Member Briefing August 5, 2024

Date postedAugust 5, 2024
Posted By: Harold King Daily Briefing,

Top Story

Japan Stocks Dive 4,451 Points, 12.4%, More Than Black Monday In 1987

Japanese stocks collapsed on Monday in their biggest single day rout since the 1987 Black Monday sell-offs, driven by last week's plunge in global stock markets, economic concerns and worries investments funded by a cheap yen were being unwound. The Nikkei share average as Friday's dismal jobs data heightened worries of a possible recession, and as the yen rallied to 7-month highs versus the dollar. This was the index's worst showing in percentage terms since the October 1987 crash. "We are basically seeing a mass deleveraging as investors sell assets to fund their losses."

Japanese Finance Minister Shunichi Suzuki said the government was monitoring markets with "grave concern. It's hard to say what is behind the decline in stocks," Suzuki told reporters. Most analysts said neither interest rate expectations nor economic data could explain the severity of the sell-off, although it was possibly driven by the rise in the yen whose near-zero short-term yields and steady depreciation had made it the funding currency for billions of dollars worth of investments for years.

Read more at Reuters

US Manufacturing PMI at 46.8% in July – An 8 Month Low

The ISM Index, a long-trusted bellwether for the manufacturing sector, sunk even deeper into contraction territory in July coming in at 46.8, a reading just spitting distance from its lowest levels of the past three years (chart). Only two components were above the 50-line of demarcation between expansion and contraction: prices paid and supplier deliveries. This is a troubling development as it signals that higher interest rates are hurting activity without the intended outcome of further lowering prices.

The fact that the supplier deliveries index was positive ought to be taken with a grain of salt. New orders have been in contraction territory for four-straight months and fell another 1.9 points to 47.4 in July. What's more likely in our view is that firms have pulled forward demand ahead of coming tariff hikes and shipping disruptions emanating from continued attacks in the Red Sea. This may also be a factor in reportedly higher prices. The employment metric registered the largest decline, slipping nearly six points last month to 43.4, or the lowest index reading since the pandemic drove millions of workers out of employment. Just two of the 18 industries included in this release reported an increase in hiring last month, and the report noted “Respondents' companies are continuing to reduce head counts through layoffs, attrition and hiring freezes.”

Read more at Wells Fargo

US Hiring Slows to 114,000 Jobs in July, Unemployment Up to 4.3%, Earnings Up 3.6%

Data from the Bureau of Labor Statistics released Friday showed the labor market added 114,000 nonfarm payroll jobs in July, fewer additions than the 175,000 expected by economists. America is still adding jobs. But the labor market’s strength has been fading, and Friday’s report adds to evidence that it could be on its way to weakness. Meanwhile, the unemployment rose 4.3%, up from 4.1% June. The unemployment rate is now at its highest level since October 2021. July's job additions came in lower than the 179,000 jobs added in June.  Manufacturers added 1,000 jobs.

Wage growth, an important measure for gauging inflation pressures, slowed to 3.6% year-over-year, down from 3.9% in June. On a monthly basis, wages increased 0.2%, lower than the 0.3% gain seen in June. Friday's report also showed the labor force participation rate falling to 62.7% from 62.6% in June. Friday's report is the latest economic data point to show signs of a cooling across the US economy. Data from the Department of Labor published Thursday showed 249,000 initial jobless claims were filed in the week ending July 27, up from 235,000 the week prior and the most since August 2023.

Read more at Yahoo Finance

NFIB: Labor Costs Grow. Skilled Workers Hard to Find.

NFIB’s July jobs report found a seasonally adjusted net 33% of small business owners reported raising compensation in July, down five points from last month and the lowest reading since April 2021. A net 18% (seasonally adjusted) plan to raise compensation in the next three months, down four points from June. The percent of small business owners reporting labor quality as their top small business operating problem was unchanged from June at 19%, although labor quality as the top problem has eased considerably over the last two quarters. Labor cost reported as the single most important problem for business owners fell two points to 9%, four points below the highest reading of 13% reached in December 2021.

Thirty-eight percent (seasonally adjusted) of small business owners reported job openings they could not fill in July, up one point from June. A seasonally adjusted net 15% of owners plan to create new jobs in the next three months, unchanged for the third consecutive month. Overall, 57% of small business owners reported hiring or trying to hire in July, down three points from June. Forty-nine percent of owners reported few or no qualified applicants for the positions they were trying to fill. Thirty-two percent have openings for skilled workers (up one point) and 16% have openings for unskilled labor (unchanged).

Read more at The NFIB

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Policy and Politics

Senate Rejects Tax Bill 

A bipartisan tax bill that sailed through the House six months ago reached a dead end as the Senate killed the once-promising deal Thursday. The bill would have revived expired tax provisions that help businesses making capital investments or conducting research, and it would have expanded the low-income housing tax credit and the child tax credit for low-income families. The legislation also would have cut off the employee-retention tax credit, a pandemic-era program riddled with fraud and ineligible claims that has cost more than triple the original estimates.

It attracted support from progressive antipoverty groups and the U.S. Chamber of Commerce. Almost all Senate Republicans opposed the measure, saying it leans too heavily toward Democrats’ priorities. On the Democratic side, some progressives saw the bill as too tilted toward businesses, but most backed it. Senate Republicans back the business changes, but they contend that the deal makes the child credit too generous, especially for some parents without earnings who would have a lower incentive to work. They argue that they could write a better version next year if they have more control of the government after November’s election.

Read more at The WSJ

Fiscal Experts: New York State Must Prepare For 'Difficult' 2026 Budget

New York fiscal experts said Thursday state leaders must identify savings as they prepare Gov. Kathy Hochul's next executive budget, which they expect will be difficult to negotiate to fill the void left by congestion pricing and multi-billion-dollar spending gaps. The Legislature passed a $239 billion budget in April — increasing spending by 7.8% amid high inflation and wage increases. But the state will face a large out-year spending gap, with more than $4 billion next year, expected to swell to a $16 billion hole by 2028.

Officials with the state Budget Division would not answer questions Thursday about how the state is preparing to deal with the $16 billion budget gap or how much the state needs to reduce health or education spending — its largest expenditures — to make ends meet. State lawmakers largely rejected significant cuts to Medicaid programs and school funding in the governor's budget proposal — unsurprising due to the critical election year. Experts with the CBC and Fiscal Policy Institute said state leaders kicked New York's spending woes down the road this budget cycle, and with steep structural budget gap on the horizon, state leaders will have difficult decisions to make.

Read more at NYS of Politics

Tropical Storm Debby Could Hit Florida As A Hurricane Today

Tropical Storm Debby is expected to make landfall as a hurricane Monday in Florida’s Big Bend region—which houses cities at the end of the panhandle including Tallahassee, St. Marks and Apalachicola—as the storm moves north off Florida’s Gulf Coast, the National Weather Service said Sunday. NWS warned of heavy rainfall in Florida’s Big Bend (six to 12 inches) and southeast Georgia and South Carolina (10 to 20 inches) that could lead to “catastrophic flooding” through Friday. The Gulf Coast of Florida is facing the “danger of a life-threatening storm surge” with six to 10 feet of inundation expected on Monday.

While hurricane conditions aren’t expected until Monday, tropical storm conditions including winds ranging from 39-73 miles per hour are expected to begin Sunday evening and last through Monday across Florida. As of Sunday at 11 a.m., the maximum sustained recorded wind speed of Tropical Storm Debby was 65 mph, according to the weather service. Florida Gov. Ron Desantis announced much of Florida was in a state of emergency on Thursday ahead of Tropical Storm Debby’s landfall and expanded it to include 61 of Florida’s 67 counties on Friday. President Joe Biden approved Florida’s emergency declaration on Saturday and ordered federal assistance to help with state, tribal, and local response efforts.

Read more at Forbes

Health and Wellness

The Science Behind Why COVID-19 Tends to Spike During Summer Months

Other than allergies, we tend to associate mild infectious illnesses like the cold, flu, and now COVID with fall and winter. But technically, those viruses can surge any time of the year, said Nikhil Bhayani, MD, an infectious disease physician and assistant professor at Burnett School of Medicine at Texas Christian University. While inconvenient, it’s normal for COVID to spike in the summer months—in fact, summer surges have happened every summer since COVID arrived on the scene. Here’s what to know about this increase in cases, including why it tends to happen during summertime, and how to protect yourself from the virus.

There are several reasons why COVID cases have been on the rise this summer and during previous summers. The first is that many people don’t currently have immunity to the virus. “Immunity to prior COVID infection is short lived,” said Bhayani, adding that it tends to “wane after three months.” The weather might also play a role in the summer surge. According to Bhayani, some of the emerging variants might thrive more in the heat than the cold. Along the same lines, increased summertime social activities, events, and travel “set the stage for a significant rise in cases and complicates any existing efforts to manage the spread.

Read more at Health.com

NYS COVID Update

The Governor updated COVID data for the week ending August 2nd.

Deaths:

  • Weekly: 23
  • Total Reported to CDC: 83,574

Hospitalizations:

  • Average Daily Patients in Hospital statewide: 1,177
  • Patients in ICU Beds: 121

7 Day Average Cases per 100K population

  • 11.2 positive cases per 100,00 population, Statewide
  • 12.5 positive cases per 100,00 population, Mid-Hudson

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Industry News

Nasdaq Enters Correction As Jobs Report Fuels Massive Stock Selloff

The Dow fell 610 points (1.5%) as the S&P 500 and Nasdaq dropped 1.8% and 2.4%, respectively, as trading closed. The Nasdaq entered correction territory after falling more than 10% from its recent high of 18,671.07 set on July 10, ending the index’s worst day since Oct. 24, 2023. The Cboe Volatility Index—often called Wall Street’s “fear gauge”—increased to as high as 29.66, the highest level for the index since March 2023, indicating increased volatility across all markets over the next 30 days.

 

A broader market selloff was led by Intel, whose shares plunged 26% for the company’s worst day since 2000 after reporting earnings that missed analyst expectations, while Amazon also had its worst day since 2022 after declining by nearly 9%. Nvidia (1.7%), Adobe (3.7%), Tesla (4.2%) and Moderna (8%) also recorded notable drops. Claudia Sahm, chief economist at the financial consulting firm New Century Advisors, told CNBC the U.S. was “not in a recession now,” though “the momentum is in that direction.” Sahm noted a recession is “not inevitable” while there is “substantial scope to reduce interest rates.”

Read more at Forbes

Firm Productivity Gains Helping the Inflation Fight

Productivity optimists received another indication of improving labor efficiency last week. Nonfarm labor productivity, measured by output per hour worked, increased at a 2.3% annualized rate in the second quarter. The better-than-expected outturn comes on the heels of a meager 0.4% rise in the first quarter and brings the year-over-year percent change to 2.7% (chart). Through Q2, labor productivity growth has averaged 1.6% this cycle, a touch stronger than the past business cycle's 1.5% average (2007–2019).

The firming in productivity growth is notable because it has scope to improve the economy's potential rate of growth. Potential GDP growth is primarily determined by two factors: the labor force and labor productivity. Both factors were growing at historically weak rates before the pandemic and were expected to continue on lackluster paths through mid-century. Yet the recent momentum in productivity suggests those expectations are going a little stale. We suspect remote work and broadening adoption of artificial intelligence will be supportive of solid labor productivity growth in the coming years, which could meaningfully boost economic growth without leading to higher inflation. Indeed, the pickup in productivity in Q2 helped tamp down growth in unit labor costs (ULCs), which can be thought of as the productivity-adjusted cost of labor. Compensation per hour worked rose at a 3.3% annualized clip in Q2, but ULCs rose at a more modest 0.9% pace as employees were able to produce more in a given hour of work.

Read more at Wells Fargo

US Construction Spending Extends Decline In June

U.S. construction spending unexpectedly fell in June and the prior month's data was revised lower as higher mortgage rates weighed on single-family homebuilding. The Commerce Department's Census Bureau said on Thursday that construction spending dropped 0.3% after a downwardly revised 0.4% decline in May.Construction spending advanced 6.2% year-on-year in June.

Spending on private construction projects fell 0.3% in June after dropping 0.4% in the prior month. Investment in residential construction dropped 0.3% after falling 0.7% in May. Outlays on new single-family construction projects decreased 1.2%. Spending on multi-family housing gained 0.1%. Mortgage rates surged in the spring, depressing homebuilding and sales. Mortgage rates have since fallen and could decline further after the Federal Reserve on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July, but opened the door to reducing borrowing costs as soon as its next meeting in September.

Read more at Reuters

Asian Manufacturing Recovery Continues, But Some Cracks Start to Show

The Asian manufacturing recovery seems to have continued at the start of the second half of the year, with survey data signaling fairly healthy factory activity in July despite the continued threat of inflation and a pullback in demand. Purchasing managers index data from S&P Global showed that new order growth for the ASEAN region hit a 15-month high in July, improving for a seventh straight month.

Demand conditions continued to strengthen, with momentum in new orders allowing firms to boost production last month and hire more staff, said Maryam Baluch, economist at S&P Global Market Intelligence. Input prices rose at the quickest pace since February, the data showed, and it remains to be seen how manufacturers will handle the added cost burden, particularly in places already struggling with high inflation.  Taiwan and South Korea continued to shine as they benefit from unabated appetite for high-tech exports. PMIs for both signaled solid growth in output and new orders, and continued optimism about future sales and output among manufacturers. But companies also flagged potential roadblocks to further expansion.

Read more at The WSJ

Victims’ Families Object to Boeing Plea Deal

Attorneys representing some families of people killed in two crashes of 737 MAX jets have filed an objection to the federal plea agreement pending before a U.S. District Court in Fort Worth, Tex., claiming it is too lenient on the aircraft manufacturer. Reportedly, some of the families want Boeing put on trial for its liability in the Lion Air and Ethiopian Airlines incidents. The agreement between the U.S. Dept. of Justice and Boeing and now pending before the court involves a guilty plea to a charge of criminal fraud conspiracy, plus a maximum fine of $487.2 million and a penalty that requires Boeing to invest $455 million to regularize its manufacturing programs’ safety standards.

When two 737 MAX jets crashed in October 2018 and March 2019, killing a total of 346 people, the investigation into the causes revealed multiple efforts to conceal Boeing’s compliance with reporting requirements and awareness of the design flaws. The government agreed not to prosecute Boeing at that time, but entered into an oversight agreement that included a substantial fine and required the company to maintain compliance with federal safety regulations in its manufacturing operations.

Read more at American Machinist

Rolls-Royce Reinstates Dividend, Raises Profit Guidance, Awards All Employees Stock Bonus

The British aerospace and defense company reported underlying profit of £1.1 billion ($1.4 billion) in the first half of the year, and said it expects that figure to rise to between £2.1 billion and £2.3 billion for 2024. That’s up from the £1.7 billion to £2.0 billion forecast in its 2023 full-year results and ahead of market expectations. Full-year free cash flow was now projected to pick up to a range between £2.1 billion to £2.2 billion, up from a previous forecast between £1.7 billion and £1.9 billion.

The firm, which supplies aviation giants Boeing and Airbus, also said it would resume dividends for full-year 2024, starting at a 30% pay-out ratio of underlying profit after tax. It comes after pay-outs were suspended in 2020, when flying halted during the pandemic. CEO Tufan Erginbilgic, who took the helm in 2023 to revitalize the company, said the strong results were a sign that the company’s plans, optimization and cost efficiency programs were taking shape. The engineering giant also announced in an internal memo that it would gift 150 shares to its 42,000 workers worldwide. "Our strong first half results and the progress we are making on our transformation have been made possible thanks to the hard work and action of our people", the company said in a message to staff.

Read More at CNBC

Intel to Cut Jobs and Suspend Dividend in Cost-Saving Push

Intel plans to lay off thousands of employees this year and pause dividend payments as part of a broad cost-saving drive more than three years into Chief Executive Pat Gelsinger’s turnaround effort. Gelsinger laid out the plan to reduce costs by more than $10 billion next year as the chip maker reported second-quarter sales of $12.8 billion, down 1%. Reaching that cost-reduction goal will require cutting jobs and lowering capital expenditure. Intel will lay off about 15,000 people, most of them by the end of this year, Gelsinger said in the interview. The company reported about 116,500 employees in its core business at the end of June.

Intel has struggled to gain a foothold in the market for artificial-intelligence chips that have driven the sales and valuations of Nvidia and some other rival chip makers. The heavy spending on those AI-focused chips to build out big data centers also has cut into demand for the non-AI processors for data centers that have long been central to Intel’s business. The U.S. government is helping fund some of Intel’s expansion through grants totaling as much as $8.5 billion. Intel said it now plans to reduce gross capital expenditures this year by more than 20% from prior plans to between $25 billion and $27 billion. More reduction is planned next year, to between $20 billion and $23 billion.

Read more at Reuters

New Boeing CEO Kelly Ortberg Faces Slew Of Challenges To Fix US Planemaker

Boeing's incoming boss, Kelly Ortberg, faces a herculean task when he starts next week - restoring the might of a U.S. corporate powerhouse rocked by multiple crises. The former Rockwell Collins boss is returning from retirement to head the 108-year-old U.S. planemaker, which is bleeding cash and beset by companywide problems expected to take years to fix. His extensive to-do list includes mending relationships with airlines and employees, boosting output, repairing company finances and securing a labor deal to avoid a possible worker strike later this year.

Current and former airline executives told Reuters they are optimistic about Ortberg's aerospace and engineering expertise and his status as an outsider untethered to Boeing's past. But the 64-year-old has a hefty task. “This is not a five-year fix-it," said Bill George, former Medtronic CEO and executive fellow at Harvard Business School. "Is he prepared to spend the 10 years it's going to take to restore Boeing?"

Read more at Reuters

Neuralink Implanted Second Trial Patient With Brain Chip, Musk Says

Neuralink has successfully implanted in a second patient its device designed to give paralyzed patients the ability to use digital devices by thinking alone, according to the startup's owner Elon Musk. Neuralink is in the process of testing its device, which is intended to help people with spinal cord injuries. The device has allowed the first patient to play video games, browse the internet, post on social media and move a cursor on his laptop.

"I don't want to jinx it but it seems to have gone extremely well with the second implant," Musk told podcast host Lex Fridman. "There's a lot of signal, a lot of electrodes. It's working very well." Musk did not disclose when Neuralink performed the second patient's surgery. Musk said he expects Neuralink to provide the implants to eight more patients this year as part of its clinical trials.

Read more at Reuters

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