Alpharo Research (#4)

This weekly article presents a selection of charts that have defined the week's economic landscape (Sources: Macrobond Financial )

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China's economy has recently entered a deflationary phase, with both the Consumer Price Index (CPI) and the Producer Price Index (PPI) showing negative growth at -0.3% and -4.4% year-on-year respectively in July. Furthermore, a collection of prominent leading indicators is converging to signal a significant deceleration in China's economic momentum, although a full-blown recession has not materialized at this point. More direct stimulus might be needed.

The current figures stand in stark contrast to the optimism that was ignited by the reopening efforts in late 2022. Notably, both the CITI Inflation Index and the Economic Surprises Index have dipped into negative territory, registering at -72 and -72.8 respectively for the month of July. This sharp contrast becomes particularly evident when juxtaposed against the robust positive surprises witnessed in the United Kingdom. Interestingly, the United States presents a unique scenario characterized by a "Goldilocks" dynamic: positive economic surprises are coupled with negative inflation surprises.

The cascade of negative surprises, coupled with the anticipation of further monetary and fiscal assistance, has precipitated a notable devaluation of the Yuan. As market sentiment responds to the prevailing economic conditions, the Yuan's value has experienced a decline. This devaluation underscores the market's evolving outlook and its response to the changing landscape of economic indicators and policy measures.

The United States continues to navigate a path toward a soft landing, as evidenced by the ongoing moderation of core inflation. In July, core inflation eased more rapidly than initially projected, registering at 4.7% year-on-year. This trend is reinforced by persistently negative inflation surprises, suggesting that inflationary pressures are being managed more effectively than anticipated.

As the probability of a recession in the US, specifically a hard landing, increases, small-cap business confidence rebounded to 91.9 in July. The outlook for business conditions over the next six months rose to -30 in July, and the outlook for sales expectations in the next three months rebounded to -12 in July.

With the improvement in small-cap confidence during July, their hiring plans also experienced a rebound, reaching -17%. However, one notable drawback of this robust figure is that they still find themselves unable to fill 42% of the positions.

The Employment Trend Index of the conference rebounded to 115 in July. This resurgence indicates the potential for a sustained tightness in the labor market, potentially leading to further increases in wage growth. This scenario could contribute to inflationary pressures in the third quarter, thereby posing a challenge for the Fed's efforts. The Fed, which had anticipated a quicker easing of the labor market, may find this development less than favorable as it strives to navigate the economic landscape.

As of July, the US consumer maintains an expectation for an inflation rate of 3.3% for the upcoming year. This anticipation persists despite the deceleration in economic growth projections, which, although moderating, still indicate positive expansion. The persistently tight labor market further contributes to this outlook. Additionally, there has been a rebound in expectations for the US housing market. However, it is important to note that the risk of sticky inflation remains a concern within the US economic landscape.

The US dollar has found support in the anticipation that the Federal Reserve may need to sustain relatively elevated interest rates, without significant increases, over an extended period. This sentiment is influenced by several factors: a modest rebound in the Consumer Price Index (CPI) observed in July, along with the persistence of a tight labor market. Additionally, the looming risks of deflation and the growing possibility of a notable economic slowdown in China are adding to the rationale for investors seeking refuge in safe havens, thereby strengthening the US dollar's position.

Industrial production in Germany experienced a moderate decline, reaching -1.8% year-on-year in June. The recent Purchasing Managers' Index (PMI) data, with Manufacturing New Orders falling to 32.8% in July, suggests a significant contraction in industrial production is anticipated for the second half of the year. This downward trend in PMI underscores the impending challenges faced by the industrial sector, further indicating the likelihood of pronounced contraction in the coming months.

France's unemployment rate reached a notable low of 6.9% in July. However, it's important to recognize that unemployment is considered a lagging indicator, reflecting past economic conditions. This is evident as the Composite Purchasing Managers' Index (PMI) for France dropped to a new low of 46.6% (inverted in the chart below), signifying a decline in economic activity. As a consequence, this PMI contraction suggests an impending significant deterioration in the French unemployment rate. The decline in the PMI reflects the current economic challenges and could foreshadow a future uptick in unemployment figures.

The UK housing market continues to grapple with the repercussions of persistently increasing mortgage rates. This has translated into a decline in residential prices, while simultaneously witnessing a pronounced resurgence in rental prices. The most recent data highlights a concerning trend, depicted in the chart showing the percentage of UK surveyors reporting house price increases compared to declines. In July, this metric reached a striking low, plummeting to -53%, marking the lowest point in 14 years. This data underscores the challenges currently faced by the UK housing market.