Peter Boockvar

Succinct Summation of the Week’s Events:

Positives,

1)We can stop talking about the debt ceiling at least through next year. 

2)May payrolls grew by a whopping 339k, well more than the estimate of 195k. The private sector contributed 283k of this (similar to what ADP said yesterday) vs the forecast of 168k. The prior two months were revised up by 93k in total. The participation rate held at 62.6%. The important 25-54 age cohort saw its participation rate tick up again to 83.4% from 83.3% and that’s above the February 2020 level of 83%.

3)Initial jobless claims totaled 232k, 3k below the estimate and vs 230k last week. The 4 week average was 230k vs 232k in the week before. Continuing claims rose 6k w/o/w to just under 1.8mm at 1.795mm, about as forecasted.

4)Job openings in April rose to 10.1mm and that’s up from 9.75mm in March (revised up from just under 9.6mm). The hiring rate though remained unchanged at 3.9%

5)Comments this week from Fed Governor Jefferson, followed by voting member Harker, point to a time out on the rate increases. 

6)The Conference Board’s May consumer confidence index was 102.3 and while that was 3 pts above the estimate, it’s down from 103.7 in April which was revised up by 2.4 pts. This compares with 104 in March, 103.4 in February and 106 in January. Both the Present Situation and Expectations components were lower m/o/m. One yr inflation expectations fell one tenth to 6.1% and that is the smallest since December 2020. That compares with 5% in the 20 yrs leading into Covid. The answers to the labor market questions softened.

7)Home prices in March, thus somewhat dated and reflecting just the beginning of the important spring transaction season, rose .66% y/o/y following a 2.1% rise in February according to S&P CoreLogic. The comparisons were very tough as prices rose 21% in March 2022 which came after rising by 13.5% in March 2021. From a m/o/m standpoint, home prices rose for a 2nd month by .4% and follows a string of declines. To this, S&P said “Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end. That said, the challenges posed by current mortgage rates and the continuing possibility of economic weakness are likely to remain a headwind for housing prices for at least the next several months.” The cities with the quickest pace of gains continues to be in the sunbelt, Miami, Tampa, Charlotte and Atlanta. The laggards were seen in Seattle, San Francisco, San Diego and Las Vegas.

8)In the bank loan data from the week ended 5/24, bank deposits rebounded by $86b after the rise of $30b last week. I guess banks are further raising rates paid on these deposits in order to stem the flight.

9)From LULU: “our business remained strong in North America and across our international regions…Guests responded well to our spring merchandise assortment.” They saw particular strength in China, “ahead of our expectations in just one more sign of the potential within this market.”

10)The China private sector weighted Caixin May manufacturing index rose to 50.9 from 49.5 and better than the estimate of no change. They said “Both supply and demand expanded, but employment sank to a 3 yr low. Businesses stepped up purchasing, inventories of raw materials grew marginally, logistics picked up, prices continued to slump, and manufacturers’ optimism wavered.”

11)China Beige Book said its “new May data saw topline growth notch its best performance since 2019, even as a new wave of Covid cases hits home. Consumption drove the improvement, with Retail finally seeing broad based gains while all of our inflation gauges accelerated meaningfully for the first time this year. Manufacturing activity defied rumors of demise, though soft demand from Western economies remains a major headwind.” No surprise that its property sector remains under pressure.

12)India’s manufacturing PMI which rose 1.5 pts to 58.7. Japan’s final read was 50.6 vs 49.5.

13)Japan’s unemployment rate in April fell to 2.6% from 2.8% while the jobs to applicant ratio held at 1.32, well off the post Covid lows but down from 1.45 in February 2020. 

14)Vietnam’s exports in May fell 5.9% y/o/y, not as bad as the 10.3% decline expected. 

15)South Korea’s May exports fell 15.2% y/o/y but a touch better than the forecasted drop of 16.3%. 

16)Eurozone inflation saw no increase in May vs the estimate of up .2%. The y/o/y gain slowed to 6.1% from 7%. The core rate was up 5.3% y/o/y, 2 tenths below expectations and down from 5.6% in April. 

Negatives,

1)In contrast to the establishment survey, the household survey said 310k jobs were lost in May and combine this with the 130k person rise in the labor force resulted in a rise in the U3 unemployment rate to 3.7% from 3.4%. The all in U6 was up one tenth to 6.7%. Hours worked declined again to 34.3 from 34.4 and which matches the lowest amount since 2011 not including the April 2020 Covid drop. Following the decline in the quit rate we’ve seen in JOLTS, job leavers as a % of unemployed slowed to 12.6% from 13.8% in April, 14.2% in March, 14.8% in February and 15.3% in January. Average hourly earnings rose .3% m/o/m as expected but April was revised down by one tenth. Versus last year they are up 4.3% vs 4.4% in April. Combine this with the drop in hours worked and there was no change m/o/m in average weekly earnings, though still up 3.4% y/o/y. 

2)The May ISM manufacturing index fell a touch to 46.9 from 47.1 and about as expected. It does mark the 7th straight month of manufacturing contraction. New orders fell down to 42.6 and backlogs stand at just 37.5. Of the 18 industries surveyed, just 4 saw growth and 14 are experiencing a contraction vs 5 up and 11 down in April.

3)This is what S&P Global said in their US mfr’g report which fell back under 50 at 48.4: “May saw a renewed deterioration of business conditions in the US manufacturing economy which will add to concerns about broader economic health and recession risks…Unless demand picks up, production growth will move into decline seen as it is clearly unsustainable to rely solely on backlogs of orders, which are now being depleted at the fastest rates for three years. Hence companies are cutting back sharply on their input buying and seeking to minimize inventory, tightening their belts for tough times ahead.”

4)Within the April JOLTS data, the quit rate fell to 2.4% from 2.5% and that is the lowest since January 2021.

5)Challenger’s May layoff report saw a 20% rise in layoffs m/o/m and up by 287% y/o/y. They said “Consumer confidence is down to a 6 month low and job openings are flattening. Companies appear to be putting the brakes on hiring in anticipation of a slowdown…With the exception of Education, Government, Industrial Mfr’g, and Utilities, every industry has seen an increase in layoffs this year.” Tech and retail led the way in job cuts. 

6)With the 30 yr mortgage rate now back to 7%, purchase applications fell 2.5% w/o/w and down 31% y/o/y. Refi’s were lower by 7% w/o/w and by 45% y/o/y. 

7)Vehicle sales in May totaled 15.05mm, below the estimate of 15.3mm and compares with 17.3mm in May 2019.

8)In the bank loan data from the week ended 5/24, C&I loans outstanding fell by another $4.3b to the lowest level since last October.

9)Some tech earnings comments:

From Salesforce: “we are still operating in an uncertain macro environment. Customers continue to scrutinize every deal and we see elongated deal cycles and deal compression, particularly in our more transactional revenue streams…Also in Q1, our professional service business starting to see less demand for multiyear transformations, and in some cases delayed projects as customers focused on quick wins and fast time to value.”

From HPQ: “As expected, the industry wide headwinds we described last quarter continue to impact our business…Looking first at the market level, global economic uncertainty remains elevated. The macro environment is challenging across most geographies. We continue to see cautious consumer discretionary spending while enterprises are delaying capital investments.”

From HPE: “In the 2nd quarter, we saw some decline in the health of microeconomic conditions, causing unevenness in customer demand, particularly in general purpose compute. We also see unevenness when comparing customer size, industry or geography…In the last few months, sales cycles have elongated, because customers are more reluctant to quickly commit to large projects or some will seek additional internal approvals at the time of their order.”

From BOX: “We did want to call out kind of an incremental element of softness on the SMB (small and medium sized businesses) front in the US.”

10)Dollar General: “The macroeconomic environment is more challenging than the Company had previously anticipated, which the Company believes is having a significant impact on customers’ spending levels and behaviors.”

Capri: “With Versace, Jimmy Choo, and Michael Kors, we have three incredibly powerful brands to drive growth. We recognize there are near term uncertainties in the Americas. However, we are encouraged by the strong trends in Asia and continued growth in EMEA.”

Macy’s: “We planned the year assuming that the economic health of the consumer would be challenged, but starting in late March, demand trends weakened further in our discretionary categories.”

11)South Korea’s May manufacturing PMI was 48.4 vs 48.1, Taiwan’s fell to 44.3 from 47.1, Vietnam’s to 45.3 from 46.7, Malaysia’s dropped 1 pt to 47.8 and Thailand’s dropped to 58.2 from 60.4. Australia’s final print was 48.4 vs 48 and is below 50 for a 3rd month.

12)China’s state sector focused manufacturing PMI fell to 48.8 from 49.2 and vs the estimate of 49.5. The service piece was down 1.9 pts to 54.5 which was below the estimate of 55.2.

13)The final Eurozone manufacturing May PMI figure was 44.8, below 50 for the 11th straight month and this print was the weakest of them all. S&P Global said “The downturn in the manufacturing sector is geographically broad-based…The decline in new orders from home and abroad signals that the weakness in output is likely to persist for several more months.”

14)The final UK May manufacturing PMI was 47.1, in contraction for a 10th month and down from 47.8 in April. S&P Global said “Manufacturers are finding that any potential boost to production from improving supply chains is being completely negated by weak demand, client destocking and a general shift in spending in the UK away from goods to services. These factors are also driving a broad decrease in demand from overseas amid reports of lost orders from the US and mainland Europe. The retrenchment in export demand is also being exacerbated by some EU clients switching to more local sourcing to avoid post-Brexit trade complications.”

15)The May Economic Confidence index for the Eurozone fell to 96.5 from 99 and that was 2.3 pts below expectations. That’s also a 6 month low. Manufacturing, services, retail and construction components all weakened while consumer confidence was little changed but at the best level since February 2022.