Manufacturing Weekly Economic Highlights | 21 October 2024

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

“DXY ended moderately stronger again this week”

“USD hits 11-week high supported by strong retail sales”

“US 2024 budget deficit 6.4% of GDP, interest payments on debt 3.9% of GDP”

“Massive deficit despite government revenue increasing 11% YoY primarily due to increase tax receipts”

“Is economic data presaging a resurgence of inflation?”

The USD Index (DXY) finished moderately higher again this past week, from 102.92 on 11 October 2024 to close at 103.46 on 18 October 2024. The DXY is up 0.56% for the week, up 2.72% for the month, up 2.10% YTD, and down 2.54% over the past 12 months.

The USD powered to an eleven-week high supported by strong US retail sales in September, supporting expectations that the US Fed will pursue only modest policy rate cuts going forward, as reported on 17 October by Reuters.

US retail sales rose 0.4% MoM in September following a gain of 0.1% MoM in August.

The FedWatch tool has priced a 92% chance of a 25 bp policy rate cut in November, with an 8% chance of no change in policy rate. The market tool has also priced in 102 bp of policy cuts in 2025.

The US Government posted a 2024 fiscal year budget deficit of $1.83 trillion, up from $1.7 trillion in 2023, which is the largest deficit on record excluding the 2020 and 2021 fiscal years during the Covid pandemic, as reported on 18 October by Bloomberg.

The US budget deficit for 2024 was 6.4% of GDP, following a deficit of 6.2% of GDP in 2023. Bloomberg noted that these large deficits represent “an unusually high burden outside of economic recessions or world wars.”

US interest paid out to service its “gargantuan debt” surged by $254 billion to $1.1 trillion, an increase of 29% YoY and representing 3.93% of GDP, the highest interest burden since 1998.

For comparison, the EU Treaty requires member states to limit government deficits to 3% of GDP and gross debt to 60% of GDP to ensure fiscal stability.

US government revenues in 2024 increased 11% YoY primarily due to increased tax receipts but were more than offset by increased government spending.

The US average interest rate on its outstanding debt in September was 3.32% which is near a 15-year high but slightly down from October for the first decline in average paid interest rate in nearly three years.

Meanwhile, MarketWatch reported on 14 October that “the 5-year inflation swap, a contract used to hedge or mitigate the risk of inflation, has jumped in the past five weeks by more than any other time since March 2023, right before the collapse of Silicon Valley Bank, according to Deutsche Bank strategist Jim Reid.”

This is one of several pieces of evidence pointing to market concerns about future inflationary pressures following the US Fed’s decision to cut policy rates by 50 bp.

Other factors pointing towards increased inflationary pressure include the risk of the Israel – Iran conflict expanding, China’s economic stimulus measures, and inflationary policy aspects of both presidential candidates Harris and Trump.

Europe

“EUR ended moderately lower again this week relative to the USD”

“EUR falls to 11-week low against the USD amid ECB’s third policy rate cut of 25 bp”

“Eurozone inflation drops below 2% target in September, but services inflation remains stubbornly at 4%”

“France’s budget deficit 6.1% of GDP, debt 111% of GDP amid push for austerity budget”

“French economy to return to its baseline condition: Gloom”

The EUR finished moderately lower again this week, from $1.095 per EUR on 11 October 2024 to close at $1.088 per EUR on 18 October 2024. The EUR is down 0.56% for the week, down 2.57% for the month, down 1.45% YTD, and up 2.66% over the past 12 months.

The EUR has fallen to an 11-week low against the USD this week, and is down 2.8% against the USD in October, on track for its largest monthly drop since May 2023, as reported on 17 October by Reuters.

The European Central Bank (ECB) this week cut its policy rate by 25 bp for the third time in 2024, following cuts in June and September.

The ECB indicated that Eurozone inflation is increasingly under control, though the economic outlook for the Eurozone is worsening.

The ECB did not share any clues as to its future intentions, but analysts do expect a fourth policy rate cut of 25 bp.

Traders are pricing in three cuts at the four ECB meetings following the October meeting, as reported on 14 October by Reuters.

The ECB appears to have shifted focus from inflation to economic stimulus, now that Eurozone inflation dropped below the 2% target in September.

Services inflation remains “stubborn” at 4%, though it dropped slightly to its weakest since November 2023.

Meanwhile, MoneyWeek compared France’s economy to the rest of Europe in an article published on 18 October.

The article opens with a quote from Raphael Gallardo of Carmignac Gestion, “The French economy has been getting away with fiscal murder for a very long time.”

France has an annual budget deficit of 6.1% of GDP and a debt to GDP ratio of 111%, far exceeding the EU treaty for fiscal prudence.

France had been able to sell bonds to finance its debt because global investors are eager to purchase European debt, but perceived southern European countries debt as too risky, and fiscally conservative northern states such as Germany and the Netherlands don’t issue many bonds.

However, France’s “weak growth” and “volatile politics,” combined with tourism-led growth in Greece, Portugal, and Spain are causing French bonds to fall out of favor with investors.

To address its massive budget deficit, the Government is pursuing an austerity budget including spending cuts and tax increases. France’s fiscal watchdog calculates that 70% of deficit reduction will come via new taxes equivalent to 1.2% of GDP.

France’s economy is in a “precarious recovery” with 2025 GDP growth forecast at 1.1%.? Growth since 2008 has averaged 0.9% YoY. Implementing fiscally prudent deficit reduction will put France’s economic growth at risk.

The article closes by noting that “after the economic ‘roller-coaster’ of the pandemic and Ukraine, the French economy has returned to its baseline condition: ‘gloom’".

China

“The CNY finished moderately lower again this week”

“China’s 3Q24 GDP falls to 4.6%; Gov’t insists it will reach its 2024 target GDP of 5.0%”

“IMF and many economists predict China’s 2025 GDP to fall to 4.5%”

“Chinese car and ship exports set records in September”

“Has China fallen into an economic trap of its own making?”

The CNY ended moderately lower again this week, from 7.066 per USD on 11 October 2024 to close at 7.102 per USD on 18 October 2024. The CNY is down 0.50% for the week, down 0.71% for the month, up 0.16% YTD, and up 2.94% over the past 12 months.

China’s economy in 3Q24 grew at 4.6% YoY, down from 4.7% YoY in 2Q24 and the slowest pace since early 2023, as reported on 18 October by The Times.

Jones Lang LaSalle Chief Economist for Greater China Bruce Pang said, “the performance aligns with market expectations, given the weak domestic demand, a still-struggling housing market and slowing export growth.”

The China Statistics Bureau said, “based on our comprehensive assessment, the economy in the fourth quarter is expected to continue the stabilization and recovery trend that occurred in September. We are fully confident in achieving the full-year target.”

The IMF has forecast China’s economy to grow 5.0% in 2024 and 4.5% in 2025, with Goldman Sachs lowering its forecast for 2024 growth to 4.9% from 5.0% previously.

Meanwhile, a poll conducted by Reuters forecasts China to grow 4.8% in 2024 and 4.5% in 2025, as reported by Reuters on 15 October.

The poll also predicts Chinese inflation at 0.5% in 2024 and 1.4% in 2025.

Out of 75 polled economists, 57% have downgraded their 2024 forecasts and 32% kept their forecasts unchanged.

The Chinese government has already announced a number of major economic stimulus measures, with additional measures expected. Economists do expect stimulus measures to improve economic activity in 4Q24 but not enough to prevent growth from falling in 2025.

As with our newsletter last week, this week also brings a glimmer of good news for China.

Bloomberg reported on 14 October that China’s exports of cars and ships set records in September despite broader shipment data slowing.

Chinese automakers shipped more than $11.5 billion USD of vehicles in September and nearly $88 billion YTD. Chinese shipbuilders exported a record 464 ships worth more than $4.6 billion USD in September, more than double the amount sold in September 2023.

Chinese export volumes have grown nearly every month in 2024, though prices have been falling since May 2023, as manufacturers cut prices to boost exports amid weak domestic demand.

On 14 October The Wall Street Journal published an interesting op-ed titled “China Falls Into Its Own Trap” with the subtitle, “Its economic model is unsustainable, but reform is too risky for the Communist Party.”

The article highlights China’s property crisis, demographic crisis arising from its one-child policy, local government’s “Ponzi scheme,” and its continued reliance on its export-oriented manufacturing strategy.

It notes that, “Xi Jinping and his aides are not stupid. They know that overdependence on housing, exports and big infrastructure is an economic dead end. They know that world markets won’t absorb continuing Chinese export growth. They know that saber-rattling over Taiwan and the Philippines alienates their closest neighbors and alarms the U.S. But shifting China’s economic model onto a more sustainable path is, they fear, too economically expensive and politically risky.”

The article ends with the ominous prediction that “twenty twenty-five is going to be an interesting year.”

Thailand

“The THB finished modestly lower this week

“The BoT cut its policy rate by 25 bp to 2.25%”

“Thailand’s household debt exceeds 90% of GDP not including informal debts”

“BoT hopes policy rate cut stimulates the economy without promoting more household debt”

The THB ended modestly lower this week, from 33.11 per USD on 11 October 2024 to close at 33.13 per USD on 18 October 2024. The THB is down 0.12% for the week, down 0.67% over the past month, up 3.64% YTD, and up 9.21% over the past 12 months.

The Bank of Thailand (BoT) voted to reduce its policy rate by 25 bp from 2.5% to 2.25% effective immediately, as reported on 16 October by the Thai News Agency.

The decision to lower the policy rate is intended to ease consumer debt burdens without hindering government efforts to reduce Thailand’s household debt ratio.

The Monetary Policy Committee voted 5-2 in favor of the rate cut. The new rate is considered neutral, and “remains consistent with the country’s economic potential.”

Meanwhile, Bloomberg reported on 17 October that Thailand’s household debt exceeds $500 billion USD with a household debt ratio of 90% of GDP. This is double the average of emerging market economies and exceeds the 80% of GDP level the Bank for International Settlements considers “worrying.”

The BoT has been reluctant to cut its policy rate out of fear of fueling more consumer loan growth.

World Bank’s senior country economist Kiatipong Ariyapruchya said, “An elevated level of household debt in Thailand is concerning as it could suppress private sector spending and weigh on economic growth. Many firms and households in the sectors hit hard by the pandemic remain vulnerable. This has implications on macroeconomic and financial stability.”

The populist policies of past governments beginning with the Thaksin Shinawatra administration in 2001 and including subsequent Thaksin-aligned governments and the military-backed governments following the 2006 and 2014 coups, have promoted consumer debt. Populist policies fueling debts included a debt moratorium for farmers, cheap agricultural loans, and a one-year program in 2011 offering a tax rebate for first-time car buyers.

Nanyang Technical University of Singapore Economics Professor Nattavudh Powdthavee said, “the government always gives bailouts like debt moratoriums and cash handouts to people, so they’re not trained to help themselves. It can lead to moral hazard and more debt creation. The easy access to illegal lending is also a factor. When people fail to service debt and resort to easy solutions, what they get is more debt.”

BoT Governor Sethaput Suthiwartnarueput said, “It’s a very severe issue. If I had to use an analogy, I would say it’s like a chronic disease, rather than an acute one, meaning it’s like diabetes rather than a heart attack. So, it’s something that’s likely to persist for a long time and a big drag on us.”

Thailand’s debt per household is expected to grow 8.4% in 2024 to a record THB 606,000 ($18,250 USD) per a survey by the University of the Thai Chamber of Commerce. It further estimates that informal debt such as from loan sharks could represent another 10% to 20% of GDP, meaning Thailand’s real household debt could exceed 100% of GDP.

Commodities

“GSCI Commodity Index retreated moderately lower this week”

“The GSCI Industrial Metals Index meandered moderately lower again this week”

“Chinese steel production down 3.6% YoY amid weak demand”

Chinese 2024 aluminum production up 3.9% YoY; forecast 2025 growth 2.0% YoY amid capacity constraints”

“Biden admin seeks US company to buy Congo cobalt miner to counter Chinese chokehold”

The GSCI Commodity Index finished moderately lower this week, from 559.64 on 11 October 2024 to close at 531.99 on 18 October 2021. This index is a weighted index based on world-production of each commodity in the index, with energy and industrial metals comprising the bulk of the index weighting. The GSCI is up 0.80% YTD. Trading Economics has maintained its GSCI forecast this week at 520 by the end of 4Q24 and 499 in 12 months.

The GSCI Industrial Metals index finished moderately lower this week, from 474.63 on 11 October 2024 to close at 466.75 on 18 October 2024. The Industrial LME Metals Index is up 16.98% over the past 12 months.

China’s steel production continued to fall in September, while other key commodities production increased, as reported by Bloomberg on 17 October.

Chinese steel mills produced 77.07 million tons in September, the lowest monthly total this year with YTD production down 3.6% YoY.

China’s ongoing property crisis has forced steel mills to slash production.

Meanwhile, Bloomberg reported on 15 October that China’s aluminum production continues to operate at “record-breaking” pace, with national output in 4Q24 expected to increase 3% YoY to 11 million tons.

Contributing to the record production is abundant electricity supplies which may allow smelters in Yunnan province to escape production cuts due to power curtailments for the first time in four years.

Yunnan province accounts for 12% of China’s aluminum production, where smelters rely on electricity produced by hydropower. Droughts in recent years have forced power curtailments, but this year’s heavy rains have filled the reservoirs with hydropower generation up 22% YoY in the first eight months of 2024.

China’s smelters account for approximately half of global supply and produced a record 3.69 million tons in August.

Demand for aluminum remains strong despite China’s slowing economy due to strong demand from clean energy and power transmission applications. Strong demand despite ample production have seen aluminum inventories fall 20% from their peak in March 2024. Prices hit a two-year high in May.

China’s aluminum output is forecast to grow 2% YoY in 2025, constrained by its capacity limit of 45 million tons per year. 2024 aluminum output is expected to reach 43.1 million tons, up 3.9% YoY.

The Wall Street Journal reported on 15 August that the US government has held talks with three US firms encouraging them to purchase one of the world’s non-Chinese cobalt producers in hopes of challenging China’s “chokehold” on cobalt.

Chemaf is a mining company based in the Democratic Republic of Congo. It says its mines could produce 20,000 tons of cobalt annually, which would make it one of the world’s largest producers of Cobalt. Its founder Shiraz Virji put it up for sale last year, but its past business practices and debts have “complicated a potential sale.”

The Biden administration has pledged billions of USD to develop African infrastructure, including a railroad from Congo through Angola to the port of Lobito on the Atlantic Ocean.

American investors remain reluctant to invest in Congo due to its poor infrastructure, limited skilled labor resources, and its reputation for government corruption.

Energy

“Crude retreated moderately lower this week”

“Henry Hub ended moderately lower again this week”

“EU Natural Gas ended moderately lower again this week”

“Oil falls on reduced geopolitical risk premium amid a growing oil glut”

“US natural gas prices collapse amid ‘Zombie Summer . . . It. Just. Won’t. Die.’”

Brent Crude finished moderately lower this week, from $78.79 USD on 11 October 2024 to close at $73.17 on 18 October 2024.

Henry Hub finished moderately lower again this week, from $2.63 USD per MMBTU on 11 October 2024 to close at $2.25 USD per MMBTU on 18 October 2024.

EU Natural Gas finished moderately lower again this week, from €39.71 per MWh on 11 October 2024 to close at €39.34 per MWh on 18 October 2024, equivalent to $10.61 USD per MMBTU. EU Natural Gas is up 21.62% YTD. Trading Economics maintained its EU Natural Gas TTF forecast this week at €39.87 per MWH by the end of 4Q24 and 45.87 in 12 months.

Oil prices plunged early this week following a report that Israel may avoid targeting Iran’s crude infrastructure when it retaliates for Iran’s ballistic missile attack, as reported on 14 October by Bloomberg.

The International Energy Agency (IEA) predicted that oil markets will “face a glut in early 2025.” The IEA made small reductions to its oil demand growth forecast while noting that spare capacity in OPEC+ nations is at near record levels.

Meanwhile, oil finished the week down amid ongoing concerns that Chinese oil demand continues to wane, as reported on 18 October by MarketWatch.

Markets also see signs of easing geopolitical risks in the Middle East.

Hummingbird Capital Managing Partner Matt Polyak said, “The key driver for this week’s decline in oil has been the geopolitical risk premium unwinding … as the oil market waits to see if there is incremental escalation between Israel and Iran and tries to discount if oil production will be impacted.”

Going forward, Mr. Polyak noted that the main focus for oil “will be Iranian-Israel dynamics, the U.S. election and [its] implications on Ukraine-Russia and [the] Middle Eastern risk premium, supply growth and demand outlook, especially as it pertains to China.”

”We will see what recent Chinese stimulus actions will do to drive demand improvement in the near term. I believe we won’t see a recovery in demand in China” until the first quarter, he added.

“That being said, with new stimulus measures, perhaps the worst of negative demand data points?are behind us and we can see acceleration in the near term.”

Bloomberg reported on 18 October that the US is “headed for weeks of abnormally warm weather through the rest of October, and its already shaken prices and demand for natural gas.”

Environmental monitoring network Oklahoma Mesonet characterized the weather as “Zombie Summer” and said, “It. Just. Won’t. Die.”

Logistics

“The BDI plummeted significantly lower this week”

“The CFI ended lower this week”

“Boeing reaches tentative settlement with union”

“US attacks Houthi weapons bunkers using B-2 stealth bombers in veiled message to Iran”

Baltic Dry?Index finished significantly lower this week, from 1,809 on 11 October 2024 to close at 1,576 on 18 October 2024. The BDI is down 24.74% YTD. Trading Economics has maintained its BDI forecast this week at 2,183 by the end of 4Q24 and 2,507 in 12 months.

The Containerized Freight?Index finished sideways this week, from 2,062.6 on 11 October 2024 to close at 2,062.2 on 18 October 2024. The CFI has fallen steadily since peaking on 11 July 2024. This index tracks the current freight prices for containerized transport from the most important Chinese ports. The CFI is up 17.20% YTD. Trading Economics has maintained its CFI forecast this week at 2,232 by the end of 4Q24 and 2,550 in 12 months.

Boeing and the International Association of Machinists and Aerospace Workers union reached a tentative agreement that could end the strike that began on 13 September and idled most of its airplane production, as reported on 19 October by The Wall Street Journal.

The proposed settlement includes a wage increase of 35% over four years, a reinstated incentive plan, and increased 401(k) retirement savings fund matching.

The agreement does not restore pensions, but it does include annual bonuses which were eliminated in Boeing’s initial offer and includes a $7,000 USD ratification bonus.

A ratification vote is scheduled for 23 October.

Meanwhile, the US attacked Houthi weapons-storage sites in Yemen using B-2 stealth bombers, as reported on 16 October by Bloomberg.

The use of B-2 bombers was “intended to send a message,” according to US Defense Secretary Lloyd Austin.

The message may have been intended for Iran. The B-2 is the only US plane capable of dropping the Massive Ordnance penetrator, which is specifically designed to destroy “adversaries’ weapons of mass destruction located in well protected facilities.” Iran has relocated much of its nuclear program underground.

Despite numerous US and UK strikes on the Houthis, they continue to attack commercial vessels in the Red Sea.

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