Better than expected European PMI’s is leading to higher interest rates in the Euro region that is spilling over to a further lift in yields in the US with the 10 yr yield now approaching 3.90%. The Eurozone February composite index rose to 53 from 50.8, solely driven by a 2.2 pt m/o/m increase in services to 53. The manufacturing component remained below 50 and slipped by .3 pts to 48.5. S&P Global said “A key change in the services sector was the revival of growth in financial services activity, albeit with real estate remaining in decline, as well as resurgent tourism/recreation and media activity. Transportation broadly stabilized after 7 months of decline, industrial services gained momentum and IT services enjoyed a surge in activity.”
With respect to manufacturing, “chemical & plastics and basic resources remained the main areas of weakness while food & drink, household goods and industrial goods manufacturing showed further signs of recovery. Auto making likewise continued to pull out of the slump seen last year.” Overall inflation pressures eased but “remained stubbornly high, especially in the service sector, in part linked to the impact of higher wage costs.”
The UK saw its PMI also improve with both components higher. The composite index rose to 53 from 48.5 with the services piece rising to 53.3 from 48.7. Manufacturing lifted by 2.2 pts to 49.2. S&P Global said “While many companies continue to report tough operating conditions, especially in the manufacturing sector, the broader business mood has been buoyed by signs of inflation peaking, supply chains improving and recession risks easing.” It’s not though all a bed of roses though as, “elevated inflation pressures clearly remain a concern, especially in the service sector.”
UK Gilts are selling off the most in the region with the 2 yr gilt yield jumping by 15 bps to 3.90% and the 10 yr yield up by 10 bps to 3.57%. This in turn is helping to lift the British pound. German yields are up about 3 bps but the euro is a bit lower.
Japan’s February composite PMI index was unchanged m/o/m at 50.7 with a lift in services and a drop in manufacturing while Australia saw a rise to 49.2 from 48.5, though still below 50.
We also saw out of Europe the German February ZEW index which rose to 28.1 from 16.9 and that was 5 pts above the estimate with improvement too seen in the Current Situation component, though remains deeply negative at -45.1. This reflects a clear contrast between the hopes of the better times to come but the acknowledgement of the still challenging times currently.
Lastly out of Europe, the February UK CBI industrial orders index was little changed at -16 vs -17 in January. CBI said, “Conditions in manufacturing remain challenging, with output disappointing and order books having thinned out since late last year. However, if growth is going to return to the sector on a sustainable basis, then manufacturers need more than the boost some will receive from lower energy prices over the winter season.”
Shifting to the US, here are some notable quotes from the Auto Nation conference call Friday:
“The overall new market remained very healthy during the quarter, as more than half of our vehicles were sold at or above MSRP. This has trended down, but it’s still far higher than historical levels.” New car sales were helped by better, but still low, inventory levels, thus helping the pricing side. Used car sales fell as inventories were down “which in my view was significantly driven by constrained used vehicle inventory.”
To a very important point about where pricing will go and settle out at and to my belief that we’re NOT going back to pre Covid trends on pricing, “the days, I hope, of 75-90 days of inventory are long in the past…And I think with cooperation from our partners, a 30 to 45 day type normal is a pretty healthy place for everyone to operate.”
I’ll also add for the umpteenth time, after this downward slope in used car prices is over, which it might be, prices are going to stay high because we’ve had 3 years of below trend new car sales which means a smaller inventory of used ones coming into the market. If you didn’t see on Friday, Manheim’s wholesale pricing index rose 4.1% in the first 15 days of February from January. “This was the largest February increase since 2009’s full month 4.4% gain…Historically, prices are stable during the first two weeks of February, as the average price change for these weeks in the six years from 2014 through 2019 was a decline of .1%.”
With respect to Home Depot, there was nothing big picture macro revealed in their press release but they are seeing another decline in traffic trends. Customer transactions fell 6% y/o/y, mostly offset by a 5.8% rise in ‘average ticket.’ “
Walmart said its number of transactions were higher by 1.8% y/o/y with the ‘average ticket’ up by 6.3%.