Richmond Reversal

In addition to weaker than expected preliminary S&P Global (formerly Markit) PMIs, another weak regional Fed manufacturing index hit the tape this morning.  The Richmond Fed’s Manufacturing Composite dropped into contraction in May as the index hit its lowest level in two years. The 23-point month-over-month drop was also the second-largest decline on record behind the 49-point drop in April 2020.

Richmond Fed Manufacturing Index

Each regional Fed’s headline manufacturing number differs slightly in composition and the Richmond reading is made using shipments, new orders, and employment as inputs.  As shown below, each of those indices experienced historic declines this month causing the massive drop in the composite.  Breadth elsewhere in the report was not much better though. Other categories like capacity utilization, order backlogs, and average workweek also pulled back sharply. Meanwhile, expectations for several categories are in the bottom few percentile of their historical ranges going back to the start of the data in the 1990s. Overall, this month’s report showed a massive slowdown in activity that is consistent with other surveys that have come out this month.

Richmond Fed Report

Two of the inputs to the composite that also fell into contraction this month were new orders and shipments.  New Orders have seen a small handful of larger declines with September of last year being the most recent one.  New Orders were also much lower after that decline last fall.  As for Shipments, the 31-point month-over-month decline ranks as the second-largest on record next to April 2020 when the index fell a whopping 77 points. While it does not necessarily outweigh the rapid deterioration in demand, one silver lining of the report was a further huge improvement in supply chains. The reading on Vendor Lead Times was sliced in half as the index remains below pre-pandemic levels.

Supply Chain Data

Again, Employment is the third input to the composite and it was the sole input to remain in expansion in May. That being said, it too fell sharply versus the prior month.  While that reading indicates lower mid-Atlantic manufacturers are currently net taking on more workers, expectations saw a record decline meaning hiring plans are likely to decelerate significantly in the near future. That is as wage growth has stalled out and the length of the average workweek has been cut.

Labor market data

Finally, in spite of supply chain improvements and weaker demand, prices have continued to rise unabated.  Prices paid hit fresh record highs across both current conditions and expectations.  Prices received are off-peak but the reading did tick up slightly in May. Click here to learn more about Bespoke’s premium stock market research service.

Inflation Data

Bespoke’s Morning Lineup – 5/24/22 – Anti-Social Media

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Morning stock market summary

Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members.  Start a two-week trial to Bespoke Premium now to access the full report.

That rally lasted long.  After bouncing from the last hour on Friday through yesterday, US stocks are set to open down by over 1% this morning following Snap’s (SNAP) earnings warning and its comments regarding the weakening broader macroeconomic environment.  Adding to the concerns regarding the economy, preliminary PMI readings out of Europe also came in lower than expected.  The US versions of these reports will be released later this morning.  Given these growth concerns, treasuries are rallying as the 10-year yield drops back down to 2.82%.  Oil prices, however, are largely unchanged on the day.

In today’s Morning Lineup, we recap on the latest declines in the tech sector (pg 4), Asian and European markets (pg 4), COVID case numbers (pg 5), the latest economic data out of Asia and Europe (pg 5), and a lot more.

After a 1.87% gain for the S&P 500 (SPY) yesterday, we’re seeing the inverse of a “Turnaround Tuesday” this morning with SPY set to open lower by just over 1%.  Since 1993 when SPY began trading, there have only been five prior instances in which SPY rose 1%+ on a Monday and then gapped lower by more than 1% the next morning.  As shown below, SPY continued lower from the open to the close on four of the five prior Tuesdays, and one week from the Tuesday open, SPY was down all five times for an average decline of 2.3%. One step forward, two steps back.

S&P 500 Gap Downs

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End in Sight For Philly Supply Chain Stress?

On the backs of a disappointing Empire Fed earlier this week, the neighboring Philadelphia Federal Reserve Bank’s own reading on its region’s manufacturing economy also came in well below expectations at the headline level.  The index for General Business Conditions was anticipated to decline from a healthy reading of 17 to a more modest 15. Instead, it plummeted to a barely positive reading of 2.6.  That would point to a significant moderation in activity in the month of May.

Philly Fed General Business Expectations

While the headline index fell sharply, the rest of the report was perhaps more mixed. Breadth was certainly weak with only three categories rising month over month (New Orders, Shipments, and Unfilled Orders). As for the indices that declined, on the one hand, some could be perceived as welcome drops with pullbacks in elevated readings of prices and delivery times.  On the other hand, the moderation in Number of Employees or CapEx expectations could be taken as a less positive sign for the broader economy.

Philly Fed Overall Components

As shown in the table above, overall most current conditions indices remain historically elevated even after recent declines. Expectations indices meanwhile are generally more depressed with some readings even near record lows.  As such, the average normalized distance between the current conditions and expectations categories throughout the report have broken out to the highest level since February 1988 and mid-1975 before that. Put differently, there have rarely been times in which the region’s manufacturers have reported such a dramatic difference between healthy current conditions while also holding a pessimistic outlook.

Spread between current conditions and expectations

Taking a closer look at individual categories, New Orders remain well off-peak but ticked higher in May rising 4.3 points to 22.1. There was an even larger jump in expectations, although the level of that index is not nearly as elevated. The modest increase in demand was met with a huge jump in Shipments and Unfilled Orders. With a 16.2 point jump month over month, Shipments are reported to be growing at the fastest rate since the fall of 2020. Given the region’s firms are getting orders out the door at a faster clip, inventories are growing only modestly with that index falling to a barely expansionary 3.2.  Additionally, that evidence of improved fulfillment also resulted in a huge drop in expectations for Unfilled Orders. In fact, that index dropped to the lowest level since March 1995. That means the region’s firms expect to work off unfilled orders at a historic rate in the coming months.

Philly Fed Data, Supply Chain

The likely reason as to why companies are anticipating such a huge improvement in fulfillment is massive expected declines in lead times.  Delivery Times remain elevated but have moderated significantly in the past couple of months. Six-month expectations meanwhile have fallen all the way down to -29.1 which, like unfilled orders expectations, is the lowest level since March 1995.

Delivery Times

Another expectations reading that has fallen precipitously in May is CapEx expectations.  The reading fell to the worst reading since September 2016 indicating huge moderation in planned investment.  Likewise, hiring is expected to slow as has already been observed by the current conditions index. We would note that these readings remain positive, meaning firms are still expecting to take on more hiring and spending on net, but at a more modest rate. Click here to learn more about Bespoke’s premium stock market research service.

Labor Market, Philly Fed

Sentiment Little Changed – Still Bearish

Depending on when a respondent reported their answers to the weekly AAII sentiment survey, they could have been justified in giving either bullish or bearish.  From last Thursday’s close to Tuesday, the S&P 500 rallied a little more than 4% but anyone reporting yesterday would have reflected the index giving back all of those gains in a single session.  Given that back and forth of equities, sentiment remains little changed. Around a quarter of respondents remain in the bullish camp as has now been the case for three weeks in a row. Albeit a historically low reading, it is a major improvement from readings in the mid-teens only one month ago.

AAII Bullish Sentiment

Bearish sentiment meanwhile ticked higher and back above 50% this week.  As with bullish sentiment, that is an overwhelmingly pessimistic reading even if it is less extreme than last month when it closed in on a 60% reading.

Bearish Sentiment

The bull-bear spread in turn was marginally improved rising from -24.7 to -24.4 indicating sentiment stays heavily slated toward pessimism.

Economic Sentiment

With both bearish and bullish sentiment gaining share this week, the percentage of respondents reporting neutral sentiment fell back below 25% to 23.6%. Click here to learn more about Bespoke’s premium stock market research service.

AAII neutral sentiment

Mixed Housing Data

On the same day that mortgage applications plunged 12% and one day after homebuilder sentiment for the month of May showed a large decline, the latest updates on Housing Starts and Building Permits showed a mixed picture.  While economists were expecting both reports to decline, the drop in Housing Starts was more than expected while the decline in Building Permits was slightly less than forecast.

The table below breaks down this month’s report by type of unit and region and shows both the m/m and y/y changes.  For Housing Starts, the 0.2% m/m decline was driven entirely by single-family units (-7.3%) while multi-family units surged 15.3%.  With respect to Building Permits, we saw a similar breakdown although the disparity wasn’t nearly as large as single-family units dropped 4.6% while multi-family units declined just 1%. On a regional basis, the Northeast and Midwest experienced 20%+ declines on a m/m basis while every region except the South experienced declines in Building Permits.

Housing Starts and Building Permits

While both Housing Starts and Building Permits declined on a m/m basis, the longer-term trend for both still remains intact.  At 1.759 million, the 12-month average of Building Permits came in at the highest level since January 2007 while the 1.659 million average level of Building Permits was the highest since February 2007.  Higher interest rates have caused a slowdown in housing at the margin, but longer-term trends have yet to show signs of rolling over.  Click here to learn more about Bespoke’s premium stock market research service.

Housing Data