Notable events over the last week
- Last week saw the release of the China Manufacturing PMI series which came in at 49.0 (vs. 49.4 expected) in February down from 49.4 in January, reaching 7 year lows. The non-manufacturing PMI also came in weaker in February at 52.7 (vs. 53.5 expected). Although the index is still in expansionary territory, the declining growth in new orders and selling prices is worrying. Higher average input costs, weak job creation and rising layoffs also put strain on the both business activity and employment. Additionally, the Caixin China PMI Manufacturing series came out slightly below consensus at 48.0 (vs. 48.4 expected) and the Caixin Non-Manufacturing PMI fell to 51 after hitting a six-month high of 52.4 in January.
- Over the weekend, the Chinese Premier Li Keqiang confirmed that the government is currently targeting GDP growth of 6.5-7% this year, with 6.5% being set as the baseline rate through to 2020. While the message did not change, it is clear that China is insistent on achieving its target. The budgetary fiscal deficit is set to extend from 2.3% to 3.0% of GDP this year, with the M2 growth target raised to 13% from 12%. In addition we have already seen significant policy easing this year, including a RRR cut and reduced required down payments, although a large general fiscal stimulus or an aggressive currency devaluation, remains off the table according to Premier Li.
- Turning to the US, the ISM manufacturing index rose to 49.5 (vs. 48.5 expected) in February from 48.2 the month before. Although the print was better than predicted, February now marks the fifth consecutive sub 50 reading, indicative of contraction. Historically the correlation between manufacturing and real US GDP has been strong and is usually effective at predicting wider economic trends, however with manufacturing now only approximately 10% of the US economy, the predictive powers may prove to be less accurate. In contrast, the ISM index for non-manufacturing (services) activity remained well above 50, printing at 53.4 (vs. 53.2 expected), albeit down marginally on the January reading of 53.5. Like the manufacturing index the readings have fallen since October last year with new orders dropping to 55.5 from 56.5 and the prices paid index fell to 45.5 from 46.4.
- The US employment report surprised to the upside on Friday as February nonfarm payrolls rose by +242k (vs. +195k expected) on the back of 30k upward revisions to previous months. The bulk of the job gains came from health care, retail and restaurants, which added 57,000, 55,000 and 40,000 new positions, respectively. The strong headline number was tainted slightly by the closely watched average hourly wages which declined for the month. Earnings unexpectedly dropped 0.1% (vs. +0.2% expected) to 2.2% YoY, down from 2.5% in January. On the other hand, the broad U6 measure of unemployment dropped to 9.7% and is the lowest since May 2008, while the labour force participation rate ticked up 0.2% to 62.9% (vs. 62.8% expected).
- The Fed’s Beige Book proved more positive than in previous months, noting economic expansion in most districts but overall flat wage growth. Encouragingly most districts also reported modest increases in loan demand, stable credit quality and unchanged credit standards. The up and coming 2016 presidential elections also cropped up, with the Boston district region highlighting the uncertainty risk stemming from the national election cycle. The book was supported by Fed presidents, William and Dudley, who highlighted that the US should be able to ‘power through’ headwinds from abroad while citing that there were no significant signs of fragility in the economy.
- In Europe, the manufacturing PMI posted at 51.2 for February (vs. 51.0 expected) dropping from 52.3 in January, and falling to12 month lows. Purchase costs fell for the seventh straight month on the back of lower commodity costs. Fears of deflation are now growing and all eyes will be on the ECB policy meeting later this week. Outside of the Eurozone, the UK continued to struggle. The index clocked in at 50.8 (vs. 52.3 expected), off from 52.9 in January, and hovering just above the stagnation mark.
- Finally, last week saw strong performance for some of the least-loved and most under-owned groups including energy and commodities, despite sentiment remaining negative. Copper, Aluminium and Iron Ore are currently trading at 3, 4 and close to 5 month highs respectively, resulting in large gains for commodity sensitive currencies such as the Russian Rouble. A string of solid US growth and inflation data points helped spark an increase in Treasury yields and pushed US HY back in to positive territory YTD. Fed expectations as reflected by the OIS forward curve have also begun to shift up at the long end, although the probability of a rate rise this month remains low at 8%. The moves have helped bank stocks gain strongly and also contributed to a lift in oil.
Q4 2015 earnings season update
With the earnings season now complete in most regions the overall picture is a bit of a mixed bag. The majority of companies beat their EPS estimates yet EPS growth was weak across the board. Downgrades to the MSCI World 2016 EPS estimates amount to 5%, much worse than the typical Q1 downgrade of 1% in previous years.
Specifically in the US, 74% of the S&P500 beat Q4 EPS estimates while EPS growth was weak at -7% YoY. Q4 also marked the first quarter of negative EPS growth for ex-energy stocks since 2009. Revenues are down 4% YoY and flat ex-energy with only 46% of the companies beating sales estimates.
The strong dollar and energy weighed down 2015 calendar year earnings, which now stand at -1.6% for the S&P 500 but up a respectable 5.8% ex energy, with strong EPS growth from Health Care (+13.8%) and Discretionary (+10.25%) against headwinds from energy (-60.3%).
It’s a similar story in Europe where Q4 earnings delivery was disappointingly soft. 51% of DJStoxx companies beat earnings estimates, with EPS down 8% YoY and flat ex-energy. 59% of the companies beat revenue expectations, while overall sales are down 2% YoY, yet encouragingly up 4% ex-energy.
Over to Asia and Japan saw 51% of the companies beat earnings estimates. EPS is down 5% YoY and down a further 2% ex-energy, most likely caused by the steep strengthening of the Yen. Only 41% of the companies beat top-line estimates, the lowest in two years, with sales down 2%.
Coming up this week (Source Bloomberg)
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