Four Macro trend that will shape the 4th quarter of 2023
There are four large macro forces that will shape the investment environment at the start of the last quarter of 2023.
So far, 2023 has been a year of great disconnect between bonds and equities, between equity valuations and earnings fundamentals and between equity prices and liquidity trends. The first three quarters of the year have seen investors hopes prevail over the laws of macro-economics and the history of the financial markets and the remainder of the year hinges on whether these hopes will be proven right or wrong.
Since Western Central banks started the widest monetary tightening in decades at Jackson Hole in August 202, economist and market historians have been predicting an inevitable recession in the US and Europe.
13 months later, Europe is showing signs of being on the verge of economic contraction while the US economy has been surprisingly resilient. Monetary policy works with a lag that is estimated to be between 12 and 18 months and we are now in the middle of that timeframe, so the 4th quarter will be crucial in that respect.
There is no doubt that the US economic outperformance has been stark since the beginning of the year. There are a number of technical factors that explain that resilience but none of them are factors that can be considered to be lasting.
Amongst them, a very large contributor to the US growth rate has been Government spending that accounted for at least half the recorded GDP in the first two quarters of the year. Some of these programs have been inherited from the COVID era and are reaching their end – such as the forbearance of student loans – and some are highly contested politically considering the surge in the US budget deficit and total public debt. An 11-hours agreement has enabled congress to avoid a Government shutdown until November 15th, but the pressing issue of the debt spiral and Government spending will remain high on the gander of the 4th quarter.
A second factor has been the sharp rise in households debt – credit cards and auto loans – as the US consumer has not yet pulled its horns in the face of rising prices and chase to run even more debt despite sharply rising interest rates. But we have now reached the stage where the excess savings accumulated during the COVID period has now been spent and savings ratios are now at record lows, leaving a major question mark on the ability of consumers to keep spending ahead. Shifts in consumption have been visible already form big ticket and un-necessary items to bare necessities, and the growing wealth divide is skewing consumption between haves and have nots, the former spending more on travel and entertainment while the latter is cutting on everything including foodstuff.
A third factor that is very specific to the US is the “positive wealth effect” coming from rising equity markets. Americans are heavily invested in the stock market either through their pension funds or through direct speculation and rising markets make them feel good, and therefore spend. Now that the markets are turning, it will be interesting to see if the “positive”” wealth effect transforms into a negative wealth effect in Q4 2023.
Finally, a significant shift has taken place within the US job market whereby the destruction of highly paid jobs as corporations have been actively cutting costs across the board has been masked by a sharp catch up in low paid jobs where the COVID era had driven a lot of workers of entire sectors of the economy out of the market, leaving those sectors – hospitality, security, airlines – understaffed. These trends are visible in the data through higher employment but lower wages and the most recent data reveals the beginning of a softening labor market.
Through its updated Summary of Economic Projections, the Federal Reserve is still offering an endorsement of a soft landing for the US economy.
However, significant headwinds are accumulating, and this warns of the risk of a dramatic slowdown in Q4.
One of the weak links remains the financial sector. Deposits are still leaving banks and credit conditions are tightening. The Fed’s balance sheet unwind continues (averaging $117 bln over the past six months since the March bank stress flare up), which is extinguishing reserves. Bank share prices are falling and are near three-month lows.
The UAW strike may continue to broaden, and if a Government shutdown has been averted for now, a November shutdown could last several weeks and have major implications for Government programs.
In addition to the disruption for the millions of households that depend on federal government services, and the important work done by the judiciary and regulators, the economic data due out that is supposed to inform the Fed’s decisions will be interrupted in a partial shutdown. The rule of thumb estimate is that a government shutdown costs about 0.2 percentage points of GDP a week and most of it is recouped when the government re-opens.
Moody’s, the last of the three main rating agencies that still grants the US AAA status, notes that a government closure would be negative credit implications. In addition, student loan servicing will resume for the first time in three years, and this is seen as squeezing consumption, which already looks set to slow.
With the sharpest rise in inflation, interest rates, mortgage rates, bond yields and credit card rates in 40 years, the disposable income of consumers has been severely dented in the past 18 months in both the US and in Europe.
European consumers do not have the same access or willingness to run debt through credit cards so the slowdown is probably happening earlier, but it is probably only a matter of time before the US consumer hits the wall and that could well happen in the 4th quarter of 2023.
Inflation to rise again ?
Equity investors have been sheering the sharp decline in headline inflation since the beginning of the year, hoping for a quick turn in monetary policies by Central Banks.
However, judging from bond yields rising to new 20-year highs, bond investors don’t have the same view and they are betting on a far more stubborn inflation ahead than anticipated by equity investors. Jamie Dimon, the charismatic CEO of JP Morgan fears bond yields at 7 % in the future and Central Bankers themselves are clearly keeping a hawkish bias with one more rate hike before the end of the year in the US and no real end in sight in Europe.
Indeed, core inflation is still stubbornly high and a large part of the decline in the headline CPI came from the base effect on one hand and the sharp decline in energy and food prices since the beginning of the year on the other. Both may actually work in reverse in the coming three months.
As we accurately predicted and traded, since June 2023, Oil prices have climbed from USD 64 to USD 91 yesterday, a 42 % increase in three months that will ultimately start pushing the headline inflation higher in the coming months. OPEC, and especially Saudi Arabia, have been working to keep world oil supplies tight. This, together with depleted strategic inventories and strong consumption has driven the price of oil sharply higher., and there is no end to these policies in sight. For most economies around the world, this will act as a headwind for growth and in last month’s forecast update, the OECD noted that Europe will be more vulnerable than the US from surging oil prices.
Moreover, Inflation is both a monetary and psychological phenomenon and as we are seeing now with the widespread strikes in the US auto sector as well as in many European countries, workers are now resorting to social action to demand higher wages to compensate for inflation.
These psychological phenomenon do not disappear overnight, Once inflation becomes entrenched in the mind of populations, it takes a severe economic downturn to take both prices and wages lower.
Over the course of economic history, there has never been a sustainable decline in inflation without a significant recession first. Hopes that Central Banks will finally succeed at taming inflation without a recession run contrary to all economic laws and historical observations.
If as we expect, inflation starts rising again in the 4th quarter, Central Banks will be forced to maintain a hawkish stance until there are clear signs that the labor market eases and that consumption declines. Whether that will happen in Q4 2023 or Q1 2024 remains to be seen.
When will monetary tightening end ?
There has been widespread hopes that the post-Covid monetary tightening cycle is ending, and that remains for now the main narrative of the financial markets.
However, there are significant dissenting voices as we highlighted above and the bond markets are actually doing the Fed’s job for now, and in a forceful way.
With US 10 year bond yields now up TENFOLD in the past 18 months and back at levels not seen since 2007, monetary tightening is in overdrive, even if equity markets valuations have not seemed to notice yet.
If there was one factor to measure inflation through, it is the cost of money – interest rates – and higher costs of money ultimately have considerable impact on what fuels economic growth ahead, the availability of credit.
Rising rates are a significant headwind for consumption in economies where economic agents – Governments, corporations and Households – are highly leveraged, such as the US, and for as long as interest rates are rising, be it by decision of central banks on short term rates or by market forces through bond yields, we are in an environment of EXTREME liquidity tightening, that will ultimately take a severe toll on economic activity.
Looking at inflation data, there may still be scope for some G10 countries to raise rates in Q4 23 or even Q1 24.
Still, investors typically respond to what is perceived to be the last hike differently than the first move in the cycle.
For now, speculation has been shifting toward the timing of the first cut ahead. Several emerging market countries, especially in South America have already begun an easing cycle, as has Poland.
Over the past 30 years, the Federal Reserve, for example, delivered the first rate cut, on average about 10.5 months after the last hike. The range has been five to 18 months. Currently, the derivatives market is anticipating something around the average. That dovetails with around when the market expected the European Central Bank to cut rates, which is in early Q3 24.
So the markets expect the tightening cycle to end sometimes in 2024, but they could be proved wrong on both sides.
On the one hand, a resurgence of inflation, as bond markets seem to anticipate, could force the Fed and the ECB to keep rising rates to much higher levels than currently expected, but on the other hand, a sharp breakdown in equity markets and/or a sharp declaration of economic growth could lead the Fed and the ECB to lower rates far earlier, as Jeremy Powell infamously did on December 24, 2018.
So the jury is still out on the path of monetary policies in the 4th quarter of 2023, but our view is that we will be seeing bond yields rising higher, toward 4.71 % or 5 % until EQUITY MARKETS BREAK DOWN, something we see with a high probability of occurrence in the coming weeks and months.
Japan is an outlier in the environment and a major risk factor for global financial stability.
It is the only country that still has a negative policy rate (-0.10%) and the Bank of Japan’s balance sheet continues to expand, buying both domestic bonds and equities.
However, cracks have started to appear in the BOJ strategy with its bond markets giving early signs of a major breakdown ahead. Bank of Japan Governor Ueda seemed to have suggested rates could be hiked late this year, but then appeared to soften the rhetoric after the recent policy meeting. Some observers think that Yield Curve Control will be abandoned before the central bank exits from the negative policy rate
The upper band of the 10-year bond yield has been doubled twice over the past year to 1.00%. It finished Q3 at its high, a little above 0.75%. The Bank of Japan is finding it more and more difficult to maintain the band under the combined pressure of rising inflation and economic growth and the Japanese Yen is dangerously reaching levels that have marked major turning points in the past.
A sharp breakdown in the Japanese Government bond market would lead to a sharp countertrend move in the currency and a massive repatriation of Japanese savings invested abroad, something that has acted as a major tailwind for Western equity markets.
Will this happen in Q4 2023 ? What we can say is that pressure is mounting and that we would not be surprised to see it happen before the end of 2023.
Political Shifts are underway
Politics is never far from the surface.
As we ae entering an election year in the US, major shifts are taking place around the word and the war in Ukraine is far from over.
The UK will likely hold a general election late next year, but there are two byelections in October that portend insight into the mood of voters. One is for a district that the Tories held, but previously by a Johnson Tory not from the Sunak-wing. The question is whether the Tories, who are trailing well behind Labour in the national polls, are still fighting.
More important for Labour’s fortunes may be the by election in Scotland. The election is for the seat of a lawmaker whose constituency recalled him for violating Covid lockdown rules. To solidify its rejuvenation, Labour needs to rebuild its Scottish presence.
Germany’s Bavaria holds its election, and the CSU has a firm grip, and it will most likely return with its junior partner, the Free-Voters of Bavaria, a local center-right party. The center-left national government is unpopular and in the previous Bavarian election, the SPD drew less than 10% of the vote, coming in fifth place. It may slip further, while the right AfD could see its fortunes increase (10.2% in 2018).
The polls warn that the Labour government could be replaced by a center-right government in New Zealand. Switzerland holds the first part of its federal elections in October and the second part in December.
India holds national elections early next year. The ban on the export of most types of rice appears to be inspired by politics more than economics. Reports indicate there are more than sufficient rice stocks, but the restrictions ensure lower domestic prices. India accounted for about 40% of the world’s traded rice and as a result of its actions, the price of rice, the staple of around half the world’s population, has surged to 15-year highs.
But it is Poland’s national election that may have the most far-reaching implications.
The Law and Justice Party is seeking a mandate for its third consecutive government. When Russia first invaded Ukraine, Poland absorbed nearly seven million Ukrainian refugees. An estimated 1.5 mln remain in Poland, but the focus has shifted to keeping Ukrainian grain out, and this has strained the bilateral relationship.
Moreover, and some link the upcoming election in late October to Warsaw’s stance toward Ukraine, the government said last month that it would not send new weapons to Ukraine. This is somewhat bombastic, as Poland’s contribution was rarely about its weapons transfers and more about it being a conduit for other countries to get their weapons into Ukraine. Warsaw indicated this would continue.
Still, between the dispute over Ukrainian agriculture goods (Poland is not the only EU country to maintain a ban) and the push back in the US among some Republicans against the administration’s proposal, from Moscow’s perspective, the coalition may fray.
At the same time, overcoming an earlier reluctance, the US will send long-range army tactical missile systems that will expand Kyiv’s firing zone and has approved the use of cluster bombs against all the rules of international Law. . By early next year, Ukrainian pilots would have completed their training for the F-16 fighter jets that the NATO members, including the US, are providing.
The takeaway is that the war is likely to persist and could broaden if not escalate in the period ahead.
Seen for the Russian side, the Ukrainian army is getting better equipped and better trained every day, with increased ability to bring the war into the Russian territory itself. At the same, time, the Russian army is in deep need of Human Resources and of ammunitions, and may not have the industrial capability to provide the latter in sufficient quantities, hence the recent moves to procure ammunition from North Korea and Iran.
For how long, will Russia tolerate the building-up of an American trained and equipped Ukrainian air force and expanded ballistic capability without reacting and what are its possible reactions ?
With NATO claiming that it can mobilise 3.5 million soldiers in Europe and engaging in the largest military drills in its existence in the coming weeks, the rhetorical war is clearly escalating.
Will it lead to a boiling point in Q4 2023 ?
The scheduled meeting of Putin and Xi Jing Ping in the coming weeks may be of significance in that respect.
But maybe, one of the most disturbing political trend is how dysfunctional the political system of the world’s largest economy has become
In a sharp turn of events this week-end, the government of the world’s largest economy has not closed down, and will stay open at least until the middle of November. That is what passes for good news about US politics these days.
As trading closed last week, the assumption was that the government would indeed shut down. Saturday’s dramatic turnaround, in which the Speaker of the House Kevin McCarthy decided to push forward with the help of Democrats’ votes to pass a stopgap spending bill, was a surprise but seems unlikely at first glance to have much impact on markets.
However, this does not mean that the political dysfunction of the US is not having a significant financial impact, in terms of widening spreads, credits default swaps or re-rating of the US debt.
Is the US political system’s inability to get things done fully priced in ?
The latest political Rabbit out of the Hat deal of this week-end only extends the agony until Nov. 17, and means that the major issues have not been solved at all. What additional impact could it have on the bond market and currency markets in November ?
Q4 2023 will probably be a highly unstable environment politically, with potentially disrupting consequences on the global financial markets.
Are we entering a period of rising concerns about the US public debt and deficits and potential loss of confidence and credit crisis on a National scale ?
With non US creditors holding abnormally high proportions of the US debt, this could have significant consequences.
To sum it up, coming on the heels of a major topping out process in Western equity markets, we see the 4th quarter of 2023 as a highly volatile period that could see a major questioning of the narrative that has supported financial assets in the first nine months of the year.
Economic growth is likely to surprise on the downside,
Inflation is likely to surprise on the upside,
Monetary policies may remain far tighter than the markets anticipate,
Unless a major breakdown in global equity markets changes considerably the path of monetary policies and bond yields.
Implications for the Financial Markets
The Dollar Index rallied for eleven consecutive weeks into the end of Q3. This is the longest advance since 2014, driven chiefly by the stark divergence. We look for the divergence to moderate due to the slowing of the US economy rather than better economic news from Europe and Japan and expect this to cap the greenback after an incredible two-and-a-half-month run.
WE ARE SELLING THE US DOLLAR AND EXPECT A TURNING POINT VERY SOON
The euro has fallen for 11 consecutive weeks through the end of September. It is the longest decline since 1996. It is extremely oversold, and the catalyst for a recovery may not be good news from the eurozone but negative news from the US.
The euro’s decline since the mid-July peak near $1.1275 extended to within a few hundredths of a cent of the year’s low set in January near $1.0485. While this partly reflects the broad strength of the US dollar, the news stream from Europe is poor. The economy remains weak, near stagnant, and there is no stimulus to be found.
The swaps market sees the September rate hike as the last in the cycle and has the first cut fully discounted in Q3 24. Although the central bank meets on October 26, the focus will shift to fiscal policy in the coming weeks as the 2024 budgets need to be submitted to the EU.
The Stability and Growth Pact fiscal targets were suspended during Covid and extended since Russia’s invasion of Ukraine. They are intended to be restored in 2024, though given the near-recessionary conditions in many members, some flexibility may be shown. Last year’s natural gas shock has given way to an oil shock this year, compounded by the current euro’s weakness.
WE ARE GOING LONG THE EURO
The market has been on “intervention watch” since early September when the dollar surpassed JPY146, where officials had intervened last year. The rhetoric and word cues deployed were ones that have signaled intervention in the past.
However, what contributed to the success last October’s intervention (and the failure in September) was in timing the operations to pick a top in US Treasury yields. However, with the increase in supply, the resilience of the US economy, and higher oil prices, the US 10-year yield rose more than 45 bp last month to the highest level in 16 years.
The implication is that when there is a reasonable chance that US yields may be peaking in the weeks ahead and the risk of intervention increases. Given the market positioning, intervention could knock the dollar down by around five years. Although the Bank of Japan meets at the end of October, the focus in the month ahead will shift to fiscal policy.
The government is drafting a supplemental budget, which could be JPY15-20 trillion (~$100-$135 bln). In addition to extending subsidies for energy, the government is talking about tax cuts to encourage wage increases and investment in strategic areas, like semiconductors. Even though a cabinet reshuffle in September failed to lift popular approval for government, Prime Minister Kishida is believed to be considering a dissolution of the Diet to hold elections either late this year or early next year. The tax cut proposal may be a central plank in a gambit to shore up support.
Contrary to conventional wisdom, despite rising domestic market rates, Japanese investors stepped up their buying of foreign bonds in the eight weeks since the bond adjustment at the end of July. They purchased about JPY5 trillion of foreign bonds compared with JPY700 bln in the previous eight weeks. Japanese investors have bought a modest amount of foreign stocks over the period of JPY440 bln. Foreign investors have dumped Japanese bonds and stocks (~JPY8.7 trillion) in the same period.
WE WOULD NOT STAY SHORT THE JAPANESE YEN AT CURRENT LEVELS
Chinese officials seemed to get more serious about supporting the economy in recent weeks. While stopping short of large-scale fiscal steps, the numerous measures and the exercise of soft power to encourage desired behavior seems to have begun yielding constructive results. Similarly, officials have managed to limit the yuan’s descent to a little more than 0.5% in September, less than most other currencies.
A squeeze in liquidity in the offshore market was arranged and reserve requirements for currency deposits were adjusted. Orders to buy more than $25 mln came under closer official scrutiny. Banks were discouraged from selling the yuan in proprietary trading. The central bank’s daily fix has been consistently in favor of the yuan. At the same time, interest rates and bank reserves were cut, extending the policy divergence with the US.
Judging from some portfolio flow reports, it does not appear that foreign investors have been persuaded to return to Chinese stocks or bonds, just yet. There is scope for additional adjustment of China’s monetary policy before the end of the year, even if not in October. The Golden Week holidays will shut mainland markets the first week in October. Barring a new setback, the groundwork for a Biden-Xi meeting in November at the APEC gathering appears to be falling into place.
WITH INVESTORS LARGELY OUT OF CHINESE ASSETS AND CHINESE EQUITIES CLOSE TO A MAJOR BUYING POINT, WE ARE GOING LONG THE CHNESE YUAN AT CURRENT LEVELS
We are now in the last phase of the rise in US bond yields for this cycle and the end point may be 4.71 or 5 %, a level that should be reached rather soon. We expect US bonds to turn sharply lower once US equities start falling decisively.
WE SHALL WAIT FOR THE TURN TO GO LONG US BONDS
US, European and Japanese Equities
As we predicted, August marked the peak of the bear market rally that started in October 2022 and we are now entering the second leg of the secular bear market that started in January 2022. We expect it to unfold over the next 6 to 8 months, with the possibility of a much shorter time frame and much deeper declines than expected by the markets currently.
Any data showing slower growth, stronger inflation or subdued earnings growth could act as a catalyst for tan acceleration downwards.
Valuations are untenable and technically the main leaders of the markets have already turned.
The trend is down and the trend is your friend
WE ARE SHORT US AND EUROPEAN EQUITIES
Major Buying Opportunity for Chinese Stocks ahead
It is still a tad too early to jump in but all the elements are in place for a major bottom in Chinese equities in October / November before a significant bull market unfolds. The economy is stabilising, industrial profits are growing again, equities are cheap and foreign and domestic investors are heavily underweighted China.
WE ARE READY TO JUMP INTO CHINESE STOCKS
Gold and Silver to Shine
With the recent breakdown, we have had our last shoe dropping completing the corrective pattern that will set the stage for a major secular rally in precious metals into 2024. The turn in the US Dollar will be the signal that investors should go massively long Gold and Silver
WE ARE LONG GOLD AND SILVER
MAXIN ADVISORS Weekly Market Review 1st Oct 2023
US Personal Spending Slows as Expected
Personal spending in the US increased 0.4% month-over-month in August 2023, in line with market forecasts, and following an upwardly revised 0.9% rise in July. Spending for services increased $47 billion, led by housing, transportation services, and health care (both hospitals and outpatient services). Spending on goods rose $36.7 billion, with the largest contribution coming from gasoline, motor vehicle fuels, lubricants, and fluids, due to higher prices. Meanwhile, real PCE which is adjusted for inflation, rose 0.1%, well below 0.6% in July, as a 0.2% rise in services spending was partially offset by a 0.2% fall in spending on goods.
US Core PCE Inflation Rises
Core PCE prices in the US, which exclude food and energy, increased by 0.1 percent month-over-month in August 2023, the least since November 2020 and below market expectations of a 0.2 percent rise. The annual rate, regarded as the Federal Reserve’s preferred measure of inflation, eased as anticipated to 3.9 percent, the lowest since May 2021. When factoring in food and energy costs, the PCE price index climbed 0.4 percent from the previous month and 3.5 percent from the corresponding period in the previous year.
US PCE Price Index Rises the Most in 7 Months
The personal consumption expenditures price index in the US rose by 0.4% from the previous month in August of 2023, marginally below market expectations of 0.5%, but accelerating from the 0.2% increase from the two prior months. It was the sharpest monthly increase since January, suggesting that inflationary pressure in the US economy is staging a comeback due to the increase in energy prices. The energy subindex soared by 6.1% amid the rise in crude oil benchmarks over the period. Also, prices for goods advanced by 0.8%, while prices for food increased by 0.2% and prices for services edged 0.2% higher. From the previous year, the PCE price index increased by 3.5%, the most in four months, after an upwardly revised July’s 3.4% advance and matching market forecasts.
Italy Industrial Sales Contract in July
Industrial sales in Italy fell by 0.4 percent from the previous month in July 2023, marking the first contraction since April, primarily driven by reduced sales of intermediate goods (-1.2 percent vs. 0.4 percent) and consumer goods (-1.1 percent vs. -0.1 percent). Simultaneously, sales increased for both energy products (3.0 percent vs. -3.7 percent) and capital goods (0.8 percent vs. 2.0 percent). On a yearly basis, industrial sales dropped by 1.6 percent in July, marking the fourth consecutive month of decline.
Dutch Manufacturing Sector Sinks to 3-Year Low
The Nevi Netherlands Manufacturing PMI fell to 43.6 in September 2023 from 45.9 in August, marking the sharpest contraction since May 2020, as weak demand conditions weighed heavily on output and new business. Production declined to its steepest point in four months, while new business decreased to a three-month low, and export orders continued to fall sharply. Consequently, firms were prompted to significantly lower their purchasing activity, with the pace of decline being the quickest in three years. Moreover, employment went down for the fourth consecutive month and at its strongest rate since July 2020. On prices, input costs dropped at an unprecedented pace, linked to a steep fall in operating costs due to lower prices for energy and raw materials. As a result, output charges were discounted solidly. Finally, although confidence remains subdued by historical standards, Dutch manufacturers remained optimistic, mainly due to a positive 12-month outlook on production.
Swiss Retail Trade Drops at Softer Pace
Retail sales in Switzerland fell 1.8 percent year-on-year in August 2023, easing from an upwardly revised 2.5 percent drop in the previous month. Sales continued to decline but at a softer rate for both food (-1.4 percent vs -2.0 percent in July) and non-food products (-1.7 percent vs -2.0 percent). On a seasonally adjusted monthly basis, retail trade grew 0.4 percent, rebounding from a two-year low of a 2.4 percent decrease in July.
Portugal September Inflation Slows
Portugal’s consumer price inflation eased slightly to 3.6% year-on-year in September 2023, down from 3.7% in August, according to a preliminary estimate. Meanwhile, the core rate, which excludes volatile items such as food and energy, came in at 4.1%, lower than the 4.5% recorded in the previous month, though still indicating some persistent inflationary pressures. Prices grew softer for both unprocessed (6.0% vs 6.4%) and processed food (6.2% vs 6.5%), while a decline was recorded in energy costs (-4.1% vs -6.5%). On a monthly basis, consumer prices advanced 1.1% in September, after a 0.3% increase in August.
UK House Prices Continue to Fall at a Steep Pace
The Nationwide House Price Index in the United Kingdom dropped by 5.3% year-on-year in September 2023, the same pace as in the previous month, and compared with market expectations of a 5.7% decrease. House prices continued to plummet at the most rapid pace since the middle of 2009, driven by the ongoing strain on housing affordability for potential homebuyers with mortgages caused by elevated borrowing expenses. On a monthly basis, house prices were unchanged, following a 0.8% fall in August.
China Manufacturing PMI Beats Estimates
The official NBS Manufacturing PMI increased to 50.2 in September 2023 from 49.7 in August, topping market forecasts of 50.0. It was the first growth in factory activity since March, amid recent stimulus from Beijing to bolster economic recovery. Output rose for the fourth month running, with the rate of expansion the fastest in six months (52.7 vs 51.9 in August); new orders went up further, rising for the second month in a row (50.5 vs 50.2); and buying levels grew slightly stronger (50.7 vs 50.5). Meantime, foreign sales fell at a softer rate (47.8 vs 46.7), amid continued weakness in employment (48.1 vs 48.0). The delivery time index fell after hitting a 6-month peak in August (50.8 vs 51.6). On the cost side, input prices were up for the third consecutive month and were at a steeper pace (59.4 vs 56.5), while a rise in output prices quickened (53.5 vs 52.0). Finally, confidence remained upbeat (55.5 vs 55.6)
China Services Growth at 3-Month High
The official NBS Non-Manufacturing PMI for China was up to 51.7 in September 2023 from 51.0 a month earlier. It was the ninth straight month of expansion in the service sector and the strongest pace since June, amid softer declines in both new orders (47.8 vs 47.5 in August) and overseas orders (49.4 vs 47.9). Meanwhile, weakness in employment persisted despite the rate of decline unchanged from the prior month (46.8 vs 46.8). Simultaneously, the delivery time index dropped to an 8-month low (51.3 vs 52.0). On prices, input cost increased for the third month running, with the rate of inflation accelerating (52.5 vs 51.7); and selling prices rose further (50.3 vs 50.2). Lastly, sentiment strengthened after notching its lowest level in eight months during August (58.7 vs 58.2).
China NBS General PMI Rises to 3-Month High
The NBS Composite PMI Output Index in China rose to 52.0 in September 2023 from 51.3 in August, pointing to the highest reading since June. Factory activity expanded after falling in the prior five months, reflecting recent support measures from Beijing and a string of monetary support from the Chinese central bank. Meanwhile, the service sector increased for the ninth straight month, with the rate of growth accelerating to a three-month high. China’s economy in August showed some signs of stabilization, while many economists believed that the recovery momentum may extend heading into the end of the year on the back of renewed consumer confidence, improving trade figures, and efforts from the government to help the property sector from its prolonged downturn. That said, the statistics agency recently warned that the foundation for the recovery and development of the manufacturing industry needs to be further consolidated.
South Korea Trade Surplus Larger than Estimated
South Korea posted a trade surplus of USD 3.7 billion in September 2023, shifting from a deficit of USD 3.83 billion in the same month a year earlier and beating market expectations of a USD 1.75 billion surplus, a preliminary reading showed. This was the fourth straight month of trade surplus as imports dropped much more than exports. Sales shrank 4.4% yoy, the 12th consecutive month of decline, but the softest fall in the sequence amid weakening demand for semiconductors and a fall in chip prices. Meanwhile, purchases fell 16.5%, the eighth decline so far this year, compared to forecasts of a 17.6% decrease amid a plunge in energy imports.
South Korea Exports Fall Less than Expected
Exports from South Korea shrank 4.4% yoy to USD 54.66 billion in September 2023, better than market expectations of a 9.1% decrease after a downwardly revised 8.3% fall in the previous month, a preliminary print showed. It was the twelfth straight month of decline in exports, but the softest fall in the sequence amid weakening demand for semiconductors and a fall in chip prices. Sales decreased for semiconductors (-13.6%), petroleum (-7%), and petrochemicals (-6.0%), while those grew for cars (10%), ships (15%), steel products (7%), and display items (4%). Shipments shrank to China, South Korea’s top trading partner (-17.6%), the ASEAN countries (-8%), and the Middle East (-2.2%). By contrast, exports grew to the US (8.5%), the second consecutive month of increase; the EU (6.5%), and the South American nations (18.2%).
South Korea Imports Extend Double-Digit Drops
Imports to South Korea shrank 16.5% year-over-year to USD 50.96 billion in September 2023, compared with market estimates of a 17.6% fall and a final 22.8% plunge a month earlier, flash data showed. This was the eighth contraction in purchases so far this year and the sixth straight month of double-digit declines, pressured by a 36% slump in energy imports. South Korea depends on purchases for most of its energy needs. Imports exceeded exports in the country from March 2022 through May 2023, due to high energy prices.
Vietnam Manufacturing Shrinks Marginally
The S&P Global Vietnam Manufacturing PMI was down to 49.7 in September 2023 from 50.5 in the prior month. This was the seventh time of fall factory activity so far this year. Output fell slightly following August’s rise, with production now having fallen in six of the past seven months. Also, employment dropped for the 7th month running, with the rate of decrease the steepest since June. Meantime, both new orders and buying levels grew for the second month while the rate of expansion in new sales from abroad was solid and more pronounced than that in August. Lead times shortened for the ninth consecutive month, albeit to the least extent since April. On the cost side, input prices rose the most in 7 months, attributed to rising fuel cost as well as higher oil and imported raw materials. In turn, output prices continued to rise, albeit at a modest pace. Finally, confidence strengthened for the fourth month and was the highest since February, on expectations of new orders.
Russia Manufacturing PMI Rises to 6-Year High
The S&P Global Russia Manufacturing PMI increased to 54.5 in September 2023 from 52.7 in the previous month, pointing to the fastest pace in the sector since January 2017, as output grew faster while new orders expanded the most since January 2017. The expansion was largely driven by domestic demand as foreign customer orders rose only marginally amid challenging economic conditions in key markets. Job creation increased the most since November 2000 while the backlog of work fell for the ninth straight month, with unfinished work declining at the softest pace since March. Input buying rose at a record pace amid efforts to replenish depleted inventories while delivery times continued to lengthen. On the price front, input cost inflation accelerated to the fastest since March 2022 amid the unfavorable of the ruble, while selling prices increased at the quickest rate since April 2022. Finally, business confidence improved.
The Week Ahead
The first week of October will witness the of eagerly anticipated US jobs report. Nonfarm payrolls likely increased by 150 thousand in September, the lest in three months, further contributing to signs of a gradually weakening labor market. Additionally, the unemployment rate is likely to have eased to 3.7%, and wage growth is expected to remain at 4.1%. Also, investors will closely monitor speeches by several Fed officials, JOLTs job openings, factory orders foreign trade data and PMI surveys from both the ISM and S&P Global.ISM PMIs are likely to signal another month of contraction in the US manufacturing sector, coupled with a softer increase in service sector activity. In other parts of the Americas, Canada’s employment figures and trade balance will be under scrutiny, along with Mexico’s business and consumer morale, Brazil’s industrial output and foreign trade, and PMI surveys from across the region.
In Europe, data is expected to show that retail sales in the Euro Area declined for the second consecutive month in August. Germany is likely to see a rebound in factory orders following their sharpest drop since April 2020, while France is expected to experience a decline in industrial production after a recovery in July. Other notable data releases include the Euro Area’s unemployment rate, Germany’s balance of trade, Italy’s unemployment rate, and retail sales, France’s foreign trade figures, Spain’s unemployment rate, Switzerland’s inflation rate, jobless data, and retail sales, as well as Turkey’s consumer prices and foreign trade statistics. In the United Kingdom, investors will also keep a close watch on housing prices reported by Nationwide and Halifax.
In Asia, PMIs in China will offer fresh updates on the impact of Beijing’s support measures and debt risks from property developers into the end of the third quarter, shortly before the country closes financial and commodity markets for the week due to Golden Week festivities. In Japan, markets await the 3rd quarter Tankan Large Manufacturers Index and the Summary of Opinions document from the Bank of Japan. In India, September’s PMI will also be eyed, while the RBI is expected to maintain its policy rate at the terminal level as inflationary threats linger. Elsewhere, South Korea, the Philippines, and Indonesia will unveil September CPI prints. Finally, both the RBA in Australia and the RBNZ in New Zealand are expected to maintain their policy rates unchanged. Other Aussie releases include August’s trade balance, the Ai Group index for September, and a series of housing data.
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