Manufacturing Weekly Economic Highlights | 21 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, as investors seek safe haven amid Chinese economic struggles”

“US Fed members see significant upside risks to inflation”

“US 3Q23 GDP up 5.8% per Atlanta Fed forecast”

“US factory output turns around, up 0.5%”

The USD Index (DXY) rose moderately again?this past week, from 102.85 on 11 August 2023 to close at 103.43 on 18 August 2023. This was the USD’s fifth consecutive weekly gain, its best run since April – May 2022. The USD was supported this week by investors seeking safe haven amid concerns about China’s economy, and by expectations of continued high US policy rates.?

Reuters reported on 18 August that most members of the US Fed rate-setting committee see “significant upside risks to inflation.” However, as reported by the Wall Street Journal on 16 August, the recently released minutes of the Fed July policy meeting indicated that the question of policy rates “had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.”

The Atlanta Fed indicated that the US economy GDP for 3Q23 is likely up 5.8% YoY, up from its previous guidance of 5.0% YoY, as reported on 16 August by Reuters. US factory output grew 0.5% MoM in July following a decline of 0.5% MoM in June.?

The Atlanta Fed August Business Inflation Expectations survey found that high interest rates are adversely impacting business capital expenditures, as reported by Investopedia on 16 August. 43% of surveyed firms said they stopped or decreased CAPEX, 30% said they were using credit less frequently, and 13% said they stopped or lowered R&D spending. 1% said they were defaulting on debt. 45% of surveyed firms said they were slowing hiring, and 30% reported leaving positions unfilled.

Europe

“EUR steadily fell throughout this past week to end moderately lower”

“ECB forecasts Eurozone GDP up 0.9% in 2023, 1.5% in 2024”

“Eurozone swings to large trade surplus in June, with exports up 0.3%, imports down 17.7%”

The EUR ended moderately down?this week, from $1.096 USD per EUR on 11 August 2023 to end at $1.088 USD per EUR on 18 August 2023.?

The European Central Bank (ECB) chief economist forecast the Eurozone to keep growing in coming years and is unlikely to experience a deep or sustained recession, as reported on 18 August by Reuters. “There’s a lot of reasons to believe the European economy will grow over the next couple of years.” He further expects European household financial position to improve, leaving households with greater disposable income. The ECB current Eurozone GDP forecast expects growth of 0.9% in 2023 and 1.5% in 2024.

The Eurozone achieved a large trade surplus in June 2023, compared with a similar sized trade deficit in June 2022, as imports from both Russia and China fell sharply, as reported on 17 July by Reuters. Exports rose 0.3% YoY, with imports falling 17.7% YoY.?

China

“The CNY ended moderately lower again this week, as Chinese state banks sold USD to slow devaluation”

“CNY hit 16-year low vs USD”

“Chinese fertility drops to 1.09, lower than Japan’s 1.26 rate”

“China suspends publication of youth unemployment statistics following June’s record rate of 21.6%

The CNY ended moderately lower again?this week, from 7.228 per USD on 11 August 2023, falling to 7.270 per USD on 18 August 2023. Reuters reported on 17 August that major Chinese state-owned banks were selling USD and buying CNY in both onshore and offshore markets to slow the rate of devaluation, as the CNY hit a 16-year low against the USD on 16 August at 7.2981 per USD. The CNY is down 2.4% in August, and 6% since 1 January 2023.?

The People’s Bank of China (PBOC) issued a surprise rate cut on 15 August, resulting in China’s 10-year yield falling to 170 basis points below the US Treasury 10-year yield. This is the largest 10-year yield gap since 2007, per Reuters on 16 August, and is increasing devaluation pressure on the CNY. As noted by Business Insider on 17 August, the PBOC is “caught in a bind between keeping the yuan stable and trying to stimulate the weakening economy.”

Much focus this week has been on the Chinese property market, with major developers Evergrande seeking bankruptcy protection and Country Garden defaulting on bond payments. However as reported by MarketWatch on 19 August. The Chinese economy also faces systemic weaknesses including a high debt burden, falling consumption, weak governance and productivity, and a highly politicized business environment. Global supply chains are being “recalibrated” to reduce exposure to China, and this trend could accelerate amid China’s ongoing economic and financial challenges.?

China continues to struggle with its demographic time bomb, with the Wall Street Journal reporting on 19 August that China’s current total fertility rate fell to 1.09 babies per woman from 1.30 in 2020. This is below Japan’s famously low fertility rate of 1.26. Earlier in 2023, China revealed that its population started shrinking in 2022, and the United Nations declared that for the first time since the 1960’s that India has passed China as the world’s most populous country. Meanwhile, Beijing continues to restrict unfavorable national statistics, suspending publication of youth (18- to 24-year-old) unemployment data, which hit a record high in June of 21.3%.

Thailand

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

“PTP makes progress towards a governing coalition, MFP falls to opposition status”

“Next parliamentary election for PM 22 August”

“Business community is out of patience with Thailand’s political mess”

The THB finished moderately weaker again this week, from 35.05 per USD on 11 August 2023 to 35.44 per USD on 18 August 2023.?

Economists polled by Reuters, as reported on 18 August, predicted that Thailand’s 2Q23 GDP grew 3.1% YoY, up from 2.7% in 1Q23, driven primarily by increased foreign tourist arrivals. However, exports continue to be down, having contracted since October 2022. Full year 2023 GDP is forecast at 3.7%, in line with the Bank of Thailand’s forecast, and 3.8% in 2024.

The Thailand election soap opera continues to plod along with a seemingly endless series of boring weekly episodes. The Constitutional Court rejected a petition concerning the PM renomination, ending the leading Move Forward Party’s (MFP) chances to form a coalition government. Second place Pheu Thai Party (PTP) collected additional coalition support, placing it in a stronger position to successfully elect its candidate K. Srettha Thavasin in a parliamentary vote scheduled for 22 August.?

In an opinion article published 14 August in Nikkei Asia, respected Professor Pavida Pananond of Thammasat Business School noted that the business community is “out of patience with Thailand’s political mess.” Thailand’s growth since the 2014 military coup has been stuck at around 3%, significantly underperforming its potential. “The grinding process of forming a new government is hurting business and undermining investor confidence.”?

Energy

“Crude ended moderately lower this week, ending a seven-week rally”

“Battle royale between supply and demand”

“UBS forecasts Brent to hit $95 by year end”

“Europe natural gas inventory exceeds 90% months ahead of November deadline”

Brent Crude closed moderately lower this week, from $86.73 on 11 August to close at 84.76 on 18 August 2023, breaking a seven-week rally which was the longest since the eight-week rally following Russia’s invasion of Ukraine.?

MarketWatch reported on 18 August that “There continues to be a battle royale between supply and demand” as OPEC+ maneuvers to cut supply as China’s economic woes depress the demand forecast. The worsening Chinese property market crisis weighed heavily on the demand expectations. Meanwhile, major bank UBS noted that they expect Brent Crude to hit $95 USD by the end of December as OPEC+ production falls to two-year lows. Global oil demand hit a record high in August, as reported on 16 August by Yahoo! finance.?

The Washington Examiner reported this week that US oil and gas rigs are down 14% YoY, presaging tightening US crude supplies. Reuters reported on 17 August that US crude inventories fell by nearly 6 million barrels last week, and US gasoline inventories fell to their lowest level in more than 2 months. In positive news, Politico reported on 17 August that the EU natural gas inventories have reached 90.12%, 3 months ahead of the November deadline. Europe is successfully cutting its dependence on Russian pipeline gas, which previously supplied 40% of demand and is now down to 8.4%. However, though wholesale gas prices are significantly lower than last year, they remain higher than historical norms and trends.

Logistics

“BDI closed moderately higher this week”

“Floating traffic jam at Panama Canal with 20-day delays amid ongoing drought”

“Dark ships transporting illegal Russian crude to China and Asian markets”

Baltic Dry?Index?closed moderately higher?this week, from 1,129 on 11 August 2023 to close at 1,237 on 18 August 2023. Trading Economics has slightly lowered its BDI forecast this week to 1,067 by the end of 3Q23, and 900 in 12 months.?

The Wall Street Journal reported on 18 August that more than 200 vessels are stuck in a floating traffic jam on both ends of the Panama Canal as the ongoing serious drought restricts vessel crossings. Wait times are up to 20 days, with some shipowners rerouting their vessels to avoid the backlog. A.P.Moller-Maersk “went to an auction and paid $900,000 on top of $400,000 normal toll fee for each ship to cross.” Ship draft has been reduced from 50 feet to 44 feet, requiring vessels to transfer cargo to smaller vessels for the crossing. The number of daily canal transits has been reduced to 32 per day, from 36 per day under normal conditions.

The demand for “dark shipping” to transport illegal Russian crude has caused the price of aging and potentially unsafe tankers to double, as reported by The Guardian on 19 August. These “ghost” ships transport Russian crude to China and other Asian ports, and often hide their location or obscure their port of origin. A 27-year-old Gabon registered tanker that likely had just delivered Russian oil to a Chinese port exploded off Malaysia in May.?

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