Manufacturing Weekly Economic Highlights | 21 May 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.

America

“USD up again as investors continue to seek safe haven”

“… the USD is very, very oversold …”

“no clear direction on Fed rates for upcoming June Fed meeting”

“US unemployment down to 3.4%, lowest since 1953”

“April Consumer Sentiment Index plunges -9.1% MoM”

The USD Index closed moderately higher again?this past week, from 102.71 on 12 May 2023 to close at 103.19 on 19 May 2023. Investors continue to expect the USD to weaken in the mid-term as US inflation cools and the US Fed pauses its rate hikes. However, short term concerns including the US debt ceiling brinksmanship, the ongoing US banking crisis, and the weak global economic outlook, are driving a safe-haven response which is supporting continued USD strength. Recently, US politicians are inching closer to a debt ceiling agreement, though achieving success by the 1 June deadline is far from assured. Reuters reported on 18 May that the USD is “very, very oversold” with hedge funds net short bets the highest since mid-2021. On 19 May Fed Chair Powell stated, “the risks of doing too much or doing too little are becoming more balanced and our policy adjusted to reflect that,” signaling that there is no clear direction on rates for the upcoming Fed 13-14 June policy meeting. Reuters reported on 19 May that the rate futures market has priced a 16% chance of a 25-basis point rate increase at the June meeting, falling from 40% prior to Powell’s comments.

On 10 May 2023 the US Labor Department reported that the April CPI increased 4.9% YoY, following March’s gain of 5.0% YoY. Core CPI remained strong at 5.5% YoY, where it has been stalled since January 2023.?

The University of Michigan reported its Consumer Sentiment index plunging -9.1% month-on-month to 58.4 “erasing over half of the gains achieved after the all-time historic low from last June.” Other short run and long run consumer sentiment indices also fell, indicating that “consumers are worried that any economic downturn will not be brief.”

On Friday 5 May the Bureau of Labor Statistics reported the US economy added 253k new jobs in April, with the unemployment rate falling from 3.5% in March to 3.4% in April, the lowest rate since November 1953. The Labor Department also reported that nonfarm productivity, measuring hourly output per worker, dropped 2.7% YoY in 1Q23. Unit labor costs, the price of labor per single unit of output, increased 6.3% YoY in 1Q23, following an increase of 3.3% YoY in 4Q22. These robust labor statistics reflect continued strong inflationary pressures, calling into question whether further Fed rate increases will be required.

Europe

“EUR devalued modestly again, inversely to the USD”?

“Eurozone STOXX 600 1Q23 results exceed expectations”

“JP Morgan downgrades Eurozone stocks to underweight”

“Major European banks beat forecasts in 1Q23”

The EUR ended modestly lower?this week, from 1.094 USD per EUR on 12 May 2023 to 1.081 USD per EUR on 19 May 2023. The EUR is primarily being driven inversely to the USD. Reuters reported on 19 May that major Eurozone companies delivered unexpectedly strong first quarter results, with two thirds of the STOXX 600 companies which have reported results to date exceeding estimates. STOXX 600 company 1Q23 earnings are currently expected to grow 7.3%, with net profit margins of 11.4%, up from 10.2% in 4Q22.

However, more recently European stocks have fallen amid investor concerns about the health of the global economy, falling consumer demand, and increased downward pressure on margins. Last week JP Morgan downgraded Eurozone stocks to “underweight.” Lombard Odier Asset Management observed that “higher rates mean higher funding costs and lower CAPEX at the moment, and eventually it will mean a lower demand, declining sales and a lower pricing power as the consumer end will come under pressure.”

Contrary to the US banking crisis, major European banks including BNP Paribas, Barclays, and Deutsche Bank all beat forecasts in the first quarter.?

On 15 May the European Commission said it expected euro-zone inflation, currently at 7%, to remain stubbornly high this year, with economic growth forecast at 1.1% this year and 1.6% in 2024.

China

“The CNY weakened modestly again, amid economic concerns, forecast to hit 7.3 per USD”

“China’s key economic indicators fall short of analyst expectations”

“China’s reopening recovery appears to be petering out”

“China youth unemployment at record 20.4%; factories struggle to find workers as graduates reject blue-collar jobs”

“G7 Summit agreed to new initiative to counter economic coercion, targeting Chinese weaponization of economic dependence”

The CNY weakened modestly again?this week, from 6.95 per USD on 12 May 2023 to 7.001 per USD on 19 May 2023, after having peaked at 7.056 per USD early in the day on 19 May. Reuters reported on 18 May that analysts expect more CNY weakness, with US Fed policy being a bigger driver of CNY performance than China’s economic weakness. Investors are steadily pulling foreign funds from China’s market. Analysts at Nomura and Societe Generale forecast the CNY possibly devaluing to 7.3 per USD, a rate last seen in November 2022. Some Chinese exporters are reportedly holding USD in anticipation of further CNY devaluation.

MarketWatch reported on 17 May that China’s industrial output and retail sales missed forecasts, amid slowing growth in home prices. “China’s reopening recovery appears to be petering out.”?

The Wall Street Journal reported on 16 May that the unemployment rate for Chinese aged 16 to 24 hit a record 20.4% in April, rising from 16.7% at the end of 2022.??The high rate of youth unemployment raises serious concerns both for economic health and for the risk of domestic social instability. Chinese factories are struggling to find young workers, but recent graduates are unwilling to accept blue-collar jobs. Further, a number of key economic indicators fell short of economist’s expectations, including retail sales, factory production, fixed-asset investment, and property sector investment.

With fears of a US recession, and weak European growth, the risk of weak Chinese economic performance is raising concerns for the health of the global economy.

As predicted last week, Reuters reported on 20 May that the G7 Summit agreed to a new initiative called “Coordination Platform on Economic Coercion” to counter economic coercion and other behavior. The G7 statement didn’t mention China, but China’s attempts to use its economic power to settle political disputes with Australia and Lithuania clearly motivated this initiative. The group “pledged action to ensure that any actors attempting to weaponize economic dependence would fail and face consequences.”?

Thailand

“THB retreated moderately; volatility remains higher than regional peers”

“Military aligned parties rejected in 14 May national elections”

“Parties maneuver to form a governing coalition”

“Thai headline inflation 2.67% in April, core CPI 1.66%”

The THB weakened moderately?this?week, from 33.67 per USD on 12 May 2023 to 34.27 per USD on 19 May 2023. The THB is down 4.8% from its recent peak of 32.7 on 2 February 2023. Reuters reported on 15 May that Thailand’s economy expanded unexpectedly fast in 1Q23 by 2.7% YoY, up from 1.4% YoY in 4Q23, driven by a recovery in tourism.?

Thailand National Elections on 14 May resulted in a strong performance by parties in opposition to the military. However, the composition of the governing coalition remains to be finalized, as parties maneuver and negotiate for a role in the coalition. The Move Forward party won the most seats in Parliament, strongly supported by the youth vote, closely followed by the Pheu Thai party under leadership of the Shinawatra clan, and the Phum Jai Thai party. The Thailand National Assembly consists of an elected 500 seat Parliament and a 250-seat appointed Senate; the governing coalition needs to achieve 376 votes out of 750 total to appoint a Prime Minister and form a government. It could take weeks to months to negotiate a governing coalition and form a government, with challenges including an outstanding complaint to the Election Commission against the Move Forward leader and PM candidate Pita Limjaroenrat which could result in his disqualification.?

On 3 May the Thai Commerce Ministry announced Thailand’s headline CPI rose 2.67% YoY in April, the slowest rate in 15 months. The Commerce Ministry further predicted that headline inflation should fall sharply in May due to a high base in 2022 and lower fuel prices. It forecast average headline inflation for 2023 to be in the range of 1.7% and 2.7%. The Bank of Thailand raised interest rates to 1.75% in March 2023 and is expected to raise rates again on 31 May 2023.?

Energy

“Crude meanders higher on global demand optimism despite strong supplies”

“Putin’s attempt to blackmail Europe using energy has failed …”

“We are not yet out of the energy crisis and the year ahead will still be challenging”

Brent Crude meandered to finish higher?this week, from $74.07 USD on 12 May 2023, peaking at $76.96 USD on 17 May, then closing at $75.59 USD on 19 May 2023. Crude prices were supported this week by trader optimism on global oil demand and the anticipated successful resolution of US debt ceiling negotiations, despite worries about strong crude oil supplies. Crude inventories increased by 5 million barrels in the week ending 12 May, compared with an expected drop of 0.9 million barrels. On 16 May the International Energy Agency predicted oil demand would exceed supply by 2 million barrels per day in 2H23. China is forecast to comprise 60% of global oil demand in 2023. Reuters reported on 17 May that crude markets are in a “wait-and-watch mode” over debt ceiling negotiations, while concerns about Chinese macro-economic conditions weighs on oil market sentiments.

On 18 May the European Commissioner for Energy indicated that “one year on, we can say that Putin’s attempt to blackmail Europe using energy has failed and more importantly for the long term we have massively invested in renewables.” She also stated that “We are not yet out of the energy crisis and the year ahead will still be challenging.”

Logistics

“BDI closed lower this week, bouncing between 1,400 and 1,600”

“Panama severe drought forcing container vessels to reduce loads and pay higher fees … delays and higher costs for shippers”

Baltic Dry?Index?fell moderately?this week, from 1,558 on 12 May 2023 to 1,384 on 19 May 2023. The BDI’s has been bouncing between approximately 1,400 and 1,600 since early March 2023. Trading Economics expects the BDI to trade at 1,473 at the end of 2Q23, and fall to 1,246 in 12 months.

Bloomberg reported on 21 May that a severe drought impacting the Panama Canal is forcing container vessels to reduce loads and pay higher fees. Incremental vessel draft reductions will be imposed on 24 May and 29 May, reducing the loads vessels can carry, and higher fees will be imposed starting 1 June 2023. These measures are expected to result in shipping delays and higher costs for goods transiting the canal. Meteorologists are forecasting continued below-normal rainfall across Panama for the foreseeable future, possibly resulting in further restrictions and higher costs.

US Producer Price Index

“April PPI up 2.38% YoY, lowest increase since Jan 2021”

“The May PPI is scheduled to be released on 14 June 2023”

US Producer Price Index:?The April 2023 PPI was released on 11 May?2023 at 131.13, the March 2023 PPI was revised from 140.86 to 140.80, and the February 2023 PPI was revised from 141.57 to 140.32. This reflects a 0.23% increase over the revised March PPI, and a YoY increase of 2.38%. This is the lowest annual rise since January 2021, and follows a 2.4% increase in March. MarketWatch reported that most of PPI gain was due to an increase in services.?

Stay informed with the latest economic updates and market insights in this week's Tractus Economic Highlights. Discover key trends, currency movements, and global developments that impact businesses worldwide.

#tractus #leadership #manufacturing