NEW$ & VIEW$ (2 OCTOBER 2013)

Global PMI rises to 27-month high

The global manufacturing economy saw a modest pace of expansion in September, rounding off its best quarter for just over two years. The ongoing recovery again failed to filter through to the labour market, however, as employment levels were broadly unchanged over the month.

At 51.8 in September, up from 51.6 in August, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – edged higher for the third month running to a 27-month peak.

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Growth tended to be centred on the developed world, with the UK at the top of the global rankings and expansions also seen in the US, the eurozone, Japan and Canada. Among the emerging markets, China, Brazil and Indonesia stagnated in September. India, Russia and South Korea saw marginal contractions, whereas conditions improved
in Taiwan, Turkey and Vietnam.

Global manufacturing production rose for the eleventh consecutive month in September, with the rate of expansion the sharpest since May 2011. Higher output was supported by improved market conditions, as incoming new business increased for the ninth month running.

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There was also positive news for international trade volumes, as new export orders posted the most noteworthy increase since May 2011. The export growth rankings were led by the eurozone nations, with the largest increases reported by Spain, Ireland, Italy and the Netherlands.

September data pointed to a negligible gain in staffing levels, continuing a sequence of near-stagnation in the labour market that has been seen through the year-to-date. Among the largest industrial regions covered by the survey, job creation was seen in the US, the UK, Canada, Taiwan and Turkey.

Cost inflation accelerated slightly during September, hitting a near one-and-a-half year peak. Manufacturer’s pricing power continued its nascent improvement, as average output charges rose slightly for the second straight month.

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Global growth? Read on:

Maersk Four Rate Rises Fail to Spread as Demand Falls

The average global rate to ship an FEU fell 7.9 percent to $1,665 for the week ending Sept. 26, the third straight weekly decline, WCI data showed. The drop was led by the Asia-Europe route, with the fee from Shanghai, China’s busiest port, to Rotterdam, Europe’s biggest, falling 19 percent to $1,703. That rate has fallen 41 percent from $2,881 on Aug. 8, the highest in almost a year. (…)

The spot rate to ship a 20-foot equivalent unit, or TEU, to northern Europe from Far East Asia is currently $765 per box, down from $1,501 at the beginning of August, Alphaliner said, citing Shanghai Containerized Freight Index data. It could fall to $500 per TEU in the next few weeks, the Paris-based industry consultant said in an e-mailed note distributed yesterday. (…)

With no potential fundamental catalyst to drive charges higher before the end of the year and capacity growth set to exceed demand at least through 2014, there probably won’t be any sustainable uplift in rates before 2015, Cantor’s Byde said. (…)

Goldman’s Global Leading Indicator Plunges Back To “Slowdown”

Everything looked so good in August. Goldman’s global leading indicator (GLI) “swirlogram” had recovered quickly from a ‘growth scare’ in Q1 and was holding firmly in “expansion” territory. Then reality hit as new-orders-less-inventories worsened, various manufacturing surveys rolled over, industrial metals gave up gains, and Korean exports provided no help. Among the few factors holding up the index from already plunging levels was the Baltic Dry Index (which has collapsed now in the last few days) and Consumer Confidence (which appears to also be rolling over).September’s plunge into “slowdown” for the GLI is the biggest drop in 8 months.

 

And commodity prices show no upward momentum (chart from Ed Yardeni:

Meanwhile, U.S. PMIs remain positive in September and…

CANADA’S PMI POINTS TO SOLID GROWTH

Canada’s manufacturing expansion accelerated to a 15-month high in September, according to the RBC Canadian Manufacturing Purchasing Managers’ Index™ (RBC PMI™).

The seasonally adjusted RBC PMI rose to 54.2 in September, up from 52.1 in August. This indicated further improvement in manufacturing business conditions, with the rate of growth above the series average and the fastest since June 2012.

The RBC PMI found that both output and new order growth accelerated in September. In particular, the latest rise in total new work intakes was strong and the fastest since June 2012. This partly reflected the greatest increase in new export orders for two-and-a-half years. Meanwhile, the rate of job creation also quickened to a 15-month high, as firms hired additional staff to handle increased business activity.

While in Mexico: Total new work intakes rose only slightly over the month, despite an increase in new export orders – the first in five months.

But:

September U.S. Auto Sales Fall 24%

(…) Industry executives said September sales were depressed because the Labor Day weekend occurred early in the month, and many cars sold during sales promotions tied to that weekend were counted in August rather than September.The selling rate for September was 15.28 million, down from an annualized selling pace of 16.09 million vehicles in August.

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image(Charts from CalculatedRisk)

Averaging August and September to smooth out the calendar perks, we get 15.68 million vehicles, down from 15.8 in July and in line with previous cyclical peaks if we exclude the bubbled 2000s.

 

Policy Makers Prepare For Siege

The federal government shutdown showed no signs of breaking, increasing the likelihood it will become entangled in an even larger battle over the Treasury’s ability to pay its bills.

Europe is not out of the wood just yet:

The rise of the currency has contributed to a tightening of monetary conditions. The IMF’s measure of the real effective exchange rate, which is deflated by the consumer price index, has risen to 98.72 from 98.24 over the last quarter and from 94.19 over the last year.

The strengthening of the currency has been accompanied by a rise in the cost of borrowing. Real three-month EUR LIBOR has risen to minus 0.94 percent from minus 2.45 percent over the last 12 months.

A monetary conditions index for the euro area has risen to 97.03 from 95.79 during the same period. The latest reading is 0.7 percent below the 10-year moving average. That compares with the figure having been 2.1 percent below that long-term mean one year ago.

The tightening of monetary conditions has occurred as a Taylor Rule model has called for the opposite to occur. A version of the monetary policy tool, based on coefficients estimated by the Federal Reserve Bank of San Francisco, suggests the main policy rate of the ECB should have been reduced to 0.25 percent from 1 percent during that period.

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Loans to non-financial corporations, adjusted for sales and securitization,
fell 2.9 percent year over year in August versus minus 2.8 percent in July. The equivalent figure for households stood at 0.4 percent year over year, unchanged from the previous month.

EARNINGS WATCH

Worrying About Profit Warnings Companies are cutting their profit forecasts at a record pace. Yet for investors, history shows the sour outlooks aren’t a reason to sell.

The number of companies projecting quarterly earnings results below analysts’ expectations climbed to 89 late last week, according to FactSet, which started tracking guidance data in 2006. The latest figure surpassed the previous records of 88 in the second quarter and 86 in the first quarter.

Earnings warnings have increased every quarter since the second-quarter of 2012, FactSet data show. Yet over that time frame, the S&P 500 has rallied 24%. (…)

“Third quarter earnings are expected to be the same as the second quarter – we will all be disappointed with low profit and sales growth, but in the end, the third quarter will set a new all-time record, beating out the current record set by the second quarter, by about 2%,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. (…)

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More Pain Looms for Banks  New troubles are piling up for U.S. banks as they prepare to release third-quarter earnings results amid warnings of weak trading revenue, a sharp decline in mortgage refinancings and rising legal costs.

(…) Analysts reduced revenue estimates for the six largest U.S. banks during the quarter and cut profit estimates for all but Wells Fargo.

Bank of America, which relies heavily on the trading and mortgage businesses, suffered the biggest drop. Analysts have reduced their third-quarter per-share earnings predictions for the Charlotte, N.C., lender by 27% since July 1. (…)

“For a while we thought a light was at the end of the tunnel,” said Gerard Cassidy, a banking analyst with RBC Capital Markets. “It seems to be a Mack truck.” (…)

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Weak third-quarter results are expected to accelerate plans for job cuts. Overall employment at the six largest U.S. banks declined by 26,254 jobs, or 2.2%, in the year ended June 30, company filings show. The largest was a 6.6% decline at Bank of America. Wells Fargo was the only gainer over the period, boosting its staff by 3.8%. (…)

Nowhere are banks hurting more than in mortgages. Banks long have braced for a slowdown, but the spike in interest rates this summer brought a yearlong boom to an abrupt end.

“It’s been brutal,” said Michael Menatian, a mortgage banker in West Hartford, Conn. “We were flat-out busy until May. Once rates went up, things went completely dead.” He said he closed around $4 million in loans every month through June, and about $1.5 million a month since then. (…)

J.P. Morgan, Bank of America, Wells Fargo and Citigroup already have cut more than 10,000 mortgage jobs this year, with plans for thousands more to come. J.P. Morgan is accelerating plans to cut as many as 15,000 jobs in its mortgage division by the end of 2014.

All told, the number of employees in the industry will likely shrink by 25% to 30% over the next year, estimates Christine Clifford, president of Access Mortgage Research & Consulting, Inc., a Columbia, Md., mortgage research and consulting firm. (…)

If you missed it, you may want to read the EARNINGS WATCH segment of Monday’s New$ & View$.

Merck to Cut Staff as Industry Trims R&D

Merck said it plans to slash its 81,000-strong workforce by 20% over the next two years, a stark show of the diminishing research-and-development capabilities of some of America’s biggest health companies.

The company also said it would close offices in New Jersey and discontinue some late-stage drug development, all in the service of saving about $2.5 billion annually by 2015. (…)

[image]After acquiring Schering-Plough Corp. for $41 billion in 2009, Merck’s workforce nearly doubled to reach a peak of 100,000. Assuming no new employees are added by 2015, the company’s total head count would fall to 64,800 after the layoffs, or just 17% more than before the merger.

Advancements in the understanding of genetics and biology have increasingly fuelled drug development in recent decades, and many of the most promising new drugs have been aimed at niche disease populations, developed in the labs of biotechnology competitors considered closer to the cutting edge of science. Merck has begun to catch up, most recently with an experimental cancer drug that harnesses the immune system to fight tumor cells. But some former executives worry that the company wasn’t quick enough to adapt and that its declining size mirrors the shrinking ambitions of other large drug makers. (…)

Merck lowered its earnings-per-share guidance to a range of $1.58 to $1.82, from a range of $1.84 to $2.05 previously; the company maintained its projected earnings per share, excluding restructuring items, at a range of $3.45 to $3.55.

Foreign Firms Tap U.S. Gas Boom

The U.S. boom in natural-gas production is luring investment from foreign manufacturers eager to tap a cheap, abundant supply of fuel and feedstocks.

Companies from the U.S. and abroad have invested or are planning to invest billions of dollars through the rest of the decade in plants that would churn out chemicals, fertilizers, plastics, metals and fuel from gas. Many foreign companies, alone or in joint ventures with U.S. partners, are taking advantage of gas that costs a fraction of what it does in Europe or Asia to expand production in the U.S.

Boston Consulting Group estimates that international companies will invest at least $50 billion through the end of the decade on projects that take advantage of low-price natural gas.

Linde AG, a German gas-and-engineering company, recently said it would spend $200 million to build a new air-separation unit in La Porte, Texas, that would provide synthetic gas for the petrochemical industry. The investment “is directly tied to the price and availability of natural gas,” said spokesman Uwe Wolfinger. “Five or seven years ago, this type of investment would have been far more likely elsewhere in the world.” (…)

Energy consulting firm IHS Cera said in a report last month that cheaper gas would kick-start the nation’s chemicals sector over the next dozen years, creating more than 300,000 jobs and driving half a trillion dollars in production through 2025. (…)

Chemicals accounted for one-quarter of the $160.5 billion in inbound foreign-direct investment in the U.S. last year, according to the U.S. Commerce Department. (…)

“If you think about the competitive advantages of an economy, having low-priced energy is about the most important,” Incitec Chief Executive James Fazzino said. Combined with a stable regulatory framework and a trained labor pool, the U.S. “is really the most attractive place in the world to invest,” he said. (…)

The Commerce Department, which for years has sought to help American companies boost exports, has put new emphasis on attracting foreign investment through a program called SelectUSA. (…)

Nomura Sees $690 Billion Flow Into Japan Stocks on Tax Break  (Tks Carl)

Japanese savers are poised to pump $690 billion into stocks to benefit from new tax breaks as the government tries to avert a retirement cash crunch in the nation with the world’s oldest population and lowest interest rates.

The Nippon Individual Savings Account program, which opens for applications tomorrow, will allow individuals to buy 1 million yen ($10,143) a year of risk assets that are exempt from taxes on dividends and capital gains for five years. The plan will draw as much as 68 trillion yen through 2018, with 65 percent of users pulling money out of bank deposits to purchase securities, estimates from Nomura Research Institute show. (…)

Equities made up just 7.9 percent of household assets as of March, compared with 34 percent in the U.S. and 15 percent in the euro zone, the most recent Bank of Japan data show. (…)

There have been other government policies that tried and failed to promote the shift of funds, and NISA is set to join them, said Yasuhiro Yonezawa, professor of finance at Waseda University in Tokyo.

“NISA will have limited impact on the investment attitude of Japanese people,” said Yonezawa. “I doubt they’ll behave rationally when it comes to asset management as they’ve been unresponsive to incentives offered by the government in the past.” (…)

The expiration of another incentive plan for investors at the end of this year will also limit NISA’s impact, according to Ichiro Takamatsu, a fund manager at Bayview Asset Management Co. Levies on dividends and capital gains will return to 20 percent after being cut by half for the past 10 years.

“Individual investors will sell shares toward the end of the year before the tax rate is raised back,” said Takamatsu. “Many are holding unrealized gains due to the Abenomics rally and that will spur profit-taking.” (…)

 

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