Wednesday, February 2, 2022

Morning Note: Manufacturing Still (relatively) Strong, But So's Inflation -- And -- A Critically Important Insight

Yesterday's release of the January ISM Manufacturing report tells of a bit of softening in terms of overall activity among the nation's factories. 

Although an overall score of 57.6 remains comfortably above 50; the line that separates expansionary and contractionary conditions.

And, when it comes to inflation, while softening activity and a slight easing in supply constraints will, one would think, ultimately cool the pace of price increases, per the third bullet point below, not yet...

Here's the report's opening line:

“The January Manufacturing PMI® registered 57.6 percent, a decrease of 1.2 percentage points from the seasonally adjusted December reading of 58.8 percent. This figure indicates expansion in the overall economy for the 20th month in a row after a contraction in April and May 2020."
Here's me summarizing the particulars:
  • New Orders down 3.1%
  • Production down 1.6%
  • Prices up 7.9% 
  • Backlog of Orders down 6.4%
  • Employment up 0.6%
  • Supplier Deliveries down 0.3%
  • Inventories down 1.4%
  • New Export Orders up 0.1%
  • Imports up 1.3%
Here's more color from the report, hinting to a slight easing of constraints; a somewhat improving sentiment that you'll be hard-pressed to glean (in a consequential sense) from the featured respondents' comments included below:
“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance. 

Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the COVID-19 omicron variant. Quits rate and early retirements hinder reliable consumption."

Panel sentiment remains strongly optimistic, with seven positive growth comments for every cautious comment, up from December’s ratio of 6-to-1."

“All of the six biggest manufacturing industries — Machinery; Food, Beverage & Tobacco Products; Transportation Equipment; Computer & Electronic Products; Chemical Products; and Petroleum & Coal Products, in that order — registered moderate to strong growth in January."
And here's what respondents are saying:
  • “We are experiencing massive interruptions to our production due to supplier COVID-19 problems limiting their manufacturing of key raw (materials) like steel cans and chemicals.” [Chemical Products]
  • “While there has been some improvement in materials making it to our factories and logistics centers, we are still constrained by (a lack of) qualified labor. Orders so far are not being cancelled, but we are concerned that customers may be losing patience.” [Computer & Electronic Products]
  • “Transportation, labor and inflation issues continue to hamper our supply chain and ability to service our customers. Fortunately, it’s also hampering our competition as well. Ultimately, the biggest impact is at the consumer level, as (price increases) continue to get passed through.” [Transportation Equipment]
  • “Our suppliers are having difficulty meeting scheduled releases as their suppliers experience delays and shortages, so lead times and inventories are struggling, resulting in lost production.” [Food, Beverage & Tobacco Products]
  • “Lack of skilled production personnel, either from missing work due to (COVID-19) variants or leaving for better opportunities, making it more difficult to complete work. Working off a backlog.” [Fabricated Metal Products]
  • “Strong backlog of orders coming into the new year. Potential to beat target revenue, depending on availability of purchased product.” [Electrical Equipment, Appliances & Components]
  • “Bookings continue to increase as we are still dealing with a shortage of labor and supply chain issues.” [Furniture & Related Products]
  • “Transportation restrictions and a lack of supplier manpower continue to create significant shortages that limit our production. This, in turn, limits what we can supply to customers, as well as on-time delivery.” [Machinery]
  • “Integrated circuit availability is really causing issues. Shortages of raw materials and other electronic materials continue to hamper deliveries to our customers.” [Miscellaneous Manufacturing]
  • “The supply chain crunch may be loosening a bit; however, specific original equipment manufacturer (OEM) parts and equipment now have lead times that we have not experienced before.” [Nonmetallic Mineral Products]

With a handful of markets shuttered for the Lunar New Year, Asian equities closed mostly in the green. Of the several we track, only Indonesia and Malaysia closed lower.

Europe's higher nearly across the board so far this morning, with all but 3 of the 19 bourses we follow trading up as I type.

While the S&P 500 and the Nasdaq Comp are green as I type, US stocks (save for tech) are struggling a bit to start the day: Dow down 71 points (0.21%), SP500 up 0.22%, SP500 Equal Weight down 0.16%, Nasdaq 100 up 0.41%, Nasdaq Comp up 0.30%, Russell 2000 down 1.41%.

Under the surface, just over half of the S&P 500's members are trading lower, while the Nasdaq Comp's losers outnumber gainers by more than 2 to 1.

The VIX sits at 22.25, up 1.18%.

Oil futures are down 0.53%, gold's up 0.32%, silver's down 0.07%, copper futures are up 0.50% and the ag complex (DBA) is down 0.10%.

The 10-year treasury is up (yield down) and the dollar is down 0.35%.

Among our 39 core positions (excluding cash and short-term bond ETF), 20 are up, 19 are down to start the session. AMD (chip maker), carbon credits, Verizon, SOXX (chip makers), Asia Pac equities and Sweden equities (added yesterday) lead the way so far this morning. The decliners are led by uranium miners, MP (rare earth miner), Viacom/CBS, oil services stocks and Latin American equities.

A critically important insight, particularly now, from Russell Napier:
"Those whose job it is to follow a particular asset class can very easily form a crowd and crowds are full of feedback loops that create, for those in the crowd, a view of the future for asset prices that an outsider often finds divorced from fact or analysis. \
It is the easiest thing in the world to assume that it is the insiders who know more about the facts in any given situation. However, when a crowd has formed, the insiders are more likely to be caught up in the extrapolation from current conditions that is the easy and thus most acceptable form of analysis to those in the crowd.
It really does not matter whether the insiders are corporate leaders, finance ministers or humble stockbroking analysts, they are likely to find their opinion contaminated once they are embraced by the “inner movement” of the crowd."

Have a great day!

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