In contrast to the sour mood yesterday on China and its mixed recovery after seeing the state sector focused PMI’s, my friends at the 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. 

To their point on manufacturing, the 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.” Bottom line, Chinese manufacturers are still mostly at the whim of its international customers where demand has softened. Residential real estate is still digesting the aftermath of its bubble. The bright spot remains consumer spending on restaurants, bars, movies, travel and other leisure activities like gambling. Macau reported its May numbers last night and they saw casino revenue up 366% y/o/y, about as expected. 

In response to the manufacturing figure, iron ore is up almost 4% and copper is higher by 2.4%. Oil continues to lag but that’s likely more positioning ahead of the OPEC meeting. Chinese stocks were mixed. 

Elsewhere in Asia, manufacturing remains soft, just as it is in Europe and the US. 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. The bright spot was India’s PMI which rose 1.5 pts to 58.7. Japan’s final read was 50.6 vs 49.5. Australia’s final print was 48.4 vs 48 and is below 50 for a 3rd month. 

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.”

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.” 

Here were some notable quotes from yesterday’s Beige Book specifically on the labor market ahead of the jobs data this week and on credit availability in the post SVB world. 

Boston:

“Employment was down slightly amid muted hiring activity, and wage pressures eased a bit on balance. According to staffing industry contacts, labor demand slowed for a wide range of positions, including legal support and talent acquisition roles, as client firms trimmed hiring plans—though they so far have enacted no major layoffs.

“The outlook was cautiously optimistic on average, but the commercial real estate forecast weakened further on credit concerns.”

NY:

“Labor market conditions have remained solid, though there have been scattered signs of cooling as heightened uncertainty has made some businesses more cautious. While employment has continued to increase, on net, the pace of hiring has slowed slightly. Moreover, businesses in the construction, transportation, and finance sectors reported a significant decline in employment in recent weeks. Nonetheless, layoffs have generally remained concentrated in large companies outside the region.”

“Conditions in the broad finance sector continued to worsen. Regional banks reported ongoing tightening in credit conditions and declining loan demand.”

Philly:

“Employment appeared to edge up after holding steady during the prior period. Contacts noted relatively few layoffs and observed that when layoffs or plant closings occur, other firms scoop up the workers. Most firms reported that labor availability continued to improve.”

“Contacts continued to note tighter credit standards, although credit quality remains very good.”

“Banking contacts reported good credit quality – noting only small upticks in loan delinquencies, which remain at very low levels. In the wake of recent bank failures, most contacts expressed concern about a credit crunch resulting from increased caution, whether from internal policies or external regulatory oversight. One contact described a one-page list of regional banks that had shut off the tap for new loans.”

Cleveland:

“Some manufacturing and construction firms reported delaying hiring because of economic uncertainty, while others were reducing “noncritical” staff to cut costs in preparation for future softer demand. In contrast, leisure and hospitality contacts reported a seasonal increase in staffing, as did one manufacturing contact who also mentioned that hiring was less difficult than in the recent past. That said, hiring remained challenging for many firms across industries. Most firms generally planned to hold headcount steady in coming months.”

“Overall, loan demand continued to decline this reporting period. Bankers posited that increased interest rates along with economic uncertainty contributed to a slowdown in borrowing from households and businesses. One lender suggested that small businesses were beginning to use available cash in lieu of borrowing because of high rates.” 

Richmond:

“Firms continued to grow their employment levels modestly over the most recent reporting period. Several firms reported having multiple open roles they were not able to fill due to a tight labor market.”

“Loan demand was down slightly across all commercial loan types, including commercial real estate, where rising interest rates and increased underwriting scrutiny kept growth muted. Consumer lending continued to be stable, with moderate demand for both new and used auto loans. Deposit levels continued to drop but have started to stabilize…Loan delinquencies continued to rise, but at rates that were still near historically low levels.”

Atlanta:

“Sixth District contacts reported that labor markets remained tight, but pressures have eased since late last year. Most firms continued to backfill open positions; however, some noted that weaker demand for products and services was slowing the pace of hiring. Several contacts noted they were increasing hiring standards. The majority of firms indicated that most positions were easier to fill, and retention had improved.”

“Liquidity remained a top concern for financial institutions over the reporting period. Continuous variations in interest rates, along with some deposit flight to higher-yielding alternatives, put stress on liquidity. Financial institutions reported that the fair value of securities portfolios continued to stabilize but unrealized losses remained elevated compared with pre-pandemic levels. District banks also reported ongoing commercial real estate loan growth, albeit at a slower pace. Shifts in commercial real estate property values raised additional concerns about increasing credit risk as financial institutions began reevaluating the collateral values of underwritten loans.”

Chicago:

“Employment increased moderately over the reporting period and contacts expected a similar rate of growth in the coming year. Many contacts continued to have difficulty finding workers, especially when hiring for skilled trades positions. However, more contacts said that hiring had become easier or that they were fully staffed.”

“Financial conditions tightened modestly over the reporting period. Bond and equity market participants saw little change in asset values or volatility. Business loan demand was flat overall, though one banking contact noted that clients manufacturing or selling discretionary consumer items had increased their credit line utilization in response to lower demand. Loan quality deteriorated some, but a few contacts noted that delinquencies remained below pre-pandemic levels. Business lenders reported slightly tighter standards, while borrowers said that credit conditions had tightened moderately.”

St. Louis:

“Employment has improved slightly since our previous report. Unemployment rates remained low, and hiring and retaining workers has remained a challenge in several industries. However, more contacts have been reporting an ability to hire and retain workers to meet demand over the past few reports.”

“Banking conditions in the District have remained unchanged since our previous report. Contacts surveyed reported that overall loan demand across all loan types softened in recent months. Contacts expect loan demand to further weaken in the upcoming quarter and noted recent increases in consumer credit use, particularly for everyday purchases, due to higher prices. Meanwhile, high interest rates have held down demand for business credit. Contacts reported that clients have been taking distributions from their portfolios to pay off loans and avoid new borrowing. Credit standards were largely unchanged from the previous quarter, but delinquency rates saw a slight uptick, a continuation of an ongoing slow rise over the past several quarters.”

Minneapolis:

“Employment grew modestly in the District since the last report, but with some volatility. Overall labor demand remained healthy. Several recent surveys of various sectors and geographies all found strong recent demand for labor. Businesses expected growing demand heading into the summer season but continued to report difficulty with turnover and finding labor. However, there were also some signs of softening labor demand. In April alone, Minnesota saw almost as many mass layoff events as in all of 2022, affecting more than 2,600 workers in total, a greater number than last year.”

KC:

“Although the overall pace of hiring in the Tenth District continued to be modest, most businesses indicated they had just as many, or more, job openings over the past month as they did at the beginning of the year. Contacts indicated they became much more selective in their hiring recently even as the number of applicants increased, partly explaining the disparity between the number of jobs posted and the level of hiring. Contacts reported that worker retention improved further in recent weeks.”

“Loan demand weakened modestly in the past month as higher interest rates and the uncertain economic environment deterred loan growth, particularly for commercial real estate. Contacts expected loan demand to remain at current levels over the next six months. Rate pressures remained elevated in the deposit market. Customers continued to diversify account balances among multiple banking institutions in response to volatility in the banking industry. Overall, deposit levels were stable across the District during the past month, with continued rotation of balances toward time deposits. Given that funding costs are growing faster than new loan growth, net interest margins were projected to compress. Credit standards remained unchanged, and contacts noted stable credit quality and low past-due levels. However, contacts expected credit standards to tighten somewhat further due to concerns about future deterioration in asset quality, as higher borrowing costs adversely affect repayment capacity.”

Dallas:

“Employment growth rebounded slightly to a more moderate pace over the reporting period. Hiring resumed in the service sector in April after stalling in March, and manufactures continued to add to payrolls at an average pace.”

“Loan demand declined for the sixth period in a row amid further loan price increases and worsening general business activity. Overall loan volumes continued to decline as well, though at a slower pace…Significant volume declines continue to be seen in commercial and industrial and commercial real estate lending. Credit conditions tightened further; 48 percent of bankers in the Dallas Fed Banking Conditions Survey said they tightened credit standards and terms over the past six weeks, the highest share since the survey began in 2017. Loan nonperformance continued to increase slightly. The banking outlook continues to deteriorate, with contacts expecting a further contraction in business activity and loan demand and an increase in nonperforming loans over the next six months.”

SF:

“Employment levels were largely unchanged during the reporting period. Labor supply remained tight across several sectors, including health care, hospitality, food services, and aviation. However, contacts from retail, manufacturing, transportation, finance, and business services reported fewer issues filling positions.”

“Conditions in the financial sector changed little over the reporting period, and uncertainty remained high. Contacts cited higher interest rates, tighter lending standards, ongoing uncertainty in the banking sector, and lower overall confidence as the main dampeners of activity in the sector. Depository institutions mentioned tighter competition for deposits. Lending institutions observed reduced demand for residential loans and uneven demand for commercial loans. Contacts reported that recent stresses in the regional banking sector negatively affected access to credit, particularly for smaller businesses. Reports also noted increasing delinquencies in consumer loans, including for auto and credit card debt.”

After talking very optimistically about their product line, overall business and of course AI, Salesforce in their earnings call said “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.”

Also after talking up its business and saying AI a lot, Crowdstrike said “The demand environment remained resilient, although we continued to see increased deal scrutiny and longer than typical sales cycles, especially for larger consolidation deals with our relentless focus on sales execution.” 

Capri said this, “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.”

Their guidance “includes stronger than previously anticipated trends from the reopening of China, as well as slower consumer trends in the Americas. Additionally, it reflects the recent strengthening of the US dollar.”

Dollar General is lowering guidance today and said “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.” 

According to Investors Intelligence, the Bull/Bear spread got even wider with Bulls rising to 47.9 from 46.5 and Bears falling to 23.3 from 23.9. That Bull print is the highest since mid April and the Bears are at the lowest since January 2022. Assume that this ‘professional’ newsletter writers are all chasing tech. The AAII individual investor survey remains the reverse with still more Bears than Bulls but a bit less so today. Bulls rose 1.7 pts to 29.1, a 3 week high. Bears fell by 2.9 pts to 36.8, a 6 week low. The CNN Fear/Greed index is at 61, in the ‘Greed’ category still and this compares with 62 one week ago.

END

We now have our first Fed Governor and likely next Vice Chair that is hinting at a June pause in hiking rates. Philip Jefferson said “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.” He did caveat this though to prevent the markets from getting carried away by saying “A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle.” And, Inflation has come down substantially since last summer, but it is still too high, and by some measured progress has been decelerating recently, particularly in the core services sector.”

As people debate today’s job openings and ahead of tomorrow’s ADP report and Friday’s BLS figure, I’m going to quote again what the CEO of ZipRecruiter said in their shareholder letter and quarterly call on May 10^th. They seem to have been forgotten.

In their Q1 quarterly shareholder letter CEO Ian Siegel said “The macroeconomic environment is highly uncertain. Our prior guidance assumed that softness in demand observed in January created a lower starting point from which a more normal seasonal pattern would reassert itself. Contrary to that assumption, in Q2 ’23, we have seen demand for recruiting services continue to decline. Job postings have decreased across the majority of industries and across companies of all sizes. Both SMBs (small and medium sized businesses) and enterprises are spending less to make hires in spite of heading into what is historically the hiring season. This means we are no longer following the standard seasonal job market pattern ZipRecruiter has tracked over the company’s 13 yr history, excluding the Covid pandemic period.”

On the earnings call, “On conversations with our customers, we see employers paring back their hiring in response to the uncertain economic backdrop we now face. Because of these trends which are unlike anything we’ve seen in our 13 years of doing business, we are not providing full year revenue guidance.”

“While Q1 ’23 revenue was down 19% y/o/y, revenue in April was down 27% y/o/y. This is reflective of a contraction in demand with both SMBs and enterprises continuing to reduce the number of jobs they post and the amount they spent for job advertising.” To this point, Siegel said “there has been an acceleration of the deceleration in the demand for recruiting services.”

I’ll finish with these comments from Siegel, “This is very clearly a macroeconomic phenomenon. This downturn is affecting a multitude of players in our industry. And just last week we had an enterprise summit where I spoke to 30 of the largest hires in America. These are companies that hire between thousands and 10s of thousands of employees per year. Across the board, all of them have reduced their hiring plans in the face of the economic uncertainty their businesses face.”