U.S. FLASH SERVICES PMI UP STRONGLY

The media talk a lot about the manufacturing PMI but the Services PMI is even more important. Markit’s Chris Williamson sums up January’s flash Services PMI:

The flash manufacturing and services PMI surveys collectively suggest that the economy grew in the final quarter of last year at a rate of around 3.5%, and that the pace will have accelerated at the start of the year. The PMIs also suggest that job creation continues to run at a rate of around 200,000 per month, meaning the non-farm payroll numbers should recover from December’s dip.

From the report:

At 56.6 in January, up from 55.7 in December, the Markit Flash U.S. Services PMI™ Business Activity Index signalled a further robust expansion of service sector output at the start of 2014. The latest ‘flash’ PMI reading, which is based on approximately 85% of usual monthly replies, pointed to the steepest rate of service sector growth for four months.

In January, the index was comfortably above the average seen for 2013 as a whole (54.8). Higher levels of business activity reflected a further improvement in underlying demand, as highlighted by a strong upturn in new business intakes at the start of 2014.

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US service providers signalled a strong expansion of incoming new work at their units during January, although the rate of growth slipped to a three-month low. Meanwhile, service sector companies recorded a slight reduction in their backlogs of work at the start of 2014, which represented the first reduction in unfinished business since last November.

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Service providers were able to reduce their backlogs of work in part due to greater staffing numbers during January. The index measuring employment across the sector has been in positive territory since March 2010, with the latest reading indicating a solid pace of job creation.

Average cost burdens continued to rise during January, and the pace of inflation picked up from the six-month low recorded in December. Some survey respondents attributed the latest increase in input prices to higher transportation costs.

Pointing up Meanwhile, US service providers increased their own selling prices at the start of 2014, which respondents widely linked to rising cost burdens. Higher prices charged have now been recorded in the service economy for seven successive months.

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NEW$ & VIEW$ (28 JANUARY 2014)

Calm Returns to Emerging Markets Efforts by emerging-market central banks to counter a vicious market selloff in recent days brought a measure of calm.

The Turkish lira held on to the large gains it made Monday, after the country’s central bank announced a previously unscheduled interest-rate decision for late Tuesday, with the dollar pinned just under 2.27 against the lira, well below the near-2.39 peak it hit Monday.

Bank Gov. Erdem Basci said Tuesday he will “not refrain from permanent policy tightening,” which appears to reaffirm the market’s clear expectation for aggressive rate rises to support the currency at the coming rates announcement, scheduled for midnight local time.

An unexpected 0.25-percentage-point rate rise by India’s central bank has also lent support to battered emerging-market currencies, which have been dented by drab economic news from China, concerns over the effects of the U.S. Federal Reserve’s pullback from monetary stimulus, and a long list of geopolitical stresses including those in Turkey, Argentina, South Africa and Ukraine.

Italy Grabs Record Low 2-Year Funding Costs

At Tuesday’s auction, the Italian treasury sold €2.5 billion euros ($3.42 billion) in December 2015-dated zero coupon notes, or CTZ, and a further €1.25 billion euros in September 2018-dated inflation-index bonds, or BTPei, the Bank of Italy said. The amounts sold were at the upper end of the treasury’s respective target ranges.

The yield on the CTZ was 1.031%. Italy’s previous lowest funding cost in this maturity segment was 1.113%, in May 2013.

Fears had surfaced that ongoing emerging-market turmoil could spill into to the euro zone’s relatively weak sovereign debt markets as the single currency area tentatively emerges from recession. But these auction results suggest the risks to the euro zone can remain contained.

 Italian Retail Sales Offer Very Slow Progress

Retail sales for Italy in November were flat, marking their best performance since August when sales also were flat. The last increase in Italian retail sales came in May 2013 with a 0.1% rise. Retail sales dropped by 1.2% over 12 months, they fell at a 1.5% annual rate over six months and they fell at an even faster, 1.7% rate, over three months. (…)

Real retail sales excluding autos are flat in November, but they had risen by 0.1% in October. Retail sales are down by 1.9% over 12 months and they are falling at a faster, 2.6% annual rate, over six months. However, over three months, real retail sales are declining at only a 0.9% annual rate. (…)

SOFT PATCH WATCH

 

(…) Last week, the flash January factory survey by data provider Markit said some respondents stated “extreme weather conditions in January had temporarily disrupted output levels.” So, too, the Kansas City Fed said its survey of area manufacturers showed production declined slightly this month because of weather.

Store chains are also feeling the freeze.

“It was a slow period for sales over the past week with some bouts of abnormal seasonal weather curbing the consumers’ appetite to shop,” the International Council of Shopping Centers said.

Consumer spending may also take a hit because households are paying more for natural gas to heat their homes.

“Weather was mentioned 21 times in the latest beige book, almost always in a negative context, the most in any winter month Beige Book since at least 2011,” wrote John Canally, investment strategist at LPL Financial, after looking at the book.

Besides store sales and manufacturing, other activity that could be hurt by weather include home building and car sales (who wants to drive a shiny new car off the lot during a snow storm).

As one positive for growth: higher demand for heat is probably lifting utility output this month.

The end result is that when January data roll out in February, the weak tone may cause some economists to trim their tracking of first-quarter GDP growth. (…)

  • FYI, updated to last Saturday:

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Economists polled by Bloomberg anticipate the economy grew 3.2 percent during the final three months of the year, a bit softer than the 4.1 percent gain in the third quarter, which was overwhelmingly the result of a $115.7 billion inventory build. While optimists may claim the fourth quarter was still strong, the data may not provide an accurate depiction of underlying conditions.

First, there’s little doubt the strong economic reports for November were
payback for the sharp, albeit temporary, weakness in October caused by
the shutdown of the U.S. government. Second, with December data coming in softer than Street expectations, recent issues such as the mass layoff announcements by Wal-Mart, Macy’s, JC Penney, Target and Intel, as well as deterioration in China’s industrial sector and currency
issues in the emerging markets, the accumulation of negatives could end up being too much weight for the sluggish recovery to bear.

The Chicago Fed’s National Activity Index decreased to 0.16 in December
from the 0.69 posting in November. Similarly, The Conference Board’s index of leading economic indicators (LEI) inched up 0.1 percent in December following a 0.8 percent spike in November. The LEI is known for predicting turning points in the economy. And the Conference Board’s coincident-to- lagging indicator ratio continues its downward descent.

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Meanwhile, meaningful housing data have been bleak – new home sales
tumbled 7 percent in November – essentially unchanged from mid-year 2013 levels. From an economist’s standpoint, new home sales matter more than their existing home counterpart since they require building materials, new durable goods (washers, dryers, refrigerators, etc.) and employ specialty trade contractors such as plumbers, landscapers,
electricians and other tradesmen.

Similarly, the MBA Purchases Index fell 3.6 percent during the week ended Jan. 17, and is off 15.2 percent from year ago levels. This gauge has been mired in weak territory for years now with no sign of improvement. (…)

 

Sales of newly built homes fell 7% to a seasonally adjusted annual rate of 414,000 in December from 445,000 in November, the Commerce Department said Monday. November’s figure was revised down by 19,000.

December sales came in below the 455,000 annual pace forecast by economists and were at their lowest level since the summer, when rising mortgage rates undermined demand.

It was not just weather related as Haver Analytics points out:

Poor weather crimped sales by more than one-third m/m in the Northeast to 21,000 (-27.6% y/y). Sales also fell 8.8% (+5.1% y/y) to 103,000 in the West while sales were off 7.3% (+4.1 y/y) in the South to 230,000, the second month of sharp decline.

Royal Philips NV and Siemens AG, two of Europe’s biggest industrial groups by revenue, reported Tuesday robust results for the three months to end-December but cautioned that business conditions remain tough, partly because of the euro’s strength against major currencies.

The cautious outlook from the Dutch and German companies follows similar downbeat forecasts from other blue-chip European companies to have reported in the past two weeks, some of them issuing profit warnings.

The year will start a bit slow,” Philips Chief Executive Frans van Houten said.

At Siemens, orders at its power-generation equipment division fell in Europe, the Americas, and Asia in the quarter. The Germany company’s main European competitors in the sector, Alstom SA of France and ABB Ltd. of Switzerland, warned on their earnings prospects last week. (,,,)

Fingers crossed States Weigh Plans for Revenue Windfalls Governors across the U.S. are proposing tax cuts, increases in school spending and college-tuition freezes as growing revenue and mounting surpluses have states putting the recession behind them.

(…) The strengthening in tax revenue started in late 2012 as higher-income residents in many states took increased capital gains among other steps to avoid rising federal tax rates on certain income. Those tax payments spilled over into 2013, and further fuel for collections came from a record stock market and improving economy. State tax revenue nationally climbed 6.7% in the fiscal year ended June 30, 2013, Moody’s Analytics says. (…)

Some states already have responded to rising tax collections by increasing spending on education and other programs, or cutting taxes. (…)

Economists warn the surge in tax revenue already is showing signs of slowing. Some of the strength has been fueled by people shifting income for tax purposes, making the gains more about timing than growth. New York, for example, forecasts income-tax receipts will grow 3% in the fiscal year starting this April after projecting a 6.5% rise in the current fiscal year. And rising collections spurred in part by profits from a record stock market leave some states such as New Jersey and California subject to sharp swings in revenue from income taxes. (…)

Can we now reasonably hope that state employment has bottomed out?

FRED Graph

 

FRED Graph

 

President to Hike Minimum Wage for Federal Contractors

President Barack Obama plans to act unilaterally to raise the minimum wage for employees of federal contractors, asserting his executive powers before the State of the Union address.

The executive order would raise the minimum wage for workers on new federal contracts to $10.10 an hour, according to a fact sheet from a White House official. It said Mr. Obama would announce the new policy in his speech Tuesday, which is scheduled to begin at 9 p.m. Eastern Time.

The current federal minimum wage is $7.25 per hour, and hasn’t been raised since July 2009. About 16,000 federal employees were paid at or below minimum wage in 2012, according to the Labor Department. The agency doesn’t specify how many employees were government contractors.

Mr. Obama’s executive policy change is the opening salvo in a broader, election-year push by Democrats to raise the federal minimum wage to $10.10 an hour for all eligible workers.

SENTIMENT WATCH

 

The “January indicator” says that if the stock market falls in January, it usually falls for the remainder of the year. So far, January has been a disaster for stocks. (…)

High five Wait, wait! Mike Lombardi, in the above post, reproduced in many other blogs today, writes that “it usually falls for the remainder of the year”. Ever thought what “usually” really means? Mark Hulbert shows you the stats since 1880:

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Voilà! Now you know that “usually” means anything above 50% of the time. Hulbert continues where Lombardi did not:

A follower of the January Indicator in 2009 and 2010 would have missed out on two years of double-digit gains if one were to have used the occasion of a “down” January to get out of the market.

Another example that it is usually best to check the facts out. Here “usually” means “generally”, at a minimum, “always” if you really care.

 

BANKING

 

Loan-Loss Reserves Shrink

At the end of September, about 6,500 U.S. banks had set aside loan-loss reserves of just 1.83% of their roughly $7.80 trillion in loans, according to data provider SNL Financial.

That cushion has been shrinking since 2010, and banks are on pace to have ended 2013 with reserves amounting to about 1.66% of total loans, based on fourth-quarter reports from eight of the country’s largest banks provided to The Wall Street Journal by SNL.

That would be the lowest proportion of such reserves since 1.74% in mid-2008, a few months before the collapse of Lehman Brothers.

By contrast, reserves hit a near-term peak of 3.24% at the end of 2010 as banks grappled with troubled loans in the aftermath of the Great Recession.

Total bank loans outstanding, however, still are below prerecession levels of $7.91 trillion at the end of 2007. (…)

U.S. Banks Prune Branches

Bank branch closures in the U.S. last year hit the highest level on record so far, a sign that sweeping technological advances in mobile and electronic banking are paying off for lenders but leaving some customers behind.

U.S. banks cut a net 1,487 branch locations last year, according to SNL Financial, the most since the research firm began collecting the data in 2002.

Branch numbers have been on a steady decline since 2009 and reached a total of 96,339 at the middle of last year, the lowest since 2006, according to data from the Federal Deposit Insurance Corp.

 

U.S. FLASH MANUFACTURING PMI AT 53.7

Only really weak point is in New Export Orders.

At 53.7 in January, down from 55.0 in December, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™), which is based on approximately 85% of usual monthly replies, signalled the slowest improvement in overall business conditions for three months. That said, the index was above the neutral 50.0 mark and slightly higher than its average for 2013 (53.5). Therefore, the latest survey results still indicate solid underlying growth across the U.S. manufacturing sector.

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Slower rates of output and new order growth were the main factors behind the fall in the headline PMI from December’s 11-month high. Although manufacturing production still rose at a solid clip, the latest expansion was the slowest since last October. Companies reporting higher output levels widely commented on resilient domestic demand and efforts to reduce their pipeline of unfinished business in January. Some panel members noted that extreme weather conditions in January had temporarily disrupted output levels.

Meanwhile, latest data indicated a further slowdown in new order growth from November’s 10-month peak. As with the weaker trend for output, there were reports from survey respondents that the unusually cold weather had a negative influence on new business intakes. Moreover, there were some signs of weaker spending patterns among international clients at the start of 2014. Volumes of new export business decreased during January for the first time in four months, although the rate of decline was only marginal.

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U.S. manufacturers indicated marked job hiring during January, with the rate of growth only slightly slower than in December. Anecdotal evidence suggested that the temporary nature of disruptions from extreme weather conditions, alongside efforts to reduce backlogs, contributed to solid staff hiring trends at the start of 2014. Levels of unfinished work were reduced for the first time since last August, despite suppliers’ lead-times lengthening to the greatest degree for almost five-and-a-half years. Backlogs were lowered in part through the use of inventories, as finished goods stocks fell at the fastest pace since September 2009.

January data indicated that input cost inflation slowed from the 11-month high recorded at the end of 2013. A number of manufacturers cited rising prices for steel, aluminum and plastics. Meanwhile, factory gate charges across the U.S. sector also increased at a slower pace in January, with the rate of inflation the weakest for three months.

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EUROZONE FLASH PMI RISES TO 53.2

The euro area private sector economy grew for a seventh consecutive month in January, according to the flash Markit Eurozone PMI®, with the rate of growth accelerating to the fastest since June 2011. The headline PMI (which tracks output across both manufacturing and services) rose from 52.1 in December to 53.2.

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Growth picked up in Germany and the rate of decline eased in France, while the rest of the region also saw a strengthening upturn.

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New orders across the euro area rose for a sixth successive month, albeit growing at a rate unchanged on December. Backlogs of work also continued to fall marginally, suggesting that the level of demand, although rising, remains insufficiently strong to enable companies to build up a pipeline of orders to fall back on if demand weakens.

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Employment was consequently trimmed slightly again, having stabilised in December, as companies remained uncertain about expanding capacity. Employment has not risen since December 2011, though the trend in the rate of job losses has eased considerably over the past year.

Selling prices also continued to fall, highlighting the fragility of demand, and have now declined continually over the past two-and-a-half years. The latest reduction was only modest, however, and the weakest since May 2012. The easing in the rate of decline reflected in part the need to pass higher costs on to customers. Meanwhile, the rate of input cost inflation picked up compared with December but was slightly below November’s recent peak.

Manufacturing continued to lead the recovery, expanding at a robust pace in January. Output, new orders and new export orders all showed the largest monthly rises since April 2011, each growing for a seventh successive month. The improvement in demand encouraged goods producers to take on more staff for the first time since the start of 2012. Although only modest, the increase in employment was the best seen since September 2011.

Service sector companies saw a more moderate increase in activity than manufacturers, but nevertheless reported that activity grew at the second-fastest rate since June 2011 (the latest improvement exceeded only by the rise recorded in September). Moreover, expectations about the year ahead held steady at a two-and-a-half year high.

However, an easing in growth of services new business suggests that any expansion of activity in February may remain weak. Slower new business growth was also a contributory factor behind firms cutting their workforce numbers again, reversing a marginal rise in December (which had been the first increase since December 2011).

Wide national divergences also persisted, with strong and accelerating growth in Germany contrasting with an ongoing downturn in France, although the latter did see an easing in the rate of decline.

Growth in Germany hit the highest since June 2011. The strong pace of expansion was fuelled by a seventh consecutive monthly rise in new business. Manufacturing output surged at the strongest pace since April 2011, but services activity growth picked up only marginally on December. Employment in Germany rose only modestly as a result, the rate of job creation sliding compared with December. Staffing levels have nonetheless now risen in each of the past three months.

In France, output fell for a third successive month, through the rate of decline eased to the slowest seen over this period. Rates of decline eased in both manufacturing and services. New orders likewise fell at a reduced rate, but the pace of job losses accelerated slightly.

Output growth in the rest of the region (excluding France and Germany) picked up to the highest since February 2011, with growth recorded for a sixth month running. The rate of job losses meanwhile eased to the weakest in the current 32-month sequence, with employment falling only very marginally in January.

 

NEW$ & VIEW$ (22 JANUARY 2014)

COLD PATCH = SOFT PATCH COMING?

Chain store sales continue very weak, partly because of the weather. Whatever the reason, that may exacerbate the inventory problem at retail and lead to a soft patch in the spring as reorder rates are cut.

Frigid weather pulled chain-store sales steeply lower in the January 18 week, down 1.9 percent on ICSC-Goldman’s same-store sales index for a year-on-year rate of only plus 0.9 percent which is the lowest reading of the whole recovery. The report warns that cold weather in the ongoing week is likely to depress readings in this report for next week.

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IMF Raises Global Growth Outlook

The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October. (…)

The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid the fights in Congress over the federal balance sheet and spending. (…)

For Europe, however, officials warned that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said, “Southern Europe continues to be the more worrisome part of the world economy.”

Exports are strengthening in the Southern euro-zone countries. But demand is slack, with weakness among banks and businesses. More budget tightening is needed as well, the IMF said, and unemployment remains at dangerously high levels, especially among youth. (…)

For Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan’s government will continue to face the challenge of trimming its budget enough to reassure investors, while not slowing the recovery.

The fund also raised the growth forecast for the world’s No. 2 economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that China’s need to contain escalating risks in the financial sector without excessively slowing growth will be a major challenge “and a delicate balancing act.”

with weak economic policies are likely to be most affected, he said. (…)

INFLATION/DEFLATION

 

Late Tuesday, a panel created by Reserve Bank of India Governor Raghuram Rajan advised the central bank to make significantly lower consumer prices the central target of its monetary policy.

The Consumer-price index is currently hovering near 10%, compared with about 6% for wholesale prices. The panel suggested the central bank aim to reduce CPI to 8% by 2015 and 6% within two years before adopting a target range around a 4% anchor.

Surprised smile Inflation Jumps in Australia Australian consumer prices rose 0.8% in the December quarter and climbed 2.7% from a year earlier, numbers that were significantly higher than expected.

Core inflation, which attempts to strip out extraordinary events such as extreme weather or new taxes, rose by an average of 0.9% in the quarter from the preceding one, compared with the 0.6% expected by 15 economists surveyed by The Wall Street Journal. Core inflation climbed 2.6% in the fourth quarter from a year earlier.

Aussies Stunned By Inflation Surprise Australia’s central bank can no longer assume the country’s inflation outlook will remain pleasantly benign, a revelation that will dramatically complicate the setting of interest rates in 2014.

(…)So how is it that a weak economy like Australia, which is weighed by a severe slowdown in mining investment, low confidence and weak commodity prices, can have an inflation problem?

There are a few contributing factors.

The first is the fall in the Australian dollar. The Aussie was the worst-performing major currency over the last 12 months, falling around 17% against the U.S. dollar. Drops of that magnitude must be reflected in higher import prices at some point. Tradable, or imported inflation, rose 0.7% in the fourth quarter from the third, building on a 1.2% rise in the third quarter from the second. (…)

The second component of the inflation riddle in Australia is homegrown. So-called non-tradable inflation, or that generated by goods and services produced locally, has been running hot for years. Some economists call it a structural problem, fearing it will take a long time to be weeded out of the consumer price index.

Non-tradable inflation rose 0.8% in the fourth quarter, adding to a long string of elevated results that date back over years.

Adam Boyton, the chief economist at Deutsche Bank, based in Sydney, says rising government charges are at the heart of the domestic inflation problem. What he terms as “government inflation” is running at annual rate of 5.7%. Inflation elsewhere in the economy is running at just 1.8%.

The list of government price hikes is long and range from environmental taxes to electricity, water and sewerage costs, coupled with higher levies on alcohol and tobacco. (…)

Floating Notes Debut in U.S as More Cash Chases Fewer Securities

The U.S. Treasury Department’s floating-rate notes may generate strong investor demand given a scarcity of money-market securities and a looming debt limit that’s accelerating a decline in bill supply.

Floaters would be the Treasury’s first new security in 17 years. Details of the inaugural sale of the two-year notes Jan. 29 will be announced tomorrow even as legislation on the nation’s borrowing limit causes the Treasury to scale back on bill sales and as dealers reduce activity in the repurchase agreement market.

WHATEVER IT TAKES

Italian Bad Loans Hit Record High – Up 23% YoY

(…) Having risen at a stunning 23% year-over-year – its fastest in 2 years, Italian gross non-performing loans (EUR149.6 billion) as a proportion of total lending rose to 7.8% in November (up from 6.1% a year earlier). As the Italian Banking Association admits in a statement today, deposits are declining (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.

Italian bad loans continue to soar – entirely ignored by the nation’s bond market participants (why worry!?)

EARNINGS WATCH

While just eight companies have provided outlooks for their first-quarter profits so far, the six that had disappointing outlooks saw shares fall an average of 3.1%, according to FactSet, a steeper drop than usual. Over the past five years, companies’ stock prices have lost an average of 0.8% after providing disappointing forecasts. (WSJ)

Ed Yardeni:

It’s not over yet, but this is turning out to be a very unusual earnings season. During each of the previous three earnings seasons last year, analysts lowered their estimates as the season approached. That set up investors to be pleasantly surprised as actual earnings turned out to be a bit better than expected.

So far, there has been no similar curve ball. Instead, during the week of 1/16, the blended actual/estimate for Q4 fell to a new low for the weekly series. The current projected growth rate for the quarter is just 6.6% y/y.

Verizon Dials Up a Big Pension Boost

Verizon Communications Inc.’s earnings got a big lift Tuesday from a change it made in its pension accounting a few years ago, and some other companies could see similar gains in the days to come.

Verizon recorded a $6 billion pretax gain in its fourth-quarter earnings for “severance, pension and benefit” credits – largely due to a gain from “mark-to-market” accounting for its pension plan, the method to which Verizon switched in 2011. After taxes, that amounted to $3.7 billion, or $1.29 a share – the biggest contributor to Verizon’s fourth-quarter earnings of $1.76 a share under official accounting rules.

That was a major turnaround from the fourth quarter of 2012, when Verizon reported a severance, pension and benefit loss of $7.2 billion pretax, or $1.55 a share after taxes, that weighed down its earnings.

Verizon is one of a handful of big companies that have made an optional switch to mark-to-market accounting, to make the results of their pension plans easier for investors to understand. They follow market prices for their pension assets, and they no longer “smooth” the impact of pension gains and losses into their earnings over a period of years.

Those companies recognize the impact of their switch through a fourth-quarter adjustment to their earnings each year, to account for the difference between their expectations for their pension plans’ performance and the year’s actual results. For 2011 and 2012, that meant losses, largely because interest rates were falling – that increased the current value of pension obligations, which affected the plans’ expenses.

But with some rates rising in 2013, and the stock market turning in a particularly strong performance for the year, the value of pension obligations fell, benefitting Verizon and other mark-to-market companies. The Wall Street Journal reported earlier this month that accounting observers expected some of them to report significant fourth-quarter gains. (…)

Among the other companies that could see similar fourth-quarter gains in coming days: AT&T Inc., which reports earnings on Jan. 28, and Kellogg Co., which reports on Feb. 6. Both have made the mark-to-market switch; AT&T reported a $10 billion mark-to-market loss in the fourth quarter of 2012, while Kellogg reported a $401 million loss in that period. (…)

Poor Start to European Earnings

Europe’s first earnings season of the year is off to a rough start, with a number of typically reliable blue-chip companies surprising markets with profit warnings and other bad news.

In recent days, Royal Dutch Shell PLC, Deutsche Bank AG, SAP AG, Unilever PLC and Alstom SA all warned about slowing profit at the tail end of last year or lower expectations for the near future. Executives have cited an array of industry-specific reasons. (…)

German business-software supplier SAP said Tuesday that it would take longer than expected to get to its 35% operating-profit margin target. It forecast €5.8 billion to €6 billion ($7.8 billion to $8.1 billion) in operating profit this year, below analysts’ expectations.

Alstom, a French maker of natural-gas turbines and high-speed trains, said its operating profit margins will fall in this fiscal year and next, having previously said the margins would improve, as its cash flow turns negative. Chief Executive Patrick Kron has recommended the company pay no dividend this year.

Over the weekend, Deutsche Bank warned that it would set aside a bigger chunk of money to absorb loan losses and said revenue from trading bonds and currencies fell.

And on Friday, Shell stunned investors by saying profit for the fourth quarter would be sharply lower than in previous periods, partly because of higher costs and lower production.

While challenges are different for each company, one weak spot has been that European economic growth continues to be sluggish. (…)

That has lowered expectations among executives. Unilever Chief Executive Paul Polman said having merely a “stable business” in Europe these days “is pretty good.”

The Anglo-Dutch consumer-products group said Tuesday that competition in developed markets and uncertainty in emerging economies would hold back growth during the year ahead.

Emerging markets are another challenge for European companies, many of which have diversified aggressively into developing economies amid flagging sales during the economic crisis at home. Today, growth in the biggest emerging markets—Brazil, Russia, India and China—isn’t accelerating as it has in previous years. (…)

RISING INEQUALITIES…

Two-Track Future Imperils Global Growth

Will wealth and income disparities become defining issues for the coming decade?

Concentrated cash pile puts recovery in hands of the few
A third of non-financial companies sits on $2.8tn hoard
 

(…) About a third of the world’s biggest non-financial companies are sitting on most of a $2.8tn gross cash pile, according to a study by advisory firm Deloitte, with the polarisation between hoarders and spenders widening since the financial crisis.

This will have a big influence on whether 2014 will bring a revival in capital expenditure or dealmaking, warned Iain Macmillan, head of mergers and acquisitions at Deloitte. “Looking ahead, the wave of cash that many are expecting will depend on the decisions of a few, rather than the many,” he said.

Of the non-financial members of the S&P Global 1200 index, just 32 per cent of companies held 82 per cent of the aggregate cash pile, the highest level since at least 2000. With nearly $150bn in its coffers, Apple alone was sitting on about 5 per of the total at the end of its fiscal year.

Such concentration has increased since 2007 when companies that held more than $2.5bn in cash or “near cash” items – not including debt – accounted for 76 per cent of the aggregate cash pile in 2007.

The study focused on gross cash holdings rather than subtracting their debt in an effort to simplify comparisons over time and identify how much money companies have to hand.

The study comes amid increasing investor calls for companies to step up capital spending. An influential survey of fund managers conducted by Bank of America Merrill Lynch released on Tuesday showed a record 58 per cent of investors polled want companies’ cash piles spent on capex.

A record 67 per cent said companies were “underinvesting” and less than a third of asset managers surveyed want companies to return more money to shareholders – the usual complaint of investors. (…)

Deloitte’s study reveals though that hoarding cash has hit companies’ share prices and revenue growth in recent years, as companies with low cash balances have done better on both measures than companies with large cash reserves.

Mr Macmillan at Deloitte said: “Small cash holding companies which have been more aggressive in their pursuit of growth have seen their revenue growth and share price performance outperform their richer counterparts.” (…)

Corporate cash may not all flow back with recovery

(…) According to Thomson Reuters data, companies around the world held almost $7 trillion of cash and equivalents on their balance sheets at the end of 2013 – more than twice the level of 10 years ago. Capital expenditure relative to sales is at a 22-year low and some strategists reckon the typical age of fixed assets and equipment has been stretched to as much as 14 years from pre-crisis norms of about 9 years. (…)

Examining quarterly Duke University survey responses from some 550 chief financial officers over the past two years, the paper said companies are far less sensitive to interest rate changes than investment theory suggests and CFOs cite ample cash and historically low rates among the reasons for that.

Less than a third of firms said moves of up to 200 basis points in key borrowing rates up or down would affect their investment plans at all.

So what would get companies to hoard or invest these days? The two most commonly chosen drivers in the survey cited in the paper were “ability to maintain margins” and the “cost of health care.” (…)

And now there:

The rally against the Valley
Showdown between tech companies and protesters in San Francisco

(…) Ostensibly a dispute about the hundreds of commuter shuttles that transport tech workers down to Silicon Valley – and how little they pay to park – the battle of the buses actually centres on complaints that the community has not shared in the spoils of the tech boom.

Speaker after speaker declared the coaches a symbol of “filthy rich corporations that could afford to pay more”, “class warfare” and “manifest destiny”. Earlier in the day a bus for Facebook employees and one heading to Google were blockaded in the latest in a series of irate protests, one of which led to a bus window being smashed.

The committee room, complete with the flags and blonde wood panelling of a courtroom, was shaken by cheers for anyone who criticised “Big Tech” with an anger which has in the past been reserved for Wall Street.

As young technology workers prefer to live in San Francisco rather than the suburban sprawl of Silicon Valley, rents have risen more than 20 per cent and evictions are up almost 40 per cent since 2010.(…)

The transportation board voted in favour of the tech companies, legalising the ferrying of almost 35,000 workers in private buses to and from public bus stops. Google said it was “excited” to work with them on the pilot programme towards a “shared goal of efficient transportation”.

But the board said the buses – with their blacked-out windows and teched-up interiors – were the “physical manifestation of a lot of larger issues” that they were not able to solve.

And there:

Vatican’s “Monsignor 500” Re-Arrested Amid Money Laundering Allegations

Monsignor Nunzio Scarano – dubbed “Monsignor 500” after his favorite bank-notewho is already on trial for allegedly plotting to smuggle 20 million euros from Switzerland to Italy, was arrested Tuesday in a separate case for allegedly using his Vatican accounts to launder a further 7 million euros. As AP reports, police said they seized 6.5 million euros in real estate and bank accounts Tuesday, including Scarano’s luxurious Salerno apartment, filled with gilt-framed oil paintings, ceramic vases and other fancy antiques. A local priest was also placed under house arrest and a notary public was suspended for alleged involvement in the money-laundering plot. Police said in all, 52 people were under investigation. Have no fear though, for his lawyer, “has good faith that the money came from legitimate donations.”

Via AP,

Scarano’s lawyer, Silverio Sica, said his client merely took donations from people he thought were acting in good faith to fund a home for the terminally ill. He conceded, however, that Scarano used the money to pay off a mortgage. (…)

GOOD SHOT: (From FT)

The Davos World Economic Forum 2014

 

NEW$ & VIEW$ (21 JANUARY 2014)

Pointing up Pointing up Pointing up U.S. bankers voice new optimism as businesses line up for loans Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy.

Increasing demand for bank loans often is a prelude to higher economic growth. With the U.S. government budget crisis fixed for now and Europe showing signs of economic recovery, companies feel more comfortable borrowing to invest in machinery, factories, and buildings.

JPMorgan Chase & Co Chief Executive Jamie Dimon, who has long described himself as “cautiously optimistic” about the economy, recently dropped the modifier “cautiously,” he said on a conference call with investors last week.

“We’re using the word optimistic because we are actually optimistic,” he added.

“The sun and moon and stars are lined up for a very successful year” in the U.S., he said the next day at a conference in San Francisco.

Pointing upI don’t see any weak spots in America,” Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.

Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.

Bankers say that anecdotally, business customers are more hopeful than they had been.

“I am hearing more when I talk with customers about their interest in building something, adding something, investing in something,” Wells Fargo & Co (WFC.N) CEO John Stumpf said on a conference call with investors last week. “There is more activity going on.” (…)

“We have seen some moderate strength in the U.S.,” GE Chief Financial Officer Jeff Bornstein said in an interview, even if he cautioned that the company has not yet seen “the breakout broadly across the economy.” (…)

“We see solid demand for loans as we head into 2014” from businesses, particularly large corporations and healthcare companies, along with owners of commercial real estate, Bank of America (BAC.N) CFO Bruce Thompson said on a conference call with analysts on Wednesday. (…)

If you missed yesterday’s New$ & View$ you have missed this from the latest NFIB report which neatly complements the above:

Small firms capex is also brightening:

The frequency of reported capital outlays over the past 6 months surprisingly gained 9 percentage points in December, a remarkable increase. Sixty-four percent reported outlays, the highest level since early 2005.

Of those making expenditures, 43 percent reported spending on new equipment (up 5 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 6 points).The surge in spending, especially on equipment and fixtures and furniture, is certainly welcome and is hopefully not just an end-of-year event for tax or other purposes. This level of spending is more typical of a growing economy.

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And to confirm what bankers are saying, this chart of weekly loans up-to-date as of Jan. 8, 2014:

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So:

Fed on Track For Next Cut In Bond Buys

The Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year.

A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke.

Punch Read this next piece carefully, as it confirms that the U.S. industrial sector is perking up:

US oil demand growth outstrips China
Abundant energy supplies drive US resurgence, IEA report shows

US demand for oil grew by more than China’s last year for the first time since 1999 according to the International Energy Agency, in a startling indication of how abundant energy supplies are driving an economic resurgence in the US.

The IEA – the rich world’s energy club whose forecasts are the gold standard for the energy market – said US oil demand grew by 390,000 barrels a day or 2 per cent last year, reversing years of steady decline. Chinese demand grew by 295,000 b/d, the weakest in at least six years. (…)

“It is clear that the US economy is rebounding very strongly thanks to its energy supplies,” said Antoine Halff, head of oil market research at the IEA.

“Sometimes oil is a lagging indicator, but sometimes it is the opposite and shows that an economy is growing faster than thought,” he added.

Pointing up The IEA said that US demand growth was driven by fuels such as propane, which is used in petrochemical plants, and indicated a pick-up in industrial activity in the US. 

The rapid growth in US consumption has taken many analysts by surprise. As recently as last month the IEA was forecasting US demand would fall in 2014, but it is now forecasting a second consecutive year of growth. 

Pointing up US consumption also appears to be accelerating. The IEA said the latest estimate of 2013 consumption was based on “exceptionally strong US monthly data for October and robust weekly data since then”.

Surging US consumption may reduce pressure on US politicians to lift an effective ban on the export of US crude oil beyond Canada. 

The IEA has been among the most vocal advocates of allowing foreign sales of US oil, arguing that domestic US oil prices would fall sharply, discouraging production, if US producers were denied a foreign outlet for their crude.

But in its monthly report the IEA acknowledged that thanks to fast-growing domestic demand and exports of refined oil products such as diesel, “challenges to [US production] growth are not imminent”.

European oil demand is also showing signs of growth for the first time since the financial crisis and the IEA said that industrialised economies as a whole are likely seeing oil demand rise for the first time since 2010. 

As a result, oil inventories in OECD countries fell by 50m barrels in November, the most since December 2011, pushing stocks 100m barrels beneath their five-year average.

The IEA also raised its estimate for total oil demand in 2014, helping push Brent crude oil prices up almost 1 per cent to just over $107 per barrel.

EU energy costs widen over trade partners
Industry paying up to four times more than in US and Russia

The gap in energy costs between Europe and its leading trading partners is widening, according to an official paper to be released by Brussels that shows industrial electricity prices in the region are more than double those in the US and 20 per cent higher than China’s.

Industrial gas prices are three to four times higher in the EU than comparable US and Russian prices, and 12 per cent higher than in China, says the European Commission paper, based on the most comprehensive official analysis of EU energy prices and costs to date. (…)

“If we paid US energy prices at our EU facilities, our costs would drop by more than $1bn a year,” said Mr Mittal, noting the US shale gas boom and more industry-friendly policies had led to much lower costs for industrial energy users in that country.

Separately, Paolo Scaroni, chief executive of the Italian oil and gas company, Eni, said in a speech at the weekend that lower American energy costs had created a “massive competitive advantage for the US” that was driving investors and businesses to that country at a rapid pace. “This is a real emergency for Europe,” he said. (…)

California Declares Drought Emergency

Governor’s move frees state resources to cope with the growing economic and environmental threat from some of the driest conditions on record.

(…) The economic fallout is beginning to spread. The U.S. Agriculture Department on Wednesday declared parts of 11 mostly Western states to be natural-disaster areas, making farmers in places including California, Arizona and Nevada eligible for low-interest assistance loans.

In California, with its huge economy, the financial impacts are likely to ripple beyond the farmers. Growers in the Central Valley’s Westlands Water District, for instance, are expected to fallow 200,000 of their 600,000 acres this year, resulting in job losses in surrounding communities, according to a statement by the agency. Other businesses that stand to suffer include landscapers, nurseries and orchards. (…)

Euro-Zone House Prices Improve

House prices rose at the fastest quarterly pace in over two years in the third quarter of 2013, a sign that the slow economic recovery continued in the second half of last year.

Eurostat said house prices across the 17 country euro zone were 0.6% higher in the third quarter of 2013 compared with the second quarter, and fell 1.3% in annual terms.

The quarterly gain was the strongest since a 1.1% increase in the second quarter of 2011, while the annual drop was the smallest since the fourth quarter of 2011.

In the second quarter of 2013 house prices in the euro zone rose 0.2% from the previous quarter and declined 2.4% in annual terms. (…)

House prices in France also bolstered the gain, rising 1.2% in the third quarter from the second. Although Eurostat doesn’t chart official data for German house prices, the estimate they use is based on European Central Bank statistics that showed house prices in the largest euro-area economy grew around 1.0% over the same period.

In Spain Eurostat said house prices grew 0.8% on the quarter in the third quarter after a 0.8% decline in the second quarter while in the Netherlands house prices grew 0.6% after a 2.0% drop in the second quarter.

Just five of the 17 countries saw house prices fall between July and September last year, according to the data—Italy, Cyprus, Malta, Slovenia and Finland.

Thailand Seen Cutting Rates as Unrest Continues

Thailand’s central bank is expected to cut interest rates at its meeting Wednesday as political unrest continues to engulf the exporter of automobiles and electronics.

Almost daily antigovernment protests, many of them violent, have destabilized the country since late last year. Prime Minister Yingluck Shinawatra has called elections for Feb. 2 but the opposition says they will boycott the polls, meaning a likely protracted battle.

At the Bank of Thailand’s most recent meeting, as political protests started to gather steam in November, the bank cut rates by 0.25 percentage point to 2.25%. (…)

Even before the instability, the outlook for Thailand’s economy was shaky. Exports, which account for around two-thirds of the economy, have performed poorly, declining 4.1% on the year in November, the latest month for which data are available.

The automobile industry is suffering because of weak demand in other Asian markets. Exports from the nation’s electronics industry, which supplies parts for personal computers—but not the fast-growing smartphone market—also have been disappointing.

The turmoil is taking its toll on the economy. Tourism, which accounts for 7% of national output, has been hard hit as foreign travelers postpone journeys. Plans to build multibillion-dollar infrastructure, including high-speed rail lines, look likely to face delays amid the political gridlock.

The Finance Ministry last week slashed its growth forecast for 2014 to 3.1%, compared with an earlier projection of 3.5% to 4.0%. Failure to push ahead this year with the 2.2 trillion baht ($66.6 billion) infrastructure plan could push growth as low as 2%, the ministry estimated. (…)

Such monetary easing, though, might have little direct effect in the current environment. The previous rate cut failed to filter through into higher bank lending because Thai banks are currently trying to reduce debt exposure.

Thai household debt stands at 80% of gross domestic product, one of the highest ratios in Asia, reflecting years of aggressive lending to finance house purchases and auto loans. A government tax rebate two years ago for first-time car owners also helped boost debt levels. (…)

China’s Working Population Fell Again in 2013

China’s working-age population continued to shrink in 2013, suggesting that labor shortages would further drive up wages in the years to come.

The nation’s working-age population—those between the ages of 16 and 59—was 920 million in 2013, down 2.4 million from a year earlier and accounting for 67.6% of the total population, the National Bureau of Statistics said Monday. The country’s workforce dropped in 2012 for the first time in decades, raising concerns about a shrinking labor force and economic growth prospects.

Last year, the statistics bureau said the population between the ages of 15 and 59 was 937 million in 2012, down 3.45 million from a year earlier, accounting for 69.2% of the total population. The bureau didn’t explain why it began using a different starting age of 16 to measure the working-age population in 2013.

The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.

Labor shortages are still common in several regions throughout the country, and many employers reported an increase of between 10% and 15% in labor costs last year, Ma Jiantang, chief of the National Statistics Bureau, said at a news conference Monday. (…)

But what’s even more significant than the shrinking working-age population was a notable decrease in the labor-participation rate, or the share of the working-age population that is actually working, Professor Li Lilin at Renmin University of China said.

“The labor-participation rate has been dropping, especially among females in the cities,” Ms. Li said.

Rising household income amid decades-long market reforms has made it possible for some who previously would have needed to work to choose to stay at home, she added.

After adjusting for inflation, actual disposable income of Chinese in urban areas grew 7% last year, while the net income of those living in rural areas rose 9.3%, the statistics bureau said. The average monthly salary of the nation’s 268 million migrant workers was 2,609 yuan ($431), up 13.9%, it said. The rise in wages means workers are likely to benefit more from the nation’s economic growth, though rising labor costs are a growing challenge for manufacturers.

SENTIMENT WATCH

 

Stock Values Worry Analysts

(…) Ned Davis Research in Venice, Fla., has reached similar conclusions. Ned Davis, the firm’s founder, published two reports titled “Overweighted, Over-Believed and Overvalued.” He looked at an array of measures including the percentage of U.S. financial assets held in stocks, margin-debt levels and how much money managers and mutual funds have allocated to stocks.

His conclusion: Investors are overexposed to stocks, but they haven’t gone to bubblelike extremes.

Vincent Deluard, a Ned Davis investment strategist, agrees that the P/E based on forecast earnings is above average. Because forecasts are unreliable, he also tracks earnings for the past 12 months, adjusted for inflation, interest rates and economic growth. All these measures yield a similar conclusion.

“We have a market that is getting a little frothy,” Mr. Deluard says. His team expects a pullback of 10% to 20% in the next six months, but perhaps not right away. Then they expect stocks to rise, maybe for years.

“This is not 2008. This is not 2000. This is more like 1998, where you have some of the signs that you see at tops, but not at extremes,” he says. (…)

High five But some people disagree. James Paulsen, chief investment strategist at Wells Capital Management, which oversees $340 billion, notes that P/E ratios in the past have moved even higher than they are today before running into real trouble.

As long as inflation stays moderate and the Federal Reserve doesn’t raise interest rates sharply, he says, the P/E ratio on earnings for the past 12 months can hit the 20s from its current level of around 16 or 17.

High five Yet Mr. Paulsen, too, is worried that 2014 could be a volatile year and that stocks could finish with little or no gain. His concern isn’t valuation; It is that the economy could warm up. Inflation fears could spread, he says, even if actual inflation stays modest. The worries could limit stock gains.

These things are so hard to predict that he and many other money managers are urging clients not to change their holdings or try to time the market.

This is so beautiful. In just a few words, Paulsen says everything we should know, makes all possible forecasts and none at all. And the article concludes saying that things are so uncertain and unpredictable that investors just just freeze sitting on their hands. Disappointed smile

 

EUROZONE COMPOSITE PMI RISES TO 52.1

The upturn in the eurozone private sector economy gained momentum in December. Although the recovery remained modest and fragile overall, growth of output was nonetheless recorded throughout the second half of 2013.

At a three-month high of 52.1 in December, up from 51.7 in November, the final Markit Eurozone PMI® Composite Output Index rose to its second highest level during the past two-and-a-half years. Moreover, the average reading for the final quarter of the year was above that for the prior quarter.

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Manufacturing continued to lead the recovery in December. Growth of production accelerated to its fastest since May 2011, as new orders improved aided by a solid increase in new export business. Service sector business activity also increased further, although the rate of expansion remained modest and eased to a four-month low. This mainly reflected the ongoing weakness of some domestic markets, hindered on the consumer side by still high unemployment in certain nations.

Marked performance differentials also remained prominent between the member states of the currency union. Ireland and Germany stayed atop
the PMI output growth league table, while Spain was the biggest mover over the month with its PMI output index surging to a near six-and-a-half year record. Output in Italy held steady, while France was the only one of the big-four nations to report contractions of both output and new orders.

Eurozone employment was unchanged in December. This was a slight improvement compared to the marginal job losses signalled by the earlier flash estimate, and halted a 23-month sequence of cuts to payroll numbers. Germany and Ireland both saw solid and accelerated rates of job creation, with the rate of increase in Germany hitting a near two-year record. Although further losses were reported in France, Italy and Spain, the rates of decline eased in all three nations.

Average input prices rose for the seventh month running in December. However, the rate of inflation eased since November and was low by the
historical standards of the survey. Pricing power remained weak, as highlighted by further selling price discounts at service providers. In contrast, manufacturing output charges rose slightly.

Pointing up The recovery in the eurozone service sector was extended to five months in December. At 51.0, unchanged from the earlier flash estimate, the Eurozone Services Business Activity Index fell to a four-month low, down from November’s 51.2, to signal an easing in the overall rate of increase.

Ireland registered the sharpest rate of expansion in services output of the five nations covered, with growth rising to a near seven-year record. Spain also reported faster expansion – the strongest in nearly six-and-a-half years – while Germany reported slower growth than in November. France and Italy continued to contract, with rates of decline broadly unchanged from November and similarly modest.

Growth of new business at eurozone service providers remained lacklustre during December, as faster increases in Ireland and Spain were offset by slower growth in Germany and outright declines in France and Italy. The subdued trend in demand meant that outstanding business in the euro area service sector declined again, extending the current sequence to two-and-a-half years.

Companies maintained a positive outlook for the sector in December, amid expectations that an improvement in underlying economic conditions in 2014 would support higher demand. The overall degree of positive sentiment rose to its highest since mid-2011, with confidence improving in France and Italy and remaining strong in Ireland and Spain. German service providers were the least optimistic overall.

Employment was broadly unchanged over the month in December, following marginal job losses in the prior two months. Payroll numbers rose at faster rates in Germany (two-year high) and Ireland (five-month peak). This was offset by ongoing job losses in France, Italy and Spain.

Input price inflation eased to a six-month low in December, down from November’s 11-month record and below the long-run survey average. Service providers’ pricing power remained weak, however, leading to a drop in output charges for the twenty-fifth successive month. Only Germany reported an increase in selling prices.

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U.S. Manufacturing Off To Strong Start

Two very strong reports to start 2014.

First the ISM via the WSJ:

The Institute for Supply Management’s monthly index, which is based on a survey of purchasing managers, hit 57 in December. That was down slightly from 2013’s high of 57.3, registered in November. Readings above 50 indicate expansion.

“I don’t see any weaknesses,” in the December survey, ISM Chairman Bradley J. Holcomb said Thursday. “I see a good, strong, balanced report…and a very promising start” for 2014. Readings for the first half of 2013 averaged 51.5, just over the expansion threshold. In the second half, that pace picked up to 56.3.

And Markit’s PMI report:

Business conditions in the U.S. manufacturing sector improved at the fastest rate since January, according to the final December Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™). At 55.0, up from 54.7 in November and above the earlier flash estimate of 54.4, the PMI indicated a solid rate of expansion.

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The PMI averaged 53.8 in the three months to December and, above the average for the three months to September of 53.2, was the highest since the first three months of the year.

Production in the manufacturing sector continued to rise strongly in December. The rate of growth was well above the series average and the fastest since March 2012. All three market groups (consumer, intermediate and investment) posted higher levels of output in December, with manufacturers of investment goods posting the fastest rate of increase.

The increase in output was largely in response to higher new orders, which itself reflected greater client demand. Total new business rose at a strong pace that was little-changed from November’s ten-month peak. Moreover, new export orders continued to increase, as has been the case in five out of the past six months. Although producers of consumer goods reported a strong increase in total new work in December, exports were broadly unchanged for the second month running.

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Manufacturing employment in the U.S. continued to increase in December, taking the current sequence of job creation to six months. The rate of growth was solid and the fastest since March. Panellists often commented on an improved business outlook.

Meanwhile, input costs faced by manufacturers rose at the fastest pace for almost a year in December. Panellists commonly reported higher raw material prices, particularly for metals and wood. Larger costs were partially passed on to clients, with firms raising their selling prices for the sixteenth consecutive month. On average, the latest rise in output charges was the strongest for almost two-and-a-half years.

Large manufacturers (more than 500 employees) reported a marked rise in output during December. This generally reflected a sharp increase in new business, with the rate of new order growth the joint-fastest since late-2009. In contrast, new order growth was only modest at small manufacturers (less than 100 employees), with new export work having fallen since November.

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