NEW$ & VIEW$ (6 DECEMBER 2012)

Global economic growth hits eight-month high in November

Global economic growth picked up speed in November, although much of the improvement was attributable to stronger expansion in the US. Elsewhere, emerging markets continued to report only tepid growth and the Eurozone remained embedded in its double-dip recession, subduing growth in neighbouring countries.



The JPMorgan Global PMI, a survey based barometer of business conditions produced by Markit, rose from a four-month low of 51.0 in October to an eight-month high of 53.7 in November. The average reading over the past two months was 52.4 and is broadly consistent with the global economy expanding at an annual pace of approximately 2.0% in the fourth quarter so far. The PMI average was up only slightly from the averages of 51.6 and 51.8 seen in the second and third quarters respectively, to signal the weakest growth patch since early 2009.

imageThe latest available official data showed that the annual rate of growth of worldwide gross domestic product (GDP) slowed from 2.1% in the second quarter to 1.7% in the third quarter – the weakest rate of expansion since the fourth quarter of 2009.

Global PMIs measuring manufacturing and services output both rose in November. The former edged above the 50.0 no change for the first time since June, though still pointed to only a marginal increase in production, while the latter registered the strongest pace of expansion since March.

The most significant development in November was a surge in US growth, linked primarily to a spike in the ISM survey of non-manufacturing, which rose to its highest since February.

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U.S. ISM Nonmanufacturing Index Recovers A Bit; Pricing Power Declines

The Composite Index for the service and construction sectors from the Institute for Supply Management (ISM) improved to 54.7 last month from an unrevised 54.2 during October.

Haver Analytics calculates a composite index using this number and the ISM manufacturing sector index released on Monday. The figure ticked up m/m to 54.1.

The business activity component of the nonmanufacturing index improved sharply to 61.2, its highest level since February. The new orders series also rose to 54.8, its highest since March. The supplier delivery series fell sharply to 49.0, its lowest since late 2009 and indicated quicker delivery speeds. The employment series fell sharply to 50.3, its lowest since July. Since the series’ inception in 1997 there has been an 87% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.

image(Chart from Doug Short)

image(Table from Bespoke Investment)

Eurozone downturn continues in November, as economic activity falls across the big-four nations

The Markit Eurozone PMI® Composite Output Index rose to 46.5 in November, up from October’s 40-month low of 45.7 and above the earlier flash estimate of 45.8. The average reading so far in Q4 is the weakest since the second quarter of 2009.

Downturns continued in both the manufacturing and service sectors in November. However, rates of contraction slowed to seven- and three-month lows respectively. Both sectors were affected by weak demand from domestic and export markets. France, Italy and Spain remained in deep contraction territory, despite rates of decline moderating in France and Spain. The downturn in Germany also eased, with output continuing to decline at a considerably weaker rate than in other large nations.


The level of incoming new business contracted for the sixteenth month in a row during November. The rate of decline was solid, as has been the case through much of the year-to-date, though eased to a five-month low and was less marked than indicated by the earlier flash estimate.

Signs of excess capacity and ongoing cost-cutting led to further job losses in November. Employment fell for the eleventh successive month and to a broadly similar extent to October. The steepest reduction in payroll numbers was reported in Spain, albeit less marked than October, while the rate of job losses in Italy accelerated to the fastest in almost three-and-a-half years. The rate of reduction eased in France, while Germany reported only a slight decline in staffing levels.

Backlogs of work declined for the seventeenth consecutive month in November, with marked reductions signalled at both manufacturers and
service providers.

 German Manufacturing Orders Surge in Sign of Resilience: Economy

Orders, adjusted for seasonal swings and inflation, jumped 3.9 percent from September, the Economy Ministry in Berlin said today. It revised September’s drop to 2.4 percent from 3.3 percent.

Export sales soared 6.7 percent in October, driven by an 8.5 percent increase in orders from outside the euro area, today’s report shows. Orders from the 17-nation currency bloc rose 3.5 percent and domestic orders were up 0.4 percent.

The U.S. is the only engine pulling the world economy…

White House Won’t Yield on Debt Limit

The White House hardened its position that Congress should raise the U.S.’s borrowing limit without preconditions.

In a Wednesday speech to top corporate chiefs, President Barack Obama said he wouldn’t negotiate with Republicans on this issue as he did in 2011. (…)

“It may be a good idea if you don’t care about the debt, but it’s a nonstarter for those of us who do,” Senate Minority Leader Mitch McConnell (R., Ky.) said. “It also represents a dangerous attempt by a president to grab more power over spending, power that Congress must not and will not cede.”

Just a month after the November election, the short-lived bipartisan spirit from the White House and Republicans has evaporated. Republican leaders say they are awaiting a new offer from the White House. The White House said it is awaiting a new proposal from Republicans.

Pointing up  Beware going over the fiscal cliff

(…) The Congressional Budget Office has estimated that while the economy would shrink at an annualised rate of 1.3 per cent during the first half of next year were the cliff not averted, growth would rebound to 2.3 per cent in the second half of 2013.

But the CBO estimates are far too conservative. The fiscal drag implied by going over the cliff would subtract about $1tn (6.3 per cent of gross domestic product) from projected growth over the 18 months from January 2013. Given the consensus forecast for 2 per cent growth next year, that leaves a growth rate of -2.2 per cent for 2013. This calculation is consistent with estimates reported in October by the IMF.

An extant American liquidity trap explains why the recession would be so severe. Such a trap exists when interest rates are frozen at zero and cannot fall. It magnifies the negative impacts of austerity. (…)

In technical terms, the negative multiplier is larger than usual. The IMF has produced evidence that negative fiscal multipliers have indeed been larger than expected since the start of the financial crisis, which has coincided with interest rates falling close to zero and economies stuck in liquidity traps. (…) (FT)

By the way (From Credit Suisse, European Commission (via Mauldin Economics):Greek%20Interest%20Expense.psd

U.S. Productivity Growth Improves & Lowers Unit Labor Costs

Nonfarm business sector productivity for Q3’12 was revised up to 2.9% (1.7% y/y) from last month’s estimate of a 1.9% gain which matched the Q2 rise. Growth was its fastest in two years. The latest increase reflected a 4.2% (3.5% y/y) gain in output and a 1.3% (1.8% y/y) rise in hours worked. The increases were accompanied by a 0.9% (1.8% y/y) rise in compensation. A a result of this faster gain in productivity and a slower rise in compensation, unit labor costs fell at a 1.9% (+1.5% y/y) annual rate.

In the factory sector, the picture was not as constructive. Productivity fell at a 0.7% (+1.3% y/y) rate as the 0.7% (4.0% y/y) decline in output was accompanied by no change (2.6% y/y) in hours worked. Since compensation rose at a 2.4% (2.9% y/y) rate, unit labor costs rose at a 3.2% (1.5% y/y) rate. That gain was the quickest in three years and helped erode corporate profitability.



Indicators Point to Sluggish U.S. Payroll Growth

Three pre-payrolls indicators (the manufacturing and services ISMs and the ADP report) have all landed on the weak side of expectations this week, hinting at downside risk to our call for a 120,000 gain in November. It looks like Superstorm Sandy had a bigger-than-expected bite, with the ADP report estimating she was responsible for 86,000 job losses in the month. The consensus call is for a print just below 90,000 on Friday, and even after adding back the storm-related losses, job growth is still too sluggish to appease the Fed and get the jobless rate falling on a sustained basis. (BMO)image

Nov. Challenger Job-Cut Report: 57,081 from 47,724 prior. This is the highest level since May. Bankruptcy of Hostess brands added 18,500 to total.

Initial Jobless Claims: -25K to 370K vs. 380K consensus, 393K prior.

The 4-week moving average was 408,000, an increase of 2,250 from the previous week’s revised average of 405,750.

Citi’s New Chief Launches First Cost-Cutting Salvo

Underlining his determination to crack down on costs, Citigroup Chief Executive Michael Corbat set out plans Wednesday to cut 11,000 jobs, close 84 branches and retreat from consumer banking in a handful of countries.


For Q4 2012, 78 companies have issued negative EPS guidance while 29 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for
Q4 2012 stands at 73% (78 out of 107). If this is the final percentage for the quarter, the Q4 2012 quarter will tie the Q4 2011 (73%) as the quarter with the second-highest percentage of companies issuing negative EPS guidance since FactSet began tracking guidance data in Q1 2006. The Q3 2011 quarter has the record for the quarter with the highest percentage of negative EPS guidance (74%). (Factset)image


S&P’s tally of Q3 earnings shows Q3 EPS at $24.39, down 3.6% Y/Y and 4.1% Q/Q. Trailing 12 months EPS are now $97.79, down 0.9% Q/Q, the first decline since Q3’09.

Q4 estimates keep being shaved. Analysts are now estimating Q4 EPS at $25.68, +8.2% Y/Y. Estimates are down 4.4% from the Q4 estimates on Sept. 28.


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