NEW$ & VIEW$ (18 OCTOBER 2013)


The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged down from 22.3 in September to 19.8 this month. The index has now been positive for five consecutive months. The percentage of firms reporting increased activity this month (36 percent) was greater than the percentage reporting decreased activity (16 percent).


The demand for manufactured goods, as measured by the current new orders index, increased 6 points, to 27.5, its highest reading since March 2011. Shipments continued to expand: The index fell 1 point to 20.4, following a 22 point increase last month. The diffusion indexes for inventories, delivery times, and unfilled orders were all positive and higher than last month.



Labor market indicators showed improvement this month. The current employment index increased 5 points, to 15.4, its highest reading since May 2011. The percentage of firms reporting increases in employment
(23 percent) exceeded the percentage reporting decreases (8 percent).



With respect to prices received for manufactured goods, 21 percent of firms reported higher prices, and 7 percent reported lower prices. The prices received index increased 2 points, to 14.2.



Wednesday’s release of the NAHB sentiment survey showed that sentiment among homebuilders unexpectedly fell from a revised reading of 57 down to 55. (Bespoke)



Growth Picks Up in China

China’s growth accelerated in the third quarter, putting to rest for now fears that the world’s No. 2 economy was headed for a sharp slowdown that would rattle world markets.

China’s gross domestic product grew 7.8% from a year earlier, according to data from the National Bureau of Statistics released Friday. That compares with 7.7% in the first quarter and 7.5% in the second. It also matched the median forecast of 18 economists surveyed by The Wall Street Journal.

On a quarter-to-quarter basis, growth rose by 2.2%, suggesting an annualized rate of growth of 9.1%.

China grew at 7.7% year-over-year over the first three quarters of 2013, making it likely that the economy would top the country’s annual growth target of 7.5%.

The FT warns:

But in a sign the rebound may not be sustained in the coming quarters, a raft of monthly data released on Friday by China’s National Statistics Bureau showed growth in industrial activity, retail sales and fixed asset investment slowed slightly in September compared with previous months.

Industrial production in September increased 10.2 per cent from a year earlier, down from a 10.4 per cent rise in August, while fixed asset investment and retail sales both decelerated slightly to grow 20.2 per cent and 13.3 per cent respectively.

Other data from last month, including the closely watched purchasing manager’s index, electricity consumption and exports all disappointed, with exports contracting 0.3 per cent from a year earlier, compared with 6 per cent average growth in the preceding two months.

Consumption accounted for 46% of growth in the first nine months, compared with 56% for investment. Exports subtracted 1.7% from growth.

But CLSA’s Andy Rothman is upbeat:

China remains the world’s best consumer story, with retail, new home and car sales healthy and inflation modest.  Restructuring is well under way, with private firms, not SOEs, driving growth in investment, employment and profits, and with, for the first time, the tertiary sector overtaking secondary as the largest share of GDP.  The government has taken a proactive approach to the trust sector, and overall credit growth continues to cool a bit – – not so much tightening as an effort to normalize credit growth and improve its quality.

We all need to stop obsessing over the GDP growth numbers; Chinese consumers and corporates don’t care about them, and even Party leaders are paying less attention.  We also need to put more emphasis on the base.  For example, if real GDP growth is 7.7% this year, that is a lot slower than 10% a decade ago.  But the economy is 3 times larger than it was back then, so even with a slower growth rate, the incremental increase in GDP is almost 200% bigger this year.

More significantly, for the first time, the tertiary sector (which includes services, retail sales and real estate) now accounts for a slightly larger share of China’s economy (45.5%) than the secondary sector (45.3%) – – clear evidence of rebalancing.  The tertiary sector remains very healthy, growing by 8.4% YoY YTD  (8.1% last year) and outpacing secondary sector (industry and construction) growth, which was 7.8% for the first 3Q (7.9% last year). (…)

More importantly, investment by privately-owned firms has risen at a faster pace than total FAI and investment by SOEs in each of the last 15 months, and in every month except one since March 2010.  Private sector investment rose 22.1% YoY in September, while SOE investment slowed to 14.9%, the slowest pace all year, and further evidence of the absence of a government stimulus.  (Moreover, fiscal spending is up 8.8% YTD, down from 21.1% during the first nine months of last year.) (…)

Real urban income rose 6.8% YoY YTD, up a bit from 6.5% in 1H but down from 9.8% in the first three quarters of last year.  Real rural income followed a similar path, rising 9.6% in the first nine months after 9.2% in 1H and 12.3% in the first three quarters of last year.  We also note that household debt is very low, and is primarily mortgages (with a minimum of 30% down) for primary residences.

It is also important to recognize that, unlike in many developed countries, wages continue to rise rapidly for China’s low-income workers.  Wages for the migrant workers who hold the majority of manufacturing and construction jobs in Chinese cities are up 13% this year.  In our view, strong income growth at the lower end of the pay scale, along with rising government spending on health care and education, is far more important than the wide gulf between rich and poor.

Global Growth Expectations: Too Pessimistic

Bloomberg consensus expectations for real GDP growth next year in the U.S. and in the other major economies have dipped to just 2.6 and 3%, respectively. This represents only a mild acceleration in growth relative to 2013 and is too pessimistic in our view.

global growth expectations

In a recent research piece we highlighted that a global resynchronization in growth is underway: the easing in fiscal drag next year alone will add 0.6 percentage points to growth for the G7, including more than 1.5% in the U.S., according to the latest IMF projection. Moreover, the recent break-out in business confidence shows that ‘animal spirits’ are gradually returning to boardrooms around the world, albeit from depressed levels. From the Tankan survey, to the IFO, to the regional Fed surveys, capital spending plans are being revised up.

And see below on M&A activity.


  • October Unlikely for Fed Tapering The Fed is unlikely to start curtailing its bond buying at its next policy meeting Oct. 29-30, given the uncertainty left by the government shutdown. Officials could act at one of the following two meetings—Dec. 17-18 or Jan. 28-29—but that, too, is uncertain.

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It will be some weeks yet before all of the economic data releases that were postponed during the government shutdown are published. As the shutdown will have severely delayed the collection process for this month, some of October’s reports may not come out until late November. That means the Fed will remain in the dark for a bit longer yet. (…)

Overall, the Fed may not have a complete picture of the economy when it meets on 29th/30th October. And although the statistical agencies will probably have caught up by the Fed meeting scheduled for 17th/18th December, by then the greater uncertainty may come from the respective budget and debt ceiling deadlines of 15th January and 7th February.

Clock  Data release schedules:



BofA Sees Strong M&A Pipeline Building

“As we head into the last quarter of the year, the [M&A] pipeline looks quite strong,” said Bruce Thompson, BofA’s chief financial officer, in a post-earnings conference call with analysts.

Moody’s concurs:

M&A’s Exceptionally Low Relative to Record High Market Value of US Common Stock

The current pace of mergers and acquisitions (M&A) lags far behind what otherwise might be inferred from the record high market value of US common stock. By way of statistical inference, the value of acquisitions involving US businesses could rise by 40% from its recent yearlong pace if the equity prices merely hold steady. Cheap corporate debt might soon help to fund a sharp upturn by acquisitions provided that potential buyers do not view too many business assets as being dangerously overvalued.



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