The IHS
Markit and ISM
non-manufacturing reports came out this morning and they were striking in
their disappointment.
The Markit Services PMI was forecast at 64.8, with an actual
at 64.6. ISM PMI was forecasted at 63,
with consensus estimates at 63.5, and came in at 60.1. ISM non-manufacturing activity was forecasted
at 65.7 and had 60.4 as the actual.
While these numbers coming in were disappointing to those
that forecast and estimate these figures, we are still in expansion mode. Remember, these are diffusion index
reports. This means, anything above a
score of 50 indicates expansion and any score below 50 indicates
contraction. We are still well in the
expansion end of the survey.
Respondents to the ISM survey indicated that sales and
demand are strong. This doesn’t mean the
service sector is trouble free. Anthony
Nieves, the chair of the ISM Service Business Survey Committee stated, “The
rate of expansion in the services sector remains strong, despite the slight
pullback in the rate of growth from the previous month’s all-time high. Challenges with materials shortages,
inflation, logistics and employment resources continue to be an impediment
to business conditions.”
I bolded what Mr. Nieves stated were the challenges. I thought it was remarkable that he would
state inflation as a challenge.
Apparently, Mr. Nieves didn’t get the memo from the Fed that this
inflation is merely transitory.
Chris Williamson, the Chief Business Economist at IHS
Markit, commented on his company’s report stating that, “Some of the easing
in the rate of expansion reflects payback after especially strong expansions in
prior months as the economy opened up from pandemic-related restrictions,
especially in consumer-facing companies. However, many firms reported that
business activity had been constrained either by shortages of supplies or
difficulties filling vacancies. Backlogs of uncompleted orders are consequently
rising at a rate unprecedented in the survey’s history, underscoring how demand
is outstripping supply of both goods and services.”
I believe this backlog that Mr. Williamson alluded to, is
going to be with us for some time. Over
the weekend, Zerohedge posted an article about the congestion
in the Outer Pearl River Delta in the South China Sea. Their piece was focused on the Yantian port
which is running at 40% capacity and is seeing delays of more than 16
days. The Pearl River Delta is home to
the 4th (Shenzhen), 5th (Guangzhou), and 8th
(Hong Kong) busiest container ports in the world. To catch up, these ports are going to have to
run at ludicrous speed to clear their backlog.
Finally, I want to touch on the Logistics
Managers’ Index (LMI) for June, which came out this morning. The LMI report came in at 75.0. This is the second highest reading in short
history of the index (which has only been around since 2016). The survey writers keyed in on inventories
which they state are up 1.3% from this same time last year. What they discovered was that “a high
volume of inventory is moving through supply chains at a significant velocity. This velocity has led to low available
capacities and high costs, including an all-time high for Warehouse Prices,
up (+2.3) to 85.4. Increased logistics
costs are a primary culprit behind the 5% increase in consumer prices for the
12-month period ending in May – the sharpest increase since 2008. Consumers have not been deterred by these
price increases, the US economy grew at a rate of 6.4% in Q1 2021, and
economists expect consumer spending could be up 9% this year – the highest
levels since 1946 – the year after the end of World War II.”
I have stated before in my alert, that consumers were not
being discouraged by higher prices.
Pairing this report with the port slowdown makes me wonder what will be
on store shelves 1 month, 3 months, and 6 months from now. Those retailers that can keep product
available will be big winners if their competitors can’t. These reports also make me believe that we
are staring stagflation directly in the face.
Today’s Market Action
We are witnessing some strange action in the market
today. After OPEC ended their meeting
without a new resolution, crude oil futures (/CL) rocketed higher to
$76.98. Then they dropped to $72.94. Presently they stand at $74.18. I believe this illustrates my point from before,
we have momentum/swing traders that have moved into this market. This is going to cause some wild swings and
we need to be prepared to take advantage of them.
Important and Potential Market Moving Events This Week
5.45am Markit (June)
6am ISM Non-Manufacturing Report (June)
6am JOLTS Job Openings (May)
10am FOMC Meeting Minutes released
4.30am Initial Jobless Claims
7am EIA Crude Oil and Gas Stocks Change
11am Consumer Credit (May)
6am Wholesale Inventories (May)
9am Baker Hughes Oil Rig Count
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