Manufacturing Weekly Economic Highlights | 22 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 this week”
“US retail sales remain strong despite inflation and high interest rates”
“US Fed deficit $509 billion in fiscal 1Q24”
“US federal spending up 12%, revenue up 8%”
The USD Index (DXY) finished moderately higher this past week, from 102.44 on 12 January 2024 to close at 103.24 on 19 January 2024.
The USD was supported by a strong retail sales report on 17 January that decreased market expectations for a cut in the US Fed policy rates, as reported on 17 January by Reuters. The Chief Market Strategist at Corpay said, "If we look at this morning's retail sales report, that points to growth on virtually every possible level and across every aggregate within the consumer spending sphere." He added that, "That points to underlying inflation pressure remaining sticky for longer, and that coincides with the fact that we're seeing a concerted push from policymakers to anchor market expectations out into the middle of the year for the first cut, and also to warn markets that the cadence of rate cuts is going to be slower than anticipated."
This coming week the Personal Consumption Expenditures Price Index will be released. MarketWatch reported on 20 January that a Wall Street Journal survey of economists predicts the December Core PCE to be 0.2% MoM and 3.0% YoY compared with 0.1% MoM and 3.2% YoY in November. The Core PCE is the US Fed’s preferred measure of future inflation trends. The survey also predicts 4Q23 GDP growth at 1.7% YoY, compared with 4.9% YoY in 3Q23. Consumer spending, which is responsible for 2/3rds of the US economy, continues to be strong despite high inflation and rising interest rates. However, the US manufacturing sector continues to struggle.
The Wall Street Journal reported on 17 January that the US federal budget deficit totaled $509 billion USD in fiscal 1Q24. This is $87 billion USD more than in fiscal 1Q23. US federal revenues increased by 8% YoY, but spending rose by 12% YoY. The interest on the public debt rose by 49% YoY to $73 billion USD. Outlays by the Federal Deposit Insurance Corporation (FDIC) increased by $62 billion USD to cover bank failures, some of which might be recovered through liquidation of bank assets.
Europe
“EUR ended modestly lower again this week relative to the USD”
“German GDP down 0.3% YoY in 2023”
“40% of goods flow between Eurozone and Asia flow through the Red Sea”
“Increased ocean freight costs could increase Eurozone inflation and cut growth”
The EUR finished modestly lower again this week, from $1.096 USD per EUR on 12 January 2024 to end at $1.090 USD per EUR on 19 January 2024.
Germany is probably the only nation in the Eurozone to suffer economic contraction during 2023, as reported on 16 January by Bloomberg. Germany barely avoided a technical recession in 2023, but its GDP fell 0.3% YoY due to rising interest rates, higher energy costs, and falling demand for its manufactured products. Economists are predicting minimal German GDP growth during 1H24 as it continues to struggle with its loss of cheap Russian energy imports and waning export demand to China.
Business Insider on 16 January reported that the Eurozone is effectively importing large volumes of Russian oil from India in the form of refined products. The EU’s purchase of refined oil products from India surged 115% YoY in 2023, while India’s purchase of Russian crude rose 140% YoY in the same period. However, under pressure from the US and Indian payment issues to Russian oil suppliers, India’s imports of Russian oil plummeted in December 2023 to a 11-month low.
Europe is suffering the brunt of the impact of Red Sea shipping disruptions, as reported on 19 January in The Wall Street Journal. The round-trip voyage from Singapore to Rotterdam increases from 34 days and 8,301 nautical miles via the Suez Canal to 43 days and 11,758 nautical miles via the Cape of Good Hope. However, subsequent to the Covid pandemic disruptions, European businesses have been maintaining larger inventories, and hence the supply chain impact of the Red Sea conflict is proportionally smaller than during the 2020 to 2021 period. Around 40% of goods traded between Europe and Asia flows through the Red Sea. Allianz Trade calculates that, “a doubling of freight costs sustained for more than three months could push the eurozone’s inflation rate up by three-quarters of a percentage point and reduce economic growth by almost a percentage point.” For reference, the average cost of transporting goods via container doubled between 22 December and 12 January.
China
“The CNY ended modestly higher this week, up 3% since September”
“China 2023 GDP up 5.2%”
“Taiwan FDI in China down 40%”
“Is China facing a deflationary spiral?”
The CNY ended modestly higher this week, from 7.124 per USD on 12 January 2024 to end at 7.120 per USD on 19 January 2024.
China’s economy finished 2023 with a growth rate of 5.2%, as reported by The Wall Street Journal on 17 January. China achieved only 3% GDP growth in 2022. Real growth in urban disposable income was 4.8%, the lowest since 2002 excluding the pandemic years of 2020 and 2022 and nearly one percentage point lower than the quarterly average from 2016 through 2019. Consumer lending remains flat, and house prices continue to fall. Employment prospects in construction improved in December, but the labor market for manufacturing and services worsened. Chinese economic growth is expected to remain below average until its property market and income growth recovers.
Bloomberg noted on 15 January that the Peoples Bank of China (PBOC) held a key interest rate steady despite the threat of deflation. Consumer prices began declining in July 2023, and the three-month consecutive decline in October through December 2023 is the longest deflationary streak since 2009. Some experts are concerned that if China doesn’t signal monetary support to avoid deflation, China could fall into a deflationary spiral that would be difficult to exit.
Taiwanese investment into China fell by nearly 40% in 2023 to the lowest level since 2001, as reported on 16 January by Bloomberg. China represented 11% of Taiwan’s 2023 outbound investment, down from 34% in 2022. Taiwan businesses are “adjusting their overseas exposure” and are boosting their investments in the US, Europe, Japan, and elsewhere to diversify production risks. The value of China’s chip imports from Taiwan suffered its biggest annual drop in 2023, partly attributed to US export controls.
Bloomberg reported on 10 January about new US economic tools to enact strict restrictions on outbound investment flows to slow China’s military development. The US has previously enacted tariffs on Chinese imports, followed by several rounds of economic sanctions and an embargo on exports of state-of-the-art computer chips. In August 2023 President Biden directed the US Department of the Treasury to draft rules barring US investments in “entities suspected of helping to develop next-generation weaponry for China’s war machine.” The ban is expected to go into effect in the coming months.
Though the extent and impact of the new ban is not currently known, the range of covered transactions “is likely to include mergers; acquisitions of minority interests; private equity, venture capital and greenfield investments; joint ventures; and convertible-debt financing.” US total FDI in China in 2022 rose 9% YoY to $126.1 billion USD
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Thailand
“THB ended the week moderately lower”
“BoT says interest rate cuts can’t fix structural economic problems”
“Thailand 2024 GDP forecast to grow 3.2%, up from 2.5% in 2023”
The THB finished moderately lower again this week, from 34.90 per USD on 12 January 2024 to end at 35.49 per USD on 19 January 2024.
Last week we noted Thailand’s ruling Pheu Thai party’s history of conflicts with the Bank of Thailand dating back to 2001. As reported on 14 January, the Bank of Thailand (BoT) “pushed back strongly against calls for lowering borrowing costs, saying interest rate cuts can’t fix structural economic problems.”
BoT Assistant Governor Piti said interest-rate cuts carry “costs and risks. We have to use it very carefully” as it could end up stoking inflation as well as lead to excessive debt.
Asst. Governor Piti also said that the deflationary trend observed in 2023 was due primarily to state subsidies and didn’t reflect falling economic demand.
The World Bank has forecast Thailand GDP to grow 3.2% YoY in 2024, up from an estimated 2.5% YoY in 2022. PM Srettha has announced his intention to boost growth to 5% during his term in office.
Energy
“Crude closed modestly higher this week”
“Henry Hub closed significantly lower while EU Natural Gas closed moderately lower this week”
“Oil prices up on geopolitical tensions, offset by global economic headwinds”
“US to set global oil production record in 4Q23 as top producer”
Brent Crude finished modestly higher this week, from $78.32 USD on 12 January 2024 to close at $78.63 on 19 January 2024.
Henry Hub finished significantly lower this week, from $3.33 USD per MMBTU on 12 January 2024 to close at $2.52 USD per MMBTU on 19 January 2024.
EU Natural Gas finished moderately lower this week, from €31.99 per MWh on 12 January to close at €28.43 per MWh on 19 January 2024, equivalent to $7.65 USD per MMBTU.
Brent Crude gained 0.5% this week, supported by tensions in the Middle East and oil output disruptions offsetting concerns about Chinese and global economic headwinds, as reported on 19 January by Reuters. The Chinese equity market fell to near a five-year low, signaling weaker demand for crude oil in 2024. Supply outages continued in Libya, and 30% of North Dakota oil output was frozen due to extreme cold weather.
Reuters also reported that the International Energy Agency (IEA) raised its 2024 global oil demand growth forecast by 180,000 bpd to 1.24 million bpd, though it also expects world supply growth in 2024 to exceed demand growth.
CNN reported on 19 January that the US is set to produce a global record of 13.3 million bpd of crude and condensate in 4Q23. December weekly US oil production hit 13.2 million bpd. The US is “exporting the same amount of crude oil, refined products and natural gas liquids as Saudi Arabia or Russia produces.” Global crude oil demand is forecast to hit a record demand in 2024, but the demand will “easily be met” by growth in supply.
Eurozone natural gas prices fell as gas inventories remain strong, as reported on 15 January by Bloomberg. The news that Qatar has suspended shipments of LNG through the Red Sea failed to boost prices. Qatar is the second biggest LNG supplier to Europe following the US. However, harsh winter weather is forecast for the UK, France, and Germany this coming week, offset by continued reduced industrial consumption. Maxar Technologies forecasts above average Eurozone temperatures by the end of January.
Logistics
“BDI rebounded this week to a moderately higher close”
“US continues to strike Houthi forces as Red Sea attacks continue”
“Panama Canal continues to struggle, but restrictions may be reduced in January”
Baltic Dry Index finished moderately higher this week, from 1,460 on 12 January 2024 to close at 1,503 on 19 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 28.2% since the beginning of 2024.
US conducted a sixth round of strikes against Houthi forces on 20 January, as reported by Fox News. President Biden said that strikes against the Houthis will continue as long as they continue to attack ships in the Red Sea. Also this week the US State Department relisted the Houthis as a terrorist organization. Biden removed the Houthis from the terrorist list during his first week in office.
The Panama Canal continues to struggle with drought conditions, with December transits sinking to a new low of 746 ships, as reported on 19 January by FreightWaves. December transits fell 4.7% MoM, compared with a 21.9% MoM fall in November. LPG transits via the Neopanamax locks fell 17.9% MoM in December on top of a drop of 34.1% MoM in November.
January reservations have been raised from 22 transits per day in December to 24 transits per day in January based on better-than-expected water levels. However, this is still 33% below the usual 36 daily transits per day. The Panama dry season lasts until May.