The economic data out of China seems to be the main driver of stock, bond, FX and commodity markets today. It’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. A few things here. The manufacturing weakness is as much a reflection of the global economic slowdown in trade than it is about China. US and European manufacturing are in a recession too. The service PMI includes construction and we know China’s residential real estate market is still under pressure, though has stabilized for now. Chinese strength is still being seen in leisure, hospitality, and travel. I don’t think much of the above should be so surprising but the market response today makes it seem to be.
The Shanghai comp was lower by .6% and the H share index by 1.9%. Also, all of Asia was red overnight and the yuan is weaker. Oil is down again, copper is weaker by .5% for a 2nd day but iron ore is little changed. European stocks are down too with some having China as their biggest customer.
The other thing of note today was the lower than expected May inflation stats from France which followed the Spain print yesterday that was too. We’ll see Germany’s at 8am. France saw headline CPI fall by one tenth m/o/m vs the forecast of up .3%. Versus last year it slowed to 6% from 6.9%. A drop in energy prices and slower rate of gain in food were the main reasons. All was not ok though with European inflation as Italy said its May CPI rose .3% m/o/m, well above the estimate of down .2%. It was up 8.1% y/o/y, 6 tenths above the forecast, though down from 8.7% in April. The 5 yr 5 yr euro inflation swap is down 3 bps and lower by 7 bps this week to 2.50% but that comes after rising by 12 bps last week. As seen below it remains near the highs. European bonds are rallying with yields lower and that in turn is helping US Treasuries to rally for a 2nd day after last week’s weakness.
5 yr 5 yr Euro Inflation Swap
Speaking of US manufacturing, the Dallas regional survey seen yesterday fell to -29.1 from -23.4 and that marks the 13th month in a row under zero. Here were some important comments:
Chemical Mfr’g
“Volumes have not rebounded at a level we would expect this time of year. Orders seem to be erratic, which is in line with automotive and building construction markets trending downward as interest rates have deeply impacted both of these key, basic materials consumer sectors.”
Food Mfr’g
“Order volume has stalled recently.”
“We have different dynamics and drivers in our business. We clearly are moving into a period of stagflation.”
Machinery Mfr’g
“We are seeing a massive slowdown in business activity.”
Paper Mfr’g
“We are seeing all indications of a continued slide in demand (three quarter now). Prices are coming down some, but labor costs are still going up. This offsets any reduction in material costs, so margins are down as a result.”
Primary Metal Mfr’g
“Business is slowing down. That is certain.”
“The building and construction industry remains significantly off, primarily residential.”
Textile Product Mills
“We feel better now than we did a month ago about sales and the general environment.” Remember Costco talked about good apparel sales as did Abercrombie and American Eagle.
Transportation Equipment Mfr’g
“There is nothing encouraging on the horizon.”
While tech investors are caught up in their hopes and promise for the new iteration of AI, the tech earnings last night were a reality check.
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.”
“We continue to make solid progress on reducing our channel inventory levels sequentially, but levels remain slightly elevated for us and across the industry. As a result, we continue to see aggressive pricing in the quarter.”
And of course the AI commentary, “Looking ahead, we see potentially significant and incremental opportunities to leverage AI and generative AI to positively impact both our products and solutions and how we operate.”
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. European, Asian and mid size company deals are holding up better than expected, while large enterprise businesses and customers in certain sectors, such as financial services and manufacturing in North America, have been more conservative with their spend.” I’d guess ‘financial services’ weakness is mostly from the US banks.
More from HPE, “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.”
Box also talked about greater scrutiny of larger deals and “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.”
From Ambarella which is down almost 20% pre market:
“Our Q1 result was slightly ahead of our expectations, despite the significant headwinds from the ongoing semiconductor industry cyclical downturn.” This was followed by AI, AI, and more AI commentary.
On their fiscal yr 2024 outlook, “Customer feedback on end demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1…By end market, we expect that both automotive and IoT revenue will be approximately flat sequentially as well.”
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