling. This will spill over and boost activity among Asian manufacturers plugged into Chinese supply chains,” said Erica Tay, an economist at Maybank.
If pre-emptive stockpiling is behind the regional upturn that means current strength is borrowing from future demand, which will weigh on output in the second half of next year, Tay said.
Another source of uncertainty centers on which other Asian economies may be in the firing line.
“Trump’s protectionist rhetoric won’t be limited to China,” said analysts at BMI, a Fitch Solutions company.
They see tariff threats as a negotiating tactic that will be used on others too. Among the top candidates are Vietnam, Japan and South Korea—all major contributors to the U.S. trade deficit, a parameter BMI reckons plays a part in designating tariffs targets. (…)
Trump Weaponizing Dollar Seen as a Needless BRICS Provocation
(…) Trump on the weekend warned the so-called BRICS countries he would require a commitment that they wouldn’t create a new currency as an alternative to using the greenback, and repeated threats to levy a 100% tariff if they did. The comments, made Saturday in a post to his Truth Social network, echo those he used in his election campaign.
“The dollar remains dominant for several reasons: the USD is the most liquid currency in the world, trades freely, it is also the lending currency of the world,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “If Trump increases the pressure on BRICS, it may well accelerate a move away from the dollar.” (…)
The dollar accounted for about 88% of all trades in the $7.5 trillion-a-day foreign exchange market, based on the latest triennial survey from the Bank for International Settlements published in 2022. BRICS members control more than 40% of central-bank reserves globally and have discussed ways to reduce reliance on the greenback — including the idea of a single currency for use between them. (…)
Any attempt to dethrone the greenback is easier said than done. The size and strength of the US economy is unparalleled, Treasuries are still one of the safest ways to store money, and the greenback is still the ultimate beneficiary of haven flows.
“With regards to this specific threat, it doesn’t appear realistic and the probability is low, but serves as a good reminder that President-elect Trump wants to keep the US dollar as a reserve currency and is unlikely to proactively devalue the dollar,” said Cindy Lau, head of fixed income at Avanda Investment Management Pte. in Singapore.
“This also reaffirms our thinking that tariffs will be continually used as a threat in his term, to serve his objectives and as a powerful bargaining tool,” she said.
While there’s no immediate threat to the dollar’s supremacy, the long-term outlook is less certain.
Brazil and China had previously struck deals to settle trade in their local currencies, while India and Malaysia had inked an accord to increase usage of the rupee in cross-border business. Thailand and China’s central banks in May signed a memorandum of understanding to promote bilateral transactions in local currencies, and Trump’s latest comments may actually increase the likelihood of further such agreements.
“From today, anyone outside the US who uses the dollar for transactions will sense this as a yoke that the US is imposing on them,” said Ulrich Leuchtmann, head of foreign-exchange research at Commerzbank AG in Frankfurt. “In the long term, this cannot be a stable state of affairs. Especially since this yoke is likely to be felt all the more oppressively the more selfishly US policy acts in other areas.”
Half-point interest-rate cut back in play after meagre third-quarter Canadian GDP growth
Canadian gross domestic product grew at an annualized pace of 1 per cent in July through September, down from 2.2 per cent in the second quarter, Statistics Canada reported Friday. This was broadly in line with Bay Street estimates but below the central bank’s downwardly-revised forecast of 1.5 per cent annualized growth. On a per-capita basis, GDP contracted for the sixth consecutive quarter.
An advanced estimate for October, which showed 0.1 per cent GDP growth that month, suggests economic activity will fall short of the central bank’s forecast in the fourth quarter as well. (…)
Interest-rate swap markets, which capture investor expectations about monetary policy, now see a roughly 45-per-cent chance the central bank will lower its policy rate by half a percentage point. That’s up from 30 per cent before the GDP numbers were released, according to LSEG data. (…)
Consumer spending grew at a healthy annualized clip of 3.5 per cent in the third quarter, and residential investment grew modestly for the first time in a year. That suggests interest-rate-sensitive parts of the economy are starting to respond to the monetary policy easing cycle that began in June.
Relatively strong consumer demand, however, was offset by softer-than-expected imports and exports as well as a significant drop in business investment, with spending on non-residential structures, machinery and equipment falling 11.3 per cent in the quarter. (…)
Friday’s data contained a significant upward revision to earlier GDP numbers. Statscan raised its estimates of economic activity in 2021, 2022 and 2023, as well as the first half of 2024. Combined, these revisions left Canada’s overall GDP level about 1.5 per cent higher than previously thought.
This suggests the Canadian economy entered the current period of weakness on a stronger footing than previously thought, and that the output gap – the difference between what an economy can produce and what it is producing – may be smaller than central bankers believed. (…)
The November labour force survey numbers, out next Friday, are the last key piece of information before the December rate decision.
Weird stats:
- Real government spending increased by 4.6% after +3.8% and contributed +1.0pp to annualized real GDP growth. The release noted that the rise in government expenditure reflected an increase in spending across all levels of government.
- Real business investment declined by 3.6% after +3.3% in Q2 and subtracted 0.7pp from annualized real GDP growth.
- On a per-capita annualized basis, real consumption expenditure increased by 1.0% after having declined by 1.5% in Q2.
- Compensation of employees grew at a +8.2% annualized pace in Q3 (vs. +7.4% in Q2).
- On net, household net disposable income increased by 9.4% in Q3 (after an upwardly revised +10.3% in Q2). In real terms, real household net disposable income increased by 7.7% (after +6.0%). The household saving rate increased to 7.1% from a downwardly revised 6.2% in Q2 (it averaged 2.2% in 2019).
EARNINGS WATCH
From LSEG/IBES:
482 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.3% reported earnings above analyst expectations and 18.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 7.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.
Of these companies, 60.6% reported revenue above analyst expectations and 39.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.
In aggregate, companies are reporting revenues that are 1.5% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.
The estimated earnings growth rate for the S&P 500 for 24Q3 is 9.0%. If the energy sector is excluded, the growth rate improves to 11.7%.
The estimated revenue growth rate for the S&P 500 for 24Q3 is 5.3%. If the energy sector is excluded, the growth rate improves to 6.4%.
The estimated earnings growth rate for the S&P 500 for 24Q4 is 9.8%. If the energy sector is excluded, the growth rate improves to 12.5%.
Seven companies offered guidance last week, 5 negative, one positive.
Nonetheless:
