There was a nice upside surprise in the Markit US manufacturing PMI for October. The index rose to 53.2 from 51.5 in September. That is the best level in a year. Output, new orders and backlogs also rose to 12 month highs. As seen in the European PMI and certainly in the UK, “input cost inflation accelerates to its strongest for almost two years.” The rebound in manufacturing seemed to be mostly due to domestic factors which “offset sluggish export sales in October.” There is also hope “for a post election upturn in client demand.” Inventories were steady after 4 months of declines. Employment growth though remained slow and fell from September.
Markit bottom lined the report by saying “Manufacturing showed further signs of pulling out of the malaise seen earlier in the year, starting the fourth quarter on a solid footing.” The improvement in output and orders are due to “optimism that demand will pick up again after the presidential election, which has been commonly cited as a key factor that has subdued spending and investment in recent months.” There are also signs that we might see some inventory building in Q4 after the sharp reductions in previous months and quarters. The caveat was “weak export growth, attributable to the strong dollar, and lackluster hiring remain big areas of disappointment.” Let’s hope we’ll get some clarity after the election regardless of who wins but I’m skeptical. I think visibility will still remain cloudy into 2017.
On the better than expected print as people believe this will spill over into the ISM report in a few weeks, the 10 yr yield is back above 1.76% . The 2 yr yield is .84%.
Japan reported another y/o/y decline in exports in September, the 12th month in a row certainly in part to the stronger yen but the decline wasn’t as much as the drop that was expected. Imports that have gotten cheaper because of the stronger yen still fell by 16.3% y/o/y, not far from the forecast of a 17% drop on a tough comparison. Taking out the FX influence and looking just a volumes saw a 4.7% y/o/y increase (most since January ’15) with all major regions seeing gains, particularly to the EU. Import volumes though fell 1.6%. Bottom line, maybe with the stabilization in the yen recently we’ve seen the worst of these yen based export declines.
The Japanese manufacturing PMI in October rose 1.3 pts to 51.7, the best level since January. Markit said “Production rose at the sharpest rate this year so far helped by a boost in sales…Data suggested that a strong expansion in foreign demand led to the rise in total new orders, as new exports rose at the fastest rate in nine months.” With Japan’s economy in and out of contraction over the last few years, these comments are good to see but with the PMI index barely above 50, it is also relative.
A major pillar of my argument that the bond bull market has seen its peak is that at least with the BoJ, the damage being done to bank profitability has them walking back (however slight) from their extreme reach of policy (they likely get no more deeper with NIRP and the curve therefore has seen its peak flattening). In its semi annual report on the financial system they said “If the recent trend of declining profits persists, the number of financial institutions experiencing an erosion of their loss absorbing capacity could increase.” They also acknowledged the growing number of banks that are losing money. The broader comment they made on the banking industry and the BoJ oversight was this, “It is necessary to examine both the risk of overheating – excessive accumulation of macro risks and exuberant asset prices – and the risk of a gradual pullback in financial intermediation due to a persistent decline in profits.”
Bottom line, the rest of us know that the BoJ is complicit for causing both of these risks to flare but these comments underline an acknowledgement that they’ve pushed it about as far as they can without further damaging their banking system. While the Nikkei rallied overnight, the Topix bank index fell .6% after 6 straight days of gains. JGB yields were little changed and the yen is slightly lower.
In Europe, the October manufacturing and services composite index rose to 53.7 from 52.6. That was .9 pts above the estimate and moves the index to the highest level of the year with both components higher m/o/m. The improvement mostly came from Germany as the composite index from France fell m/o/m but still remains at the 2nd best of the year. Markit referred to the rebound in the region as showing “renewed signs of life at the start of Q4.” With respect to pricing and inflation, “Not only are average charges increasing at the steepest rate for just over five years, but October also saw the extent of manufacturing supply chain delays hit one of the highest in five years. Increasingly widespread delays suggest demand is outstripping supply for many goods, something which is usually soon followed by rising prices and investment in additional capacity.”
These inflation comments from Markit reflect another pillar of my bond bear thesis, that global inflation stats have bottomed.
In the UK, the October CBI industrial orders index weakened to -17 from -5. This level matches the weakest since October 2015. The estimate was for no change. Reflecting growing pricing pressure, average selling prices rose to match the highest level since April 2014. On the flip side, the weaker pound led to a 4 pt improvement in export orders to match a two year high. Therein lies the tradeoff of a plunge in the pound which CBI said in its release today, “Manufacturers are optimistic about export prospects and export orders are growing, following the fall in Sterling. However, the weaker Pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer prices in the months ahead.” The Pound today is little changed and the FTSE 100 is flat. Gilt yields are lower by 3 bps notwithstanding the pricing figure.
Spain finally has a government after the Socialists said they wouldn’t again block Rajoy from having a coalition. All eyes now on Italy’s referendum on December 4th.