Manufacturing buildout is driving a surge in non-residential construction spending

The Daily Shot: 02-Jun-23
The United States
Canada
The United Kingdom
The Eurozone
Europe
Asia-Pacific
China
Emerging Markets
Commodities
Energy
Equities
Global Developments
Food for Thought



 

The United States

1. Let’s begin with the labor market.
 
The ADP private payrolls report surprised to the upside (again).
 

 
Hotels and restaurants boosted hiring.
 

 
But manufacturers continue to shed jobs, according to ADP.
 

 
Construction hiring has been surprisingly robust.
 

 
Small firms have been reporting “doom and gloom” recently, according to the NFIB report. And yet, they are hiring.
 

 
Meanwhile, large companies laid off the most people in years last month.
 

 
Regional trends have been uneven (2 charts).
 

 

 
Here is a look at initial jobless claims (2 charts).
 

 

 
Continuing claims are now 28% above last year’s levels.
 

 
Job cut announcements increased in May.
 

 
Job losses due to business closures have surpassed the 2020 peak.
 
Source: LPL Research  
 
There are plenty of summer jobs, but postings are below last year’s levels (2 charts).
 
Source: @indeed  
 
Source: @indeed  
 
What should we expect from today’s payrolls report?
 
Consensus estimate:
 

 
Oxford Economics:
 
Source: Oxford Economics  
 
Morgan Stanley:
 
Source: Morgan Stanley Research  

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2. The ISM manufacturing index edged lower in May, remaining firmly in contraction territory (PMI < 50).
 

 
Here are the contributions.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
New orders hit the lowest level since the COVID shock.
 

 
And the backlog of orders hasn’t been this low since the GFC.
 

 
In contrast to the ADP report, the ISM findings highlight job gains within the manufacturing sector.
 

 
Input costs unexpectedly declined.
 

 
The ISM index signals a softer job market ahead.
 
Source: BofA Global Research  

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3. Construction spending was stronger than expected in April.
 

 
Residential construction spending appears to have bottomed, while private nonresidential construction spending remains on an upward trend.
 
Source: Chart and data provided by Macrobond  
 
Manufacturing investment has been driving nonresidential construction spending.

Wells Fargo: – … manufacturing project spending continues to boost overall nonresidential outlays. In addition to an upshift in renewable energy projects, the build-out of electric vehicle supply chains and domestic semiconductor manufacturing facilities is currently underway. Momentum should only build as more public funding from the Inflation Reduction Act and CHIPS and Science Act becomes available.

Source: Wells Fargo Securities  

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4. Unit labor costs have been rising sharply.
 
Source: Deutsche Bank Research  
 
But the Q1 increase was revised lower.
 

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5. Automobile sales declined in May.
 

 
6. Bloomberg’s economic surprise index continues to surge.
 

 
7. The federal government has averted a potential debt ceiling catastrophe.
 
Source: @WSJ   Read full article  
 
T-bill yields and US sovereign CDS spreads tumbled.
 

 

 
How will the debt-ceiling bill impact the debt-to-GDP ratio?
 
Source: @WSJ   Read full article  


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Canada

1. According to the S&P Global PMI index, manufacturing activity is back in contraction.
 

 
2. Housing affordability (proportion of pre-tax income needed to service housing costs) remains an issue, which could push more Canadians to rent instead of own.
 
Source: PGM Global  


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The United Kingdom

1. Mortgage lending declined in April.
 

 

 
Source: @markets   Read full article  
 
2. Home prices saw the biggest year-over-year decline in years last month.
 

 
Source: BBC   Read full article  


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The Eurozone

1. Inflation was lower than expected in May. The core CPI has finally peaked.
 

 
2. Factory activity remained deep in contraction mode last month.
 
Source: S&P Global PMI  
 
Italy:
 
Source: S&P Global PMI  
 
Spain (mild contraction):
 
Source: S&P Global PMI  
 
The Netherlands:
 
Source: S&P Global PMI  

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3. German retail sales were weaker than expected in April.
 

 
Separately, Germany remains very exposed to China.
 
Source: The Economist   Read full article  
 
And German exporters selling into China are losing market share.
 
Source: @financialtimes   Read full article  

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4. The euro-area unemployment rate continues to fall.
 

 
Source: MarketWatch   Read full article  

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5. The Eurozone Citi Economic Surprise Index has been plunging, widening the divergence with the US.
 
Source: @TheTerminal, Bloomberg Finance L.P.  


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Europe

1. Manufacturing activity in the rest of Europe is also contracting.
 
Norway:
 

 
Poland:
 
Source: S&P Global PMI  
 
The Czech Republic:
 
Source: S&P Global PMI  
 
Switzerland:
 

 
By the way, the Swiss PMI points to downside risks for the GDP.
 
Source: Pantheon Macroeconomics  

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2. This chart shows estimates for business formation and bankruptcies in the EU.
 
Source: Eurostat   Read full article  


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Asia-Pacific

1. Let’s begin with South Korea.
 
The GDP has recovered the Q4 loss last quarter.
 

 
Inflation is easing.
 

 
The won appears to have bottomed against USD as the US debt ceiling disaster is averted.
 

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2. Next, we have some updates on Australia.
 
A June RBA rate hike is now more likely, according to rate futures.
 

 

 
The 2-year bond yield hit a multi-year high.
 

 
The minimum wage increase is adding pressure on the central bank to tighten further.
 
Source: The Guardian   Read full article  
 
Mortgage financing unexpectedly declined in April.
 


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China

1. US-listed Chinese stocks have been underperforming US peers.
 

 
According to BofA, China’s tech stocks are cheap relative to the Nasdaq 100.
 
Source: BofA Global Research  

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2. Here is a look at the contributions to China’s inflation.
 
Source: Arcano Economics  
 
3. This chart shows housing completions vs. new construction.
 
Source: Gavekal Research  
 
Floor space under construction is lagging behind the previous two years.
 
Source: Gavekal Research  

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4. Revenue and profit margins improved for a third consecutive month in May.
 
Source: China Beige Book  
 
Manufacturing activity accelerated last month, according to China Beige Book.
 
Source: China Beige Book  

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5. Hong Kong’s retail sales are rebounding.
 


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Emerging Markets

1. Let’s begin with Brazil.
 
The Q1 GDP growth topped expectations.
 

 
Source: Reuters   Read full article  
 
The trade surplus hit a record high, …
 

 
… boosted by strong exports.
 

 
Formal job creation dipped below last year’s level but remains robust.
 

 
The unemployment rate surprised to the downside.
 

 
Factory activity is still contracting.
 
Source: S&P Global PMI  
 
The Brazilian real appears undervalued relative to the broader EM currency basket.
 
Source: MRB Partners  

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2. Next, we have some updates on South Africa.
 
Business activity softened in May, …
 

 
… as expectations tumble.
 

 
Source: @markets   Read full article  
 
Electricity production remains depressed.
 

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3. USD/INR (Indian rupee) held resistance near 83.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
4. EM inter-country equity correlations declined sharply in recent weeks
 
Source: TS Lombard  


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Commodities

1. US cattle futures continue to surge.
 

 
2. China’s imports of wheat and corn surged in recent quarters.
 
Source: Fitch Ratings  


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Energy

1. US oil stockpiles jumped last week.
 

 

 
2. US gasoline inventories are at multi-year lows.
 

 
Refinery utilization remains robust.
 

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3. Once again, Brent crude held support near $70/bbl.
 

 
4. US crude oil and refined product exports hit a record high in March.
 
Source: @WSJ   Read full article  
 
5. US natural gas is holding support at $2.0/MMBtu.
 

 
6. Shares of uranium companies rose sharply over the past couple of days.
 


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Equities

1. The AI fever drove all of the S&P 500 year-to-date gains.
 
Source: BCA Research  
 
2. Flows into tech funds have been surging (2 charts).
 
Source: BofA Global Research  
 
Source: BofA Global Research  
 
As a result, total flows into equity funds recorded a sizeable gain.
 
Source: BofA Global Research; @MikeZaccardi  

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3. Since last year, stock price drawdowns have been in the range between historical recession and non-recession bear markets.
 
Source: Fidelity Investments   Read full article  
 
So far, drawdowns in US cyclicals have been less severe than in prior recessions.
 
Source: Global X ETFs   Read full article  

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4. This chart shows sector drawdowns from prior highs.
 
Source: @bespokeinvest  
 
5. The S&P 500 equity risk premium remains depressed.
 

 
6. Nasdaq 100 valuations continue to diverge from real yields.
 

 
7. Retail investors finally jumped into the market, …
 
Source: Vanda Research  
 
… as the AI FOMO kicked in.
 
Source: Vanda Research  


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Global Developments

1. The dollar appears stretched, as nominal GDP is expected to decline relative to international markets.
 
Source: MRB Partners  
 
2. Diversification into less-traded currencies has reduced the dollar’s share of global reserves.
 
Source: Moody’s Investors Service  
 
3. This chart shows the global manufacturing PMIs for May.
 
Source: S&P Global PMI  
 
4. Here is a look at global asset returns in May and year-to-date. Some European and Chinese assets struggled alongside commodities last month.
 
Source: Deutsche Bank Research  


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Food for Thought

1. Income tax plus employee and employer social security contributions:
 
Source: OECD   Read full article  
 
2. US mass shooters with legal guns:
 
Source: @TheDailyShot  
 
3. Deadly extremists:
 
Source: The Economist   Read full article  
 
4. Projected US energy production:
 
Source: Goldman Sachs  
 
5. India’s monthly rainfall:
 
Source: @WSJ   Read full article  
 
6. Better-paying professions requiring higher education and creative abilities are more at risk from generative AI.
 
Source: Felten, Raj, Seamans; h/t Torsten Slok   Read full article  
 
7. Road fatalities per 100 million miles traveled:
 
Source: The New York Times   Read full article  
 
8. The best french fries:
 
Source: @CivicScience   Read full article  

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Have a great weekend!


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