Manufacturing Weekly Economic Highlights | 29 January 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

“USD closed moderately higher again this week.”

Headline PCE rises to 2.6%, core PCE falls to 2.9%

“Goods prices down, services prices up”?

“Personal income up 0.3% in December, but real disposable income only up 0.1% after inflation”

The USD Index (DXY) finished moderately higher again this past week, from 103.24 on 19 January 2024 to close at 103.47 on 26 January 2024.

US headline Personal Consumption Expenditures (PCE) rose 0.2% to 2.6% YoY in December, as reported on 26 January by Barron’s. This was generally in line with market expectations. This compares with the previously released Consumer Price Index which rose to 3.4% YoY in December compared with 3.1% in November. The PCE is the preferred measure used by the US Fed to monitor inflation.

Core PCE which excludes volatile food and energy costs, decreased to 2.9% YoY from 3.2% in November. On a monthly basis, Core PCE increased to 0.2% MoM from 0.1% MoM in November.

The PCE index details reflect falling goods prices of 0.2% MoM in December, following a decline of 0.7% MoM in November. Goods prices are up less than 0.1% YoY.

Services prices rose 0.3% MoM and 3.9% YoY as of December.

US consumer spending increased 0.7% MoM, up from an increase of 0.4% in November. However, the personal savings rate fell to 3.7% from 4.1% in November, indicating that consumers are using savings to fund their spending. The US pre-pandemic personal savings rate was around 7%.

US personal incomes rose 0.3% MoM in December, nearly matching the 0.4% MoM increase in November. Disposable personal income increased 0.3% MoM in December. However, real disposable income, which factors in inflation, rose only 0.1% MoM.

Europe

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

“Eurozone PMI remains in contraction at 47.9"

“Output price index rises to 54.2, signaling increased inflationary pressure”?

“When will the ECB cut policy rates?”

The EUR finished modestly lower again this week, from $1.090 USD per EUR on 19 January 2024 to end at $1.086 USD per EUR on 26 January 2024.

The Eurozone composite Purchasing Managers Index (PMI) rose slightly in January to 47.9 from 47.6 in December, but remained in contraction, as reported on 24 January by the Daily Mail. The services PMI was down to 48.4 from 48.8 in December. Both the input and output indices increased with the output price index rising to 54.2 from 53.8 in December, signaling increased inflationary pressure. The Eurozone manufacturing PMI has been in contraction since July 2022.

The European Commission published documents outlining proposals to monitor and restrict exports of sensitive technology and investments, as reported on 23 January by The Economist. The proposals are primarily targeted towards China. However, the proposals reportedly fall far short of a joint statement between US President Biden and EU Commission President Ursula von der Leyen in March 2023 that proposed close US / EU cooperation. The article compares Japan and the EU in their approach to protecting strategically important firms. Japan is actively buying into such strategic firms and delisting them from stock markets. Japan has also identified strategic goods vital to Japanese survival, such as medical supplies, and incentivizes firms to diversity their imports. The article also notes that Japan has free-trade agreements covering 80% of its trade, whereas Europe is struggling to secure trade agreements.

Bloomberg published an opinion by Marcus Ashworth on 22 January arguing for European Central Bank (ECB) rate cuts. The ECB Governing Council has signaled no rate cuts in 1Q24; however, a market consensus may be growing for a first rate cut in June 2024, with two 25 basis-point cuts by mid-year. German manufacturing is “deep into recession territory for over a year, with France on a similar trajectory.” Eurozone inflation has recently fallen below 3%, followed closely by core inflation, and wage growth has fallen from a peak of 5.2% YoY in 2022 to 3.8% YoY now. The ECB was late in raising policy rates in the face of rising inflation. Will it now be late in cutting rates as inflation falls and the economy cools?

Reuters reported on 22 January that the German chemicals industry is suffering from delayed shipments due to the Red Sea conflict, forcing some companies to cut production. The German chemicals sector, which has annual sales of around $282 billion USD, is the third-biggest industrial segment following automotive and engineering. Around one third of its non-European imports come from Asia. Some companies have shifted to air freight for vital supplies, but many chemicals are not allowed to be transported by air. The Red Sea logistics challenges come on top of high labor and energy costs which are challenging German chemicals manufacturers.

China

“The CNY ended modestly higher this week, up 3% since September”

“China ramping up stimulus to support stock market and economy”

“Chinese industrial profits down 2.3% in 2023”

“Chinese unemployment 5.1%, youth unemployment 14.9%”?

“Chinese average salaries down 1.3%”

The CNY ended modestly higher this week, 7.120 per USD on 19 January 2024 to end at 7.109 on 26 January 2024.

Chinese authorities continue to signal increased stimulus to support its flagging economy, as reported on 26 January by Bloomberg. The Chinese stock market has lost $6 trillion USD since its peak, and Chinese officials are reported considering a $278 billion USD “stock rescue package” to buy shares onshore through the Hong Kong exchange link. The People’s Bank of China (PBOC) also cut its reserve requirement ratio by 0.5%. “Announcing an RRR cut in advance suggests there’s no other effective tools available to stem the market rout,” said Shen Meng, managing director at Beijing-based Chanson & Co.?

Also reported by Bloomberg on 25 January, the PBOC “will set up a new credit market department to promote financing to technology, green, and other sectors.” The PBOC is also cutting the interest rate on $279 billion USD of low-cost bank funds to encourage lending to small firms and agriculture.

Meanwhile, China’s industrial firm’s profits fell 2.3% in 2023 for the second consecutive annual decline. Lower profits were primarily driven by “sharply lower factory-gate prices, driven by over-capacity in some industries.”

However, there are some signs of improvement, with December 2023 profits up 16.8% YoY, with analysts forecasting a 5% to 6% increase in profits in 2024.

The Wall Street Journal published an article on 27 January outlining the challenges in the Chinese labor market. The official Chinese unemployment rate was 5.1% in December, down from the full-year average of 5.6% in 2022. However, the Chinese unemployment report only covers urban dwellers, and anyone who works one hour or more per week is classified as fully employed. Chinese youth unemployment peaked at 21.3% last year before China ceased publishing data. China just resumed publishing youth unemployment based on a new methodology, with December youth unemployment reported at 14.9%.

A Chinese recruiting firm reported that average salaries offered by companies in 38 major cities fell 1.3% YoY in 4Q23, the largest decline since the company began publishing records in 2016.

Thailand

“THB ended the week modestly lower”

“December exports up 4.7% YoY, imports down 3.8% YoY”?

“Only two countries in the world have lower policy rates than Thailand”

THB ended the week modestly lower, from 35.49 per USD on 19 January 2024 to end at 35.61 on 26 January 2024.

Thailand’s exports rose for a fifth consecutive month, up 4.7% YoY in December, down from 4.9% YoY in November. However, December exports were down 2.9% MoM amid geopolitical headwinds and China’s ongoing economic slowdown. Thailand’s exports of automobiles, car parts, and electronics increased, offset by reduced chemical exports. Rice exports increased in volume by 4.1% YoY with rice export value increasing 27%, driven by global food security concerns.

Thai exports to the US increased 0.3% YoY, exports to China rose 2.0% YoY, while exports to Japan fell 3.7% YoY

Meanwhile, 2023 full-year imports declined 3.8% YoY, leaving Thailand with a trade deficit of $5.1 billion USD.

Reuters reported on 24 January that the Bank of Thailand (BOT) Governor Dr. Sethaput said “slower-than-expected economic growth was not a crisis as portrayed by the government, nor would it be revived by its quick-hit stimulus measures.” He added that the BOT’s current policy rate is “broadly neutral” and that Thailand was not facing a deflationary situation. Dr. Sethaput noted that 'there are only two countries in the world … that have lower policy rates than us. And that’s the Japanese and the Swiss.'

Former Thai PM candidate Pita Limjaroenrat, leader of the Move Forward Party which won the most votes in the May 2023 general election, won the legal case brought by the Election Commission over his shareholding in defunct media company ITV. Pita resumed his parliamentary duties on 25 January. However, the Move Forward Party still faces a legal challenge over its campaign pledges to amend the lese majeste law that protects the monarchy from defamation. The Constitutional Court is scheduled to rule on this case on 31 January, and a guilty verdict could result in the EC dissolving the party and banning its leaders from politics for five years.

Energy

“Crude closed modestly higher this week”

“Henry Hub closed moderately higher while EU Natural Gas closed moderately lower this week”

“No new output cuts expected from OPEC+”?

“US halts LNG exports to non-free-trade partners to address climate change”

Brent Crude finished moderately higher this week, from $78.63 on 19 January 2024 to close at $83.69 on 26 January 2024.

Henry Hub finished moderately higher this week, from $2.52 USD per MMBTU on 19 January 2024 to close at $2.72 on 26 January 2024.

EU Natural Gas finished moderately lower this week, from €28.43 per MWh on 19 January 2024 to close at €28.08 on 26 January 2024, equivalent to $7.58 USD per MMBTU.

Crude prices this week were supported by stronger-than-expected US economic growth in 4Q23, and by expectations that China’s reduced reserve requirement ratio (RRR) will drive increased demand. US crude inventories fell by 9.2 million barrels last week as production fell by 1 million barrels per day on harsh winter weather, as reported on 26 January by CNBC.

Meanwhile Bloomberg reported on 26 January that OPEC+ isn’t planning any oil output changes when it meets on 1 February. Saudi Arabia and its partners have just started their most recent 900,000 bpd production cuts and will be waiting to assess their impact on the market. The production cuts are currently only applicable to 1Q24 but could be extended.

Newsweek reported on 26 January that the Biden administration has announced a temporary halt on natural gas exports to address climate change which it described as “the existential threat of our time.”

LNG exports to countries not covered by a free-trade-agreement with the US will be halted pending new Department of Energy criteria that will consider both the costs to the American economy and the environmental impact of LNG exports.

The White House said that approximately half of 2023 US LNG exports went to Europe. LNG exports to Europe will not be affected by the halt, as the US 'remains unwavering in our commitment to supporting our allies around the world.'

Reduced US LNG exports would increase US domestic natural gas supply, reducing prices. It remains to be seen if reduced natural gas prices will slow the transition from fossil fuels to renewable energy sources.

Reuters reported on 26 January that more than a dozen tankers carrying 10 million barrels of Russian crude oil have been floating off South Korea for weeks due to US sanctions and payment issues. The oil was en route to the Indian Oil Corporation, and the parties are in dispute over which currency to use to pay for the crude.

Logistics

“BDI closed modestly higher this week”

“Red Sea disruptions to persist for several more months”?

“Oil tanker burns following Houthi strike”

Baltic Dry Index finished modestly higher this week, from 1,503 on 19 January 2024 to close at 1,518 on 26 January 2024. Trading Economics has maintained its BDI forecast this week to 2,207 by the end of 1Q24 and 2,586 in 12 months. The BDI is down 27.51% since the beginning of 2024.

Bloomberg reported on 23 January that the Red Sea conflict has “caused the biggest diversion of international trade in decades.” Sailors are reportedly demanding double pay, and insurance rates are surging. More than 500 container ships have diverted to avoid the Red Sea. Maersk, the second largest container carrier, has warned that disruptions will persist for at least several more months. JPMorgan economists have predicted a 0.7 percentage-point increase in global goods inflation during 1H24 if the shipping disruption persists. Central Banks may delay pending policy rate cuts due to inflationary pressures arising from increased logistics costs.

The Houthis have vowed to continue their attacks as long as the Israeli Gaza conflict continues.

On 26 January, a British oil tanker was struck by a missile in the Gulf of Aden after passing through the Red Sea, as reported on 27 January by CNN. One cargo tank on the starboard side is on fire, and the crew is working to fight the fire and save the vessel. Military ships are reportedly en route to provide assistance.

The US Navy continues to engage anti-ship ballistic missiles fired by Houthi rebels at Navy vessels and other ships.

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