Manufacturing Weekly Economic Highlights | 14 August 2023

Welcome to our weekly manufacturing and economic newsletter, providing key insights and analysis on the latest developments in the global market. Stay updated and make informed decisions!

In this edition, we focus on the economic conditions in America, Europe, China, Thailand, as well as updates on the energy and logistics markets.

Americas

“USD finished higher again this week, supported by rising T-bill yields”

“DXY is up 2.5% since its mid-July 15-month low”

“US CPI up 3.2%, core CPI up 4.7%”

The USD Index (DXY) rose moderately again?this past week, from 102.01 on 4 August 2023 to close at 102.85 on 11 August 2023. The USD is being support by growing yields on US Treasury bonds ahead of a very heavy schedule of US bond issuance, as reported by Reuters on 11 August. The DXY is up 2.5% from its 15-month low in mid-July.

The US Consumer Price Index (CPI) increased 3.2% YoY and 0.2% MoM in July, up from 3.0% in June, with core CPI up 4.7% YoY in July, down from 4.8% YoY in June. Reuters quoted the San Francisco Fed as saying, “more progress is needed” to tame inflation, and added that “the labor market is not yet balanced.”

The CME FedWatch prices a 90% likelihood that the US Fed will hold rates unchanged when it meets on 20 September, as reported by Barron’s on 11 August. The main driver of August inflation was shelter costs, with the labor market remaining tight and services inflation remaining strong. Bannockburn Global Forex strategist Chandler indicated that Chinese deflation is unlikely to have a significant impact on US prices because most US prices such as services and shelter are domestically generated.

US Producer Price Index

“June PPI up 0.85% YoY and 0.30% MoM”

“PPI increase is higher than economists expected”

“The next US PPI release is scheduled for 14 September 2023”

US Producer Price Index:?The July 2023 PPI was released on 11 August 2023 at 140.95, an increase of 0.30% MoM and 0.85% YoY.??The June PPI was revised from to 140.53 from 140.50, the May?2023 PPI was revised to 140.58 from 140.31, and the April 2023 PPI was revised to 141.01 from 140.82. As reported by MarketWatch on 11 August, economists polled by the Wall Street Journal had expected a 0.2% MoM PPI increase.

Core PPI increased 2.7% YoY in July, matching the increase seen in June, and compares favorably with the 5.8% YoY rate in July 2022. The cost of services saw their largest increase in a year, up 0.5% MoM, compared with a drop of 0.1% in June. The cost of goods increased 0.1% in July compared with 0.0% in June. Intermediate goods prices fell 0.6% for the sixth consecutive monthly decline.

Producer price pressure has been dropping much faster than consumer price pressure, squeezing margins.?

Europe

“EUR meandered to a sideways finish this week”

“The ECB has changed policy direction; deferring rate increases in favor of holding current rates “high for longer”

“Is Germany the new Sick Man of Europe”

The EUR meandered sideways?this week, from $1.102 on 4 August 2023 to $1.096 on 11 August 2023. Markets are reacting to a change in the European Central Bank (ECB) policy direction, now suggesting that it might pause its rate hikes in September, as reported by Reuters on 10 August.

Weak GDP growth in the Eurozone, especially in Germany, is the direct result of ECB’s tight monetary policy, which “has consciously dampened economic activity via higher rates in an attempt to bring inflation … to its 2% target.” ECB board member Panetta recently proposed “persistence” in keeping policy rates high rather than raising them further. ABN-AMRO said in a note to clients “We continue to expect the ECB to pivot significantly over the next few months, with no further hikes this year and March kicking off a series of rate cuts.”

The German economy is suffering from weak trade with China, a downturn in its manufacturing and construction sectors, and high energy prices which are confounding business models based on cheap Russian fuel. Germany is also struggling with its reliance on exports, a shortage of labor, and low investment.

China

“The CNY steadily sank to a moderately weaker finish this week”

“Chinese exports down 14.5%, imports down 12.4%”

“Chinese consumer prices down 0.3%, factory gate prices down 4.4%, raising concerns of a deflationary spiral”

“China FDI down to 0.4% of output, 67% fall since pre-COVID, lowest since records began 25 years ago”

“China’s total debt 3X GDP, higher than USA”

The CNY finished moderately weaker?this week, from 7.166 per USD on 4 August 2023 to 7.228 per USD on 11 August 2023.?

Chinese July exports fell 14.5% YoY, the biggest decline since February 2020. June exports were down 12.4% YoY. Chinese exports in July to the US and Eurozone each plunged more than 20% YoY, as reported by the Wall Street Journal on 8 August. However, exports to Russia rose 52% YoY, though total export volume to Russia remains relatively small. Chinese July imports fell 12.4% YoY, more than June’s fall of 6.8%.

China’s share of US imports during the 12-month period ending July 2023 was 14.9%, significantly down from its peak of 21.6% in 2017, as the US economy decouples from China and increases trades with Mexico, Europe and other Asian economies, as reported in the Wall Street Journal on 12 August. US imports from 25 Asian nations including Thailand, Vietnam, and India (Asia excluding China) represented 24.6% of US imports during the same period. Mexico has grown to become the US’s number 1 trading partner (combined imports and exports) at 15.7%, followed closely by Canada at 15.4%, with China falling to third place at 10.9%.

In further bad news for the Chinese economy, the Wall Street Journal reported on 9 August that Chinese consumer prices were down 0.3% YoY in July, raising concerns that the Chinese economy could be in danger of falling into a deflationary spiral. However, core inflation, excluding food and energy prices, rose 0.8% YoY in July from 0.4% in June. Chinese factory gate prices fell 4.4% YoY in July, down from a fall of 5.4% YoY in June, continuing a falling factory price trend since October 2022. Chinese deflation is being driven by excess supply and weak domestic demand, partly due to weak social security support for Chinese households.

The Bank for International Settlements reported that China’s total debt has reached 3 times its GDP, which is even higher than the US debt burden. China’s high debt levels are constraining economic stimulus options.

Chinese officials are implementing economic stimulus measures, including prompting local governments to issue more bonds to boost infrastructure spending, which could boost the demand for commodities.

On 9 August the US enacted prohibitions on American investments into some Chinese, Hong Kong, and Macau companies developing advanced semiconductors and quantum computers, effective in 2024. Americans will also be required to inform the US of direct investments into Chinese artificial intelligence and other semiconductors. China’s retaliatory options are likely limited but are expected to include export restrictions on key materials including rare earths and minerals.

Foreign direct investment into China fell to 0.4% of output in June 2023, compared with an average of 1.6% for the five years preceding the COVID pandemic. This is the lowest level of FDI since recordkeeping began 25 years ago and represents a 67% decline over the pre-COVID average, as reported by Reuters on 8 August. FDI is being adversely impacted both by geopolitical factors, and due to increased Chinese regulatory burdens.

Thailand

“THB has steadily fallen since 1 August to end moderately lower this week”

“Thai July headline CPI 0.38%, core CPI 0.86%”

“PTP party gathers ninth alliance partner in quest to form a governing coalition”

“Next parliamentary vote expected 18 or 19 August”

The THB finished moderately weaker again this week, from 34.67 per USD on 4 August 2023 to 35.05 per USD on 11 August 2023. The Baht has continued to weaken despite a 25-basis point rate hike to 2.25% on 2 August 2023. Thai Central Bank Governor Dr. Sethaput indicated a change in policy direction, stating “Next time, there is a chance that we will hold or raise. But the thing you won’t see is a cut as it’s not the right time to cut.”

Headline CPI increased 0.38% YoY in July, compared with 0.23% YoY in June, the third consecutive month below the Bank of Thailand’s target range of 1% to 3%. The Commerce Ministry expects 2023 average headline inflation to be 1% to 2%, though August headline CPI could rise slightly due to drought-induced food price increase and rising energy prices. Core CPI in July was 0.86%, compared with 1.32% in June.

In the ongoing political soap opera, on 10 August the Pheu Thai party (PTP) received additional support in its quest to form a governing coalition as the military-aligned Palang Pracharat Party became the ninth party to join the PTP alliance, as reported by Reuters on 10 August. Thailand has been governed by a caretaker government for five months, as the Move Forward Party (MFP), which won the most electoral votes, twice failed to form a governing coalition. Meanwhile, former PM Thaksin, who has lived in self-exile for 15 years, postponed his planned return to Thailand from 10 August by “a couple of weeks” as he needed a medical check-up. However, on 5 August he visited Cambodia to celebrate PM Hun Sen’s 71st?birthday. The Constitutional Court is set to rule on the renomination of MFP leader K. Pita on 16 August. The next parliamentary vote for PM is expected on 18 or 19 August.

Energy

“Crude posted its seventh consecutive weekly gain”

“Chinese oil imports fall 18.8% MoM but remain up 17.7% YoY.?

Brent Crude closed modestly higher again this week, rising steadily from $86.15 on 4 August 2023 to close at $86.73 on 11 August, its seventh consecutive weekly gain and the longest since the eight-week rally following Russia’s invasion of Ukraine.?

The International Energy Agency (IEA) reported that global crude inventories could drop sharply during the remainder of 2023, though it has reduced its 2024 demand growth by 150k barrels per day to 1 million BPD. OPEC forecast a rise in 2024 oil demand of 2.25 million BPD, as reported by Reuters on 11 August.

Crude prices continue to be supported by output cuts by Saudi Arabia and Russia, concerns of supply disruptions of Russian oil shipments in the Black Sea due to the Ukraine war, and strong US CPI data, tempered by weak Chinese economic data. China’s monthly oil imports reached a near-record in June 2023, then fell 18.8% MoM in July to their lowest level since January 2023,??while remaining up 17% YoY.

Logistics

“BDI coasted to a sideways finish this week”

“US LTL rates expected to rise 10% to 15%”

Baltic Dry?Index?closed sideways?this week, from 1,136 on 4 August 2023 to close at 1,129 on 11 August 2023. Trading Economics has raised its BDI forecast this week to 1,073 by the end of 3Q23, and 904 in 12 months. The BDI has been range-bound since late May 2023, oscillating between around 920 and 1,240, and during the month of July bounced between 990 and 1,100.

Following leading US trucking company Yellow’s bankruptcy and suspension of all operations, Less than Truckload (LTL) shipping rates are expected to rise 10% to 15%, as reported on 11 August by Reuters.?

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