Econ Brothers' Moning Macro 12/2/12
SUMMARY: Global data is getting better and that is very good news for SPX EPS…especially considering corporate profits (which is more US focused) have been so strong (driven by strong nominal GDP). I think what we write below on the EPS outlook is important considering how negative many seem to be on earnings next year, and European fear spreads continue to move tighter.
OVERNIGHT NEWS- GOOD BACKDROP: Better data from China, Geithner saying a deal could get done, European PMI in line (Eurozone Manufacturing PMI 46.2 vs. consensus 46.2 and prior 46.2…even Greek PMI was higher than previous! Greece Manufacturing PMI 41.8 vs. prior 41.0), Merkel indicated private sector haircuts could happen (Merkel was asked by German weekly Bild am Sonntag if such a haircut could come after German elections in autumn next year. "If Greece one day gets along with its revenue without making new debt, then we have to look at the situation and assess it," Merkel replied.) And although Rajoy is still pretty fair from moving to sign an MOU, Rajoy did say he wouldn’t hesitate to turn to the ECB. The off-set is Chinese stocks moving back toward the lows (new issues worries being cited…but coal stocks were a leader to the downside and Chinese steel prices have rolled a bit of late) and unlike the last few days, it wasn’t just Chinese stocks lower as Hong Kong was down, India down a touch and rest of Asia flat.
European fear spreads are much tighter on the day (2yr Euro basis swap has been tighter every day for 2 weeks and have nice move today…Spanish/Italian yields have collapsed to new lows today…we also had news from Germany that could be helping yields…Germany’s composite budget will be in balance or near-to-balance every year from this year through 2016 gauged by the euro’s Maastricht Criteria accounting rules, the Finance Ministry in Berlin forecast today).
UK manufacturing PMI continues to point to weak activity
The manufacturing PMI came in slightly higher than expected in November. The headline index rose to 49.1 (consensus: 48.0) from a downwardly revised 47.3 previously. Despite the small increase, this measure remains consistent with contracting activity in the sector. On the other hand, the output index jumped by six points to 51.0 and is now indicating rising output for the first time since June. New business continued to fall with the new orders index at 49.7 (from 47.7) and the new export orders index at 47.6 (from 45.3). Exports remained vulnerable to weak demand from Europe and the US. We think this component of the survey is likely to be subdued in the coming months owing to weak global activity and especially as growth in the UK’s main trading partners is likely to underperform the overall global trend.
Payroll numbers fell further, with the employment index at 47.7 (from 48.8). This is the fourth consecutive fall in employment in the sector and more generally, the index has fluctuated around the 50 point mark since July 2011. This weakness in employment coincides with the steady deterioration in manufacturing activity since the second half of 2012. We expect these employment data to perform poorly as long as manufacturing activity fails to recover.
The diverging trend between input and output price inflation was corrected to some extent in November as a result of easing input price pressures. The input price index fell to 53.0 (from 57.8) and there was some anecdotal evidence suggesting that weak raw material demand had led to lower prices at some suppliers. The output price index edged up to 51.5 (from 51.3), with weak demand and competitive pressures limiting the pace of price increases.
The manufacturing PMI has been consistent with contracting activity for seven consecutive months now and today’s data suggest a continuation of this trend, albeit at a slower pace of contraction. The PMI survey has been painting a more subdued picture of the manufacturing sector than official data in recent months and despite the improvement in November, the gap between the two data remains significant. Although we would caution against taking the PMI survey at face value, we would also point out that beyond the quarterly volatility even the official data suggest weak underlying output. Overall, we think conditions in the manufacturing sector remain difficult and think that the economy remains far from the hoped-for rebalancing towards export-driven manufacturing. We forecast manufacturing output to contract in Q4, and for 2012 as a whole, and to experience only a slow recovery next year.
Euro area final manufacturing PMIs: Tentative improvement – waiting for more
Euro area: No revision from flash - modest improvement in November, mixed picture across countries
- · Euro area November final manufacturing PMI remained unchanged from the flash estimate at 46.2, rising by 0.7 points in October and bouncing back to its September level (46.1).
- · The output and new orders components were slightly revised up +0.3 and +0.1 points to 46.1 and 44.2, respectively.
- · PMI new orders-inventories increased sharply from -4.2 to -2.9 from October, reaching its highest level since February 2012.
- · The input prices index was revised down 3 tenths to 53.3, whereas the output prices index remained unchanged from the preliminary estimate at 49.5. They both stand below their long-term averages of 58.0 and 51.7, respectively.
Positive outcomes can be seen across the board, the output components rising by 1.1 points to 46.1, its highest level since April 2012 and the new orders index gaining 1.0 points to 44.2, its highest point since March 2012. The employment index was almost back to its September level (47.7) at 47.2 (+1.1 points).
Overall, today’s release does not provide much new news from the flash estimate. Our assessment is that the slight uptick we have seen in the euro area headline index only offsets for last month's drop. As a result, we remain to be convinced about the upward trend in the forthcoming releases concluding on a normalization path. In any case, as we have already highlighted, the euro area IP carry over is significantly negative at -1.4% (with the September data).
U.S. Macro Flash: Nov. ISM 49.5 vs 51.7; More "Cliff" Comments than "Sandy" (via Citi)
•The ISM Composite Index fell more than expected to 49.5 in November from 51.7 in October, consistent with soft output growth in 4Q. Industry comments quoted in the report covered a good number of concerns on the fiscal cliff and “uncertainty” with just one mention of Hurricane Sandy as impacting shipments.
•The details of today’s report matched the commentary. Production rose to 53.7 from 52.4 while new orders fell to 50.3 from 54.2. New export orders weakened slightly while imports strengthened a hair. The inventories index fell a sharp 5 index point to 45, but employment also fell to 48.4 from 52.1. This was the lowest employment index reading since September 2009.
•While producers won’t “decouple” from consumers for very long, there’s perhaps a bit of evidence that business caution on inventories and investment will impact employment too before the year is out. The sharp decline in the inventories index is consistent with a drag on output in 4Q, and sub 1% real GDP growth.
•In contrast, construction spending in October was stronger than expected, rising 1.4% despite some likely Sandy impact at the turn of the month. Residential investment readings were particularly strong and widespread across categories. Net revisions to August and September were upward, suggesting some small boost to 3Q GDP on revision and a good start to 4Q in this (narrow) growth component.
US Markit PMI beats expectations ahead of ISM
The US Markit PMI printed 52.8 in the final November reading, a bit above the flash estimate of 52.4 and the consensus forecast of 52.1. This is higher than the final October print of 51.0 and the strongest reading since the May value of 54.0. There were notable improvements in most of the major component indices, as new orders (53.6, previous: 51.1), output (53.5, previous: 51.4), and employment (52.6, previous: 51.8) all rose.
Chancellor Osborne admitted on Sunday that his plan to eliminate the deficit was off track, but insisted that a change of course in Wednesday's Autumn Statement would be 'a complete catastrophe'. His comments fuelled speculation that he would miss his target of cutting debt as a share of national income by 2015-16 and that spending cuts could extend until 2018. The Chancellor is expected to announce he is breaking the traditional link between benefits and inflation next April and may also lower the tax-free allowance for pension contributions. (FT)
Mr. Osborne set out plans for a “£10bn tax dodging clampdown” after MPs on the public accounts committee branded some tax practices by multinational companies“immoral”. HMRC will be given an extra £77m a year to focus on enforcement on multinationals, the wealthy and offshore evasion. (FT)
The Public and Commercial Services union will meet over the next few days to decide whether to hold a ballot for strike action. The union is in dispute with the government over jobs, pay and pensions and has accused the coalition of planning “attacks”on working conditions. (FT)
The leader of Birmingham city council, the UK’s largest local authority, has warned that services will be slashed by almost 50% by 2017. (FT)
Banque de France governor Christian Noyer has said there was “no rationale” for allowing the bulk of euro financial business to be conducted in the UK. He said most of this business should be within the eurozone, reflecting the capacity of the ECB to provide liquidity and to ensure regulatory oversight. More than 40% of worldwide euro FX is handled in London, a bigger share than the eurozone combined. (FT)
Manufacturers and City of London recruiters have reported a bleak outlook for their sectors. The EEF said export orders have turned negative while overall output and orders were at their weakest for three years. Investment and recruitment intentions were also weak. Meanwhile, the City suffered its worst