US looking to manufacture a soft economic landing - Stuff

Greg Smith is the head of retail at Devon Funds www.devonfunds.co.nz and a regular opinion contributor.

OPINION: The US indices were lower last week, with the S&P500 shedding around 1.4%, but still up some 3.4% over the past month. Recessionary concerns continue to linger for investors, with some central banks indicating they are not done yet with interest rate tightening efforts. The Bank of England came through with a jumbo rate hike of 50bps taking rates to 5%, a 15-year high, and the 13th consecutive increase. Governor Andrew Bailey said the central bank will do whatever is necessary to tame inflation (which came in at a higher-than-expected 8.7% in May). Core UK inflation is running at the highest level since March 1992. The Bank of England, like many other central banks, is though walking a tightrope, with a looming mortgage cliff as people roll off low rates.

Some other central banks are clearly not done with their rate-hiking processes either. Norway’s central bank raised rates by 50bps, also taking rates to a 15-year high, and said more are to come. The Swiss National Bank also came through with a rate rise of 25bps and said that it was prepared to go higher. All this was nothing though compared to Turkey which has nearly doubled its interest rate from 8.5% to 15%, the first rate rise since March 2021, and after the country has been cutting rates in recent years. Turkish President Recep Tayyip Erdogan has long held the interesting view that higher interest rates cause inflation rather than dampening it. He may now be getting on board with what economic textbooks say.

Purchasing Managers Index (PMI) data was released over the weekend, and there were positives and negatives for the world’s largest economy, which reflected some fairly consistent trends across the globe.

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The manufacturing sector is continuing to cool against the backdrop of interest rate rises over the past 18 months and a slowing economy. Manufacturing activity in the US slowed more than expected in June, with the index registering 46.3, down from 48.4 in May and below estimates for 49.0. Anything below 50 means contraction mode, suggesting the sector is continuing to turn down.

However, the services side of the economy still going well, with the PMI there printing at a still very healthy 54.1. New order growth eased, but was still the second-fastest in just over a year. This also meant that the overall composite index (combining manufacturing and services) came in at 53, still firmly in expansion mode.

S&P Global

S&P Global Flash US Composite PMI, June 2023.

This also reflects what we have seen from consumers this year here and globally, with spending moving more from goods, which exploded during the pandemic, to that on “getting out and about” on services and experiences. This demand shift is also reflecting itself in prices with those for factory goods falling the most in three years, while those for services hit a five month-high. The overall measure of prices received however dropped to the lowest since 2020.

Even though there are still recessionary fears, this is potentially positive news for the soft-landing theory for the world’s largest economy, with US inflation falling and overall economic activity still remaining positive, while central banks are nearing the end of rate hiking plans. The fact that manufacturing, an important part of the US economy (~12%) is contracting sharply will not be lost on the Fed.

It was a similar story in the UK as well, with the manufacturing sector remaining firmly in contraction mode, but services in expansion territory. Prices are also falling, which is good news given UK inflation has been running hotter than other places - falling factory gate prices should feed through to CPI in time. This will be a relief to UK consumers who have been feeling the pinch, although they appear to have found a spring in their step following warmer weather – UK retail sales rose unexpectedly in May.

In Europe, the Purchasing Managers Index slid to a five-month low led by weakness in France and Germany’s factories. The services sector is still going very well although overall activity in Europe is only just in expansion, which might give some cause for thought to the European Central Bank to cool its jets as it were. The ECB holds its annual conference this week.

Asian markets were weaker, although there were a few wins for India it seems last week. Prime Minister Narendra Modi was in Washington for a state visit, and got a very warm reception from executives of Big Tech. Calls to get global companies to “Make in India” hit the mark it seems. Amazon said it will take its investments in India to US$26 billion by 2030, adding US$6.5 billion to already planned investments, with cloud computing a focus. Memory chip firm Micron is aiming to open a facility in Modi’s home state of Gujarat as the broader chip industry looks for ways to diversify its supply chain.

Google plans to open a global fintech operation centre in western India, and is investing US$10 billion in the India digitisation fund. Google is also working with the Indian Institute of Science on open sourcing of speech data for AI models. Apple chief executive Tim Cook was also upbeat, saying that India represents a “huge opportunity” and that there was plenty of room for expansion. OpenAI’s chief executive also met with Modi to discuss opportunities to collaborate, while Elon Musk also engaged.

This all comes as another Asian superpower China is having a somewhat tense relationship with the US. It might be to India’s gain, which has already overtaken China as the world’s most-populated country. There have been some challenges to foreign companies, but India has pledged to ease the process to do business there.

Chris McKeen/Stuff

New Zealand’s credit rating is front of mind for ANZ economist Henry Russell after a week of warnings and worrying economic data.

India appears to be on the up, while inflation is heading the other way in Asia (and in most places globally). Japan’s inflation rate came in at 2.3% in May, easing from the 3.5% recorded in April. Singapore’s CPI dipped to 5.1% from 5.7% in April, the lowest since March 2022. Malaysia’s inflation rate eased to 2.8% in May, its third straight month of decline.

The Australian share market sold off on Friday, with the ASX200 declining 1.3% and erasing a week’s worth of gains. The prospect of the RBA pushing through with further interest rate hikes has raised concerns over the Australian economy, which in most ways has been very resilient. There will be significant “interest” in Aussie inflation numbers out on Wednesday. The rate of CPI inflation is expected to fall to 6.1% year-on-year, which would be a step down from the 6.8% recorded last month. A lower-than-expected number would arguably again give the RBA cause to pause.

The kiwi market bucked weakness elsewhere in the region on Friday, with the NZ50 finishing Friday flat at 11,737, but lower for the week. It has been a fairly quiet period in terms of corporate announcements. Economic data releases were also fairly thin on the ground. There is a bit more on offer this week with business and consumer confidence figures due out.

Overseas this week there are inflation numbers out in the US and Europe, as well as Australia. Inflation continues to fall back from peak levels in most (but not all) parts of the world. In an environment where investors are weighing up what type of economic landing will play out, lower than expected prints will be well received, while hot ones will not.

Threats of an uprising in Russia have also restoked investor concern around geopolitical risks. The standoff between the Kremlin and the Wagner group looks to have subsided over the weekend but may not be the end of the story. The war in the Ukraine which was supposed to last “days” has now been going for 16 months, and will likely see increasing doubts over Putin’s rule the longer it drags on.

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