After yesterday’s deeply negative Dallas manufacturing survey which followed negative prints from NY, Philly, KC and Richmond, today’s Chicago May figure fell to 40.4 from 48.6, thus well under the breakeven of 50. As I don’t have the press release yet I have no details on the internals. Expect another below 50 print in tomorrow’s ISM manufacturing index and which if the case would be the 7^th straight month.

Chicago PMI

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% and noteworthy, the quit rate fell to 2.4% from 2.5% and that is the lowest since January 2021.

After falling in March, job openings picked up in construction (likely more demand from some of the big builders). Manufacturing job openings did fall to the lowest since February 2021. There was a jump in demand for retail workers and in transportation but openings for leisure/hospitality, which was the big demand spot over the past few yrs post Covid, continues to shrink as they fell to the lowest since April 2021. Not surprisingly job openings for real estate/rental/leasing fell but did rise for finance/insurance. Demand for education/healthcare workers remains consistent.

Bottom line, I know this is a big focus of everyone but it’s very dated and the trend is still for a lesser amount of openings as this April figure compares with the 2022 average of 11.17mm. Yields did rise in response to the upside surprise. Friday’s estimate for the May BLS payroll report, and thus more timely, is for a job gain of 195k which would be the 2^nd month in 3 below 200k which was last seen in late 2019 pre Covid.

The economic outlook is pretty damn cloudy with a huge amount of confusion on what happens from here but if I had a dollar for every time I heard ‘challenging macro economic environment’ from companies in their quarterly calls I’d be able to buy a sports team. Point here is the Fed should show some humility too in not being so confident on how things play out in the coming months and if the case would mean a time out on rate hikes until we can gain some clarity. After all, there is another meeting in July, and in September, and yes in November and December too if they choose to keep on hiking. I’m not telling them to back off from their inflation goals but skipping a meeting doesn’t mean they have to.

Job Openings

Quit Rate

END

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.”

END

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. One has to go back to 2012 to see the last time home prices were little changed and which of course followed the sharp drop. From a m/o/m standpoint, home prices rose for a 2^nd 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.

Bottom line, we know all about the supply constraints with existing homes as high mortgage rates currently have trapped, so to speak, those with much lower mortgage rates in their home. Home construction is certainly trying to fill in that gap as total transactions of about 30% are now filled in by builders vs the historical average is something closer to 10%. This only works though in some markets where land and lots are readily available. In highly dense suburban markets one has to go far out from city centers in order to find communities of new construction. The end result is still an overall subdued pace of housing transactions, though prices remain still high. I guess we can call it a stagflationary situation in at least this sector of the economy.

Home Price Index y/o/y

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. Those that said jobs are Plentiful fell to the lowest since April 2021 and those that said they are Hard to Get rose to a 6 month high. Also, those that see ‘more jobs’ in the coming 6 months fell to the least since May 2016. Income expectations though did rise .5 pt.

With regards to spending intentions, after falling by 1 pt last month, plans to buy a vehicle rose .9 pts. Plans to buy a home was little changed. Plans to buy a major appliance did bounce by almost 4 pts.

In terms of the age and income distribution, the Conference Board said “While consumer confidence has fallen across all age and income categories over the past three months, May’s decline reflects a particularly notable worsening in the outlook among consumers over 55 yrs of age.”

Bottom line, the weakness in the current jobs situation and expected employment weakness was the notable take. Spending intentions though held in as inflation expectations receded again.

Consumer Confidence

One yr Inflation Expectations

Those that see ‘more jobs’

END

Assuming Congress now passes what was agreed upon we now get to test the thesis of a liquidity sucking sound out of private sector assets to fund the refill of the Treasury’s coffers and whether it matters or not. The complexion of the buyers will be important too. To buy many of the T-bills, will the money come out of the Fed’s RRP or will bank reserves get drained or will fresh money into money markets handle some of the weight? Also, while the government spending line will be pretty much set for the next few years, the tax revenue side is definitely not. Treasuries are rallying today on the deal, particularly the short term bills that many avoided on the deal date uncertainty. After this pricing reset, especially for the bills that were maturing between June 1 and the 15th, we’ll see how the market handles the supply. 

Also to think about, what happens to economic activity as the government’s base line spending is supposed to grow at a much slower pace than that seen over the past 3 years? My friend Luke Gromen in his weekend piece made a great point, “with Federal spending at around 25% of GDP, deficit cuts would likely drive tax receipts down and deficits higher.” The budget deficit as a % of GDP already stands at around 7%. In recessions going back 40 years, it bottomed at 5-10% at the depths of the respective recession whereas now we’re only dancing with the prospect of one. In the upcoming recession, we’ll see this most likely in double digits. 

Specifically with spending, my friend David Rosenberg yesterday pointed out that beginning student debt loan payments will be a cost to the borrower in the aggregate of $5b per month starting soon. Also, the end of the emergency SNAP (Supplemental Nutrition Assistance Program) benefits was about a $50b per year economic stimulus that is expiring. Now there are some offsets like the $5 trillion plus that is in money market funds getting a yield of about 4% which equates to about $200b of newfound income on an annualized basis. About 14 months ago this money which totaled about $4.5 trillion was yielding nothing as we know. But, the differentiation of who is benefiting and who is going to be negatively impacted by the above are certainly not necessarily the same. 

In the bank loan data from Friday, C&I loans outstanding rose $1b after falling by $15b in the prior 4 weeks. This slight lift comes off the smallest amount since last October. Bank deposits rebounded by $30b after the drop of $26b last week. It’s uncertain as to how much went into high yield deposits and/or CDs that banks are employing to a greater extent in order to stem the deposit losses. Either way, it’s good to see the rise in deposits but it comes at a big cost to banks relative to the near zero cost of funds they are still offering many. 

There was some inflationary relief in Spain as they said its CPI fell .2% in May m/o/m instead of rising by 2 tenths that was expected. The y/o/y gain slowed to 2.9% from 3.8%. The prices of food and energy continued to moderate. Core CPI slowed too but still remains high at 6.1%. Yesterday the Governor of the Spanish central bank said “We think that we still have some way to go in tightening monetary policy, although we also think that we are closer to the end.” 

There was notable softness in the May Economic Confidence index for the Eurozone as this index 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. On the this, the Spanish CPI figure and the US Treasury rally has European bonds rallying too with yields lower. 

Eurozone Economic Confidence 

With the reelection of Erdogan in Turkey again as the president, the Turkish lira is falling for the 15th day in the past 16 and by 1.4% today after the drop of .7% yesterday. I’d call it a form of sado masochism on the part of the majority of the Turkish voters that wanted him again as president considering the destruction in the standard of living that Erdogan’s policies have brought. The Turkish lira is down 90% vs the US dollar since Erdogan took power. 

Speaking of FX, with the Japanese yen weakening to the 140 level vs the US dollar, a government currency official in Japan said “It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable.” So it seems that 140 level is their soft line in the sand and the yen is rallying in response to back under 140. 

Yen

Headline PCE for April rose .4% m/o/m as did the core rate and both were one tenth above expectations. The y/o/y gains were 4.4% and 4.7% respectively, up from 4.2% and 4.6% in the month prior. Goods prices were up 2.1% y/o/y and seems to have bottomed out and service prices grew by 5.5% y/o/y and likely has topped out as rent growth recedes from here.

Bottom line, because PCE comes out weeks after CPI there is typically less drama and thus rarely deviates much from expectations. Even though the numbers came in a bit above estimates, I don’t believe any Fed member should be making their June meeting decision solely on the basis of a one tenth upside of a backward looking figure. Yes, inflation is persistent, though at a slowing pace and the rental growth slowdown is not yet reflected. There must be some appreciation that since SVB failed, between the Fed and credit conditions, we’ve seen an additional 100 bps of rate increase equivalents (give or take). Isn’t it just prudent to see how things play out in the coming months? Isn’t there another FOMC meeting in July and usually every 6 weeks thereafter?

Headline PCE y/o/y

Personal income growth of .4% m/o/m was as forecasted. Specifically private sector wages and salaries grew by .5% m/o/m and 5.6% y/o/y (vs 5.3% in the month prior and 5.6% in the month before that). Spending was up .8%, 3 tenths more than estimated with a rebound in spending on both durable and non-durable goods. Spending on services continues on. Combining the two saw the savings rate fall to 4.1% from 4.5% and for perspective, this has averaged 6% in the 20 years leading into Covid. We might see a slight raise in Q2 GDP estimates on that upside in spending. We’ve heard so much information from many retailers over the past few weeks that tells us all we need to know about the state of consumer spending.

Core durable goods orders in April were much better than anticipated with a 1.4% m/o/m jump vs the estimate of no change but comes after a .6% drop in March and .2% fall in February. The internals though driving the gain was pretty mixed. Orders for vehicles/parts fell for a 2^nd month and hasn’t grown since January. All those chip orders for AI hasn’t yet showed up as orders for computers/electronics and electrical equipment both declined m/o/m. Machinery orders were the only upside, gaining 1% but after drops in 4 of the previous 5 months. Metals orders were mixed.

Shipments of core goods were about as expected when we include the March downward revision so there shouldn’t be any GDP change on this.

Bottom line, while that core figure saw nice upside, the breadth of gain was pretty limited and I’ll say again, a company needs growing cash flow in order to finance growth in capital spending and for many companies, the trajectory of earnings and cash flow is now down.