In MMM, a great proxy for economic activity because of their broad spectrum of product lines, missed numbers and said this in their press release, “The slower than expected growth was due to rapid declines in consumer facing markets – a dynamic that accelerated in December – along with significant slowing in China due to Covid related disruptions. As demand weakened, we adjusted manufacturing output and controlled costs, which enabled us to improve inventory levels.” I’ll say again my belief that China will get MUCH better this year (really beginning in Q2) which will help the Asian region, Europe and commodity producers everywhere and only somewhat the US. MMM also said “We expect macroeconomic challenges to persist in 2023…Based on what we see in our end markets, we will reduce approximately 2,500 global manufacturing roles – a necessary decision to align with adjusted production volumes.”
In terms of profit margins, MMM operating income margin fell to 19.1% in Q4 2022 vs 20% in Q4 2021.
Separately on commodity prices, the CRB raw industrials index yesterday closed at the highest since mid September and there is a lot more upside here to be had after the notable China lockdown pullback last year.
It’s PMI day today. Japan’s composite manufacturing and services PMI for January got back above 50 at 50.8 vs 49.7. Services led the way, up by 1.3 pts m/o/m to 52.4. Manufacturing was unchanged at 48.9. Services benefited from further covid relaxations and more travel with the latter helped by a subsidy program, “while manufacturing firms continued to face muted customer demand.”
In Australia, they saw the same trend of better services and weaker manufacturing with the combined composite index at 48.2 vs 47.5 with both components below 50. Services rose 1 pt m/o/m to 48.3 while manufacturing softened to 49.8 from 50.2. That manufacturing dip below 50 was for the first time in almost 3 years. The press release differentiated the two “with service sector contraction easing on better demand while manufacturing output shrank faster amid lower new business and supply issues.”
The January Eurozone PMI got back above 50 at 50.2 from 49.3 and that was just above the estimate of 49.8. Services rose almost 1 pt to 50.7 while manufacturing was up by 1 pt to 48.8. S&P Global said “The survey suggests that a nadir was reached back in October, since when fears over the energy market in particular have been alleviated by falling prices, helped by the warmer than usual weather and generous government assistance. At the same time, supply chain stress has eased, benefiting producers most notably in Germany, and more recently the reopening of the Chinese economy has helped to restore confidence in the broader global economic outlook for 2023, propelling business optimism sharply higher.” Putting this altogether, the survey is “merely indicating a stagnation of the Eurozone economy.” Germany and France each had their composite indices just below 50.
As for the UK economy, its January PMI fell to 47.8 from 49 with services falling almost 2 pts to 48 while manufacturing was less weak at 46.7 vs 45.3. The strikes in the UK are not helping either. S&P Global said “Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year. Jobs also continued to be lost as firms tightened their belts in the face of these headwinds, though many other firms reported being constrained by an ongoing lack of available labor.” The positive, “improved business expectations for the year ahead and a further cooling of inflationary pressures.”
Lastly on the overseas data, France said its business confidence index for January fell 1 pt m/o/m as expected. It’s printed 102 for the 4th month in the past 5. European bonds are up slightly on all the data while the euro is flat and stocks are mixed after an amazing start to the year.
My bottom line will tie back to the China reopening and also it’s important to mention the impact as to who will benefit most. Our fight with China is not a black or white situation because the economic consequences could be very big and very long term. When China has to decide whom to buy a certain product from going forward, the US or Germany or the US or Japan, and assuming similar quality, the US will lose out as the Chinese will choose a vendor that is not in the US if they can. For example, Airbus will sell more planes to China than Boeing. Siemens will sell more product to China than GE. Samsung will sell more DRAM than Micron. If one is looking for a fundamental reason of why international stock markets could do better than the US when looking at the next 5-10 years, this could be one of them.