Manufacturing Weekly Economic Highlights | 8 January 2024
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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 this week”
“Fed policy rates unlikely to be cut before mid-year”
“US unemployment holds steady at 3.7%; labor demand gap narrowing”?
“December average hourly wages up 4.1%”
The USD Index (DXY) finished moderately higher this past week, from 101.38 on 29 December 2023 to close at 102.44 on 5 January 2024.
The USD finished the first week of 2024 with its best first week rise since 2011, as reported by Bloomberg on 5 January 2024. Markets are pricing in the expectation that the US Fed won’t cut rates in 1H24. As noted by Reuters on 5 January, the Fed’s December policy meeting revealed that most policymakers agree that policy rates need to remain high for some time. The CME FedWatch tool as of 3 January 2024 priced in a 66% chance of a Fed rate cut in March 2024, down from 87% last week. Analysts are anticipating the USD to remain stable to slightly stronger during 1Q23 but will fall by year end 2024 on three Fed rate cuts.
The US unemployment rate in December held steady at 3.7% as reported by The Washington Post on 5 January, as December payrolls increased by 216,000 jobs. For the full year 2023, the US labor market added 2.7 million jobs, for an average monthly gain of 225,000 jobs. The unemployment rate has been under 4% for 25 consecutive months for the first time since the 1960’s. Government employment in December increased by 52,000 jobs, with healthcare adding 38,000 jobs. Social assistance jobs such as therapists and social workers expanded by 21,000 jobs, with leisure and hospitality rising by 40,000. However, transportation and warehousing jobs decreased by 23,000.
December average hourly wage growth was up 4.1% YoY to $34.27 per hour. ?
Labor demand still exceeds labor supply, but the gap is narrowing. Job openings in November were down, and the hiring rate has also fallen to below 2019 pre-pandemic levels. Investopedia reported on 3 January that November job openings fell to 8.8 million from 8.9 million in October, with 1.4 job openings for every unemployed person. This ratio peaked at 2 job openings for every unemployed person in March 2022. However, layoffs are also lower than pre-pandemic levels at 1%, with new unemployment claims down to a two-month low.
Investopedia also reported 3.5 million people voluntarily quit their jobs in November, down 157,000 from October, suggesting workers are less confident about finding new work.
Europe
“EUR sank modestly lower against the USD”
“Eurozone inflation rises to 2.9%, core inflation falls to 3.4%”
“ECB President Lagarde warns inflation could tick up in coming months”?
“ECB expected to hold rates at least through June”
The EUR finished modestly lower this week, from $1.104 USD per EUR on 29 December 2023 to end at $1.095 USD per EUR on 5 January 2024.
Eurozone inflation increased to 2.9% YoY in December, up from 2.4% in November and the first increase following seven consecutive monthly declines, as reported by the Daily Mail on 5 January 2024. ECB president Lagarde “warned that inflation could tick up in coming months, taking a detour from its recent downward path.” Analysts are increasingly convinced that the ECB will hold rates at least through June 2024 to continue to battle inflation.
Eurozone inflation in December was boosted as Germany and France ended energy subsidies enacted a year ago.
Eurozone core inflation in December fell to 3.4% YoY from 3.6% YoY in November.
French consumer prices increased in December by 4.1% YoY, up from 3.9% YoY in November. Food prices rose 7.1% YoY, down from 7.7% YoY in November. Energy prices were up 5.6% YoY in December from 3.1% YoY in November and services prices rose 3.1% YoY in December compared with 2.8% YoY in November. Reuters noted on 4 January that the increase in services prices “is more worrying, as services account for half of the consumer price index.” This may signal that French wage increases are being passed on to consumer pricing.
Reuters reported on 4 January that German inflation rose 3.8% YoY up from 2.3% YoY in November, significantly impacted by base effects and the expiration of energy price controls. German energy prices rose 4.1% YoY in December, compared with a fall of 4.5% YoY in November. However, German food prices continued to trend downward, falling 4.5% YoY in December following a fall of 5.5% in November. German core inflation was 3.5% in December, down from 3.8% in November.
China
“The CNY ended modestly lower this week”
“President Xi acknowledges economic headwinds”
“China’s PMI continues to signal contraction”?
“PBOC boosts funding to support housing and infrastructure investment”
The CNY ended modestly lower this week, from 7.081 per USD on 29 December 2023 to end at 7.112 per USD on 5 January 2024.
President Xi acknowledged “headwinds” facing China for the first time in his annual New Year message, as reported by CNN on 1 January. “Some enterprises had a tough time. Some people had difficulty finding jobs and meeting basic needs.” “All these remain at the forefront of my mind.” “We will consolidate and strengthen the momentum of economic recovery.”
CNN also noted that China’s manufacturing PMI dropped to 49.0 in December, down from 49.4 in November for the third consecutive month of contraction. The PMI has been under 50 since May 2023 except for a brief blip above 50 in September 2023.
The People’s Bank of China (PBOC) injected nearly $50 billion USD into policy banks in December via the Pledged Supplemental Lending program (PSL), ramping up financing for housing and infrastructure projects, as reported on 2 January by Bloomberg. ?The PSL is a direct and efficient method to inject funds into the economy. The interest rate on PSL loans was 2.4% as of the end of September 2023, which is lower than the one-year policy rate and benchmark lending rate of banks.
The South China Morning Post published a very interesting article on 5 January 2024 about western policies variously called de-risking, strategic decoupling, friend-shoring, reshoring, or near-shoring, which China regards collectively as decoupling. The article cites the head of economics at Lingnan University Hong Kong who believes this trend, which he characterizes as re-industrialization, could last 10 years or more. “Re-industrialization, once it starts, is hard to reverse because it is cost effective. [It] involves a lot of investment which has been sunk.” For example, US manufacturing investment in 2022 increased 10.5% YoY to $670.5 billion USD, up 54% compared with the prior decade.
The Reshoring Initiative, a US based think tank, estimates that nearly two million manufacturing jobs were returned to the US since 2010, with the first million jobs taking 11 years to return, and another million jobs in just the past 3 years. However, it also noted that in the first half of 2023 182,000 new US jobs were related to announced reshoring and FDI with only 9% returning from China, with 17% from S. Korea, 15% from the UK, and 11% from Germany.
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In response to decoupling and reshoring trends, China has indicated openness to Chinese manufacturers pursuing overseas ventures. It is also leveraging its status as the world’s largest consumer goods market and pursuing “Fourth Industrial Revolution” technological breakthroughs.
Thailand
“THB ended the week modestly lower”
“Proposed 2024 fiscal budget increase 9.3% to boost Thai growth”?
“Thailand and China to waive bilateral visa requirements”
The THB finished modestly lower this week, from 34.25 per USD on 29 December 2023 to end at 34.66 per USD on 5 January 2024.
The long delayed 2024 Thai budget plan for the fiscal year beginning 1 October 2023 received strong parliamentary backing on 5 January as reported by Bloomberg. The spending plan valued at $100 billion USD, a proposed increase of 9.3%, is intended to boost growth as Thailand struggles to overcome high borrowing costs, near-record household debt, and sluggish exports. The spending bill must now go to second and third readings in the House in April before proceeding for Senate approval.
Thailand and China have announced a bilateral agreement to waive visa requirements for travelers, as reported by Bloomberg on 2 January. The agreement, schedule to be signed by the end of February, will allow tourists a maximum stay of 30 days per entry, and a total of 90 days with multiple entries within 180 days.
Thailand is currently ranked 64th on the Henley Passport Index, with Thai citizens having visa-free access to 80 destinations. Top ranked Singapore enjoys visa-free access to 193 destinations.
Energy
“Crude closed moderately higher this week”
“Henry Hub and EU Natural Gas closed moderately higher this week”
“Red Sea attacks boosts short-term prices”
“US refilling of Strategic Petroleum Reserve sets price floor”?
“US displaces Qatar as top LNG exporter”
Brent Crude finished moderately higher this week, from $77.08 USD on 29 December 2023 to close at $78.90 USD on 5 January 2024.
Henry Hub finished moderately higher this week, from $2.50 USD per MMBTU on 29 December 2023 to close at $2.91 USD per MMBTU on 5 January 2024.
EU Natural Gas finished moderately higher this week, from €32.350 per MWh on 29 December 2023 to close at €34.551 per MWh on 5 January 2024, equivalent to $9.25 USD per MMBTU.
Crude prices were supported this week by fears of supply disruptions in the Red Sea, political unrest in Iran, and protesters disrupting activities at Libya’s largest oil field El Sharara, as reported on 3 January by MarketWatch. Brend Crude contracts are now in “backwardation” where near future prices are higher than later deliveries.
Iran has reportedly dispatched a 51-year-old frigate warship to the Red Sea following the US military sinking of three Houthi rebel boats that attacked a Maersk cargo ship.
The US government is increasing its oil purchases to replenish its Strategic Petroleum Reserve, as reported on 4 January by Barron’s. The US sold 218 million barrels of oil from the strategic reserve in 2022 to reduce US gasoline prices by an estimated 40 cents per gallon. The US bought 2.1 million barrels for February 2024 delivery, and 3 million barrels for March delivery. US oil purchases could put a “soft floor” under oil prices. However, an economist at the Federal Reserve Bank of Dallas argues that the Strategic Petroleum Reserve doesn’t need to be fully replenished because the US is now a leading producer of oil and therefore faces less risk from a disruption in foreign oil supplies.
Bank of America expects oil to remain volatile in 2024, as reported on 5 January by Reuters. It expects Brent to remain in a band of $70 to $90 USD due to non-OPEC supply and an uncertain outlook on oil demand.
Forbes reported on 5 January that the US has overtaken Qatar as the world’s top exporter of LNG. This is especially noteworthy as the US only began exporting LNG in 2016. US LNG exports grew 15% YoY in volume in 2023, benefiting from rising domestic shale gas production and a growing global demand for natural gas.
Meanwhile, Germany reduced natural gas imports in 2023 by a 32.6%, mainly through energy savings following disruption in supply of Russian gas in response to its war with Ukraine. Germany in 2023 imported 43% of its gas from Norway, 26% from the Netherlands, and 22% from Belgium, with the remainder from overseas or elsewhere in Europe.
Logistics
“BDI finished modestly higher this week”
“Half of normal container vessel traffic avoiding Red Sea, increasing voyage time 25%”
“US bound containers now choosing West Coast over East Coast or Gulf”?
“Panama Canal drought continues, rainy season starts in May”
Baltic Dry?Index finished modestly higher this week, from 2,094 as of 22 December 2023 to 2,110 on 5 January 2024. Trading Economics has increased its BDI forecast this week to 2,207 by the end of 1Q24 and 2,586 in 12 months.
?Yemen’s Iran-backed Houthi militants continue to attack Red Sea vessels with missiles and drones despite a US-led naval force patrolling the Red Sea and intervening to prevent or respond to attacks, as reported on 5 January by Bloomberg. Houthi rebels have damaged some vessels but thus far have not sunk any vessels are caused any major injuries to sailors. As of late December, half of the container vessels normally transiting the Red Sea and Suez Canal have diverted around Africa, adding 25% to the length of their voyages. The Red Sea is the only route to the Suez Canal, through which 12% of global trade passes including 30% of container traffic. A.P. Moller-Maersk said on 5 January that it will continue diverting away from the Red Sea “for the foreseeable future.”
Container spot rates for cargo shipped from Asia to the US West Coasts are rising, as reported on 4 January by FreightWaves. Asian cargo destined for the US East Coast and Gulf Coast ports had previously been rerouted from the Panama Canal to the Suez Canal due to the drought restrictions at Panama. Now this traffic is being rerouted on longer voyages around the Cape of Good Hope. As a result, the shorter route from Asia to the US West Coast is becoming increasingly attractive.
Shanghai to Los Angeles spot rates for forty-foot equivalent units on 4 January were $2,726 USD, up 30% from 21 December 2023. The Panama Canal rainy season begins in May.