Investors Uneasy about Several Recessionary Risks
September 22, 2023
Preliminary September purchasing manager survey results out today attest to deepening economic weakness in Europe. Euroland’s composite PMI reading of 47.1 after 46.7 in August and 47.0 in July are consistent with a 0.4% quarter-on-quarter drop in GDP in 3Q. Such would represent a fourth straight listless quarter following a 0.1% dip in the final quarter of 2022 and 0.1% upticks in the first and second quarters of 2023. The composite and service French PMI scores pointed to the sharpest contraction in 34 months, while the manufacturing index (43.6) plumbed to a 40-month low. The British composite and service sector readings were at 32-month lows, and Germany’s composite score (46.2) remained quite depressed though not as much so as August’s 39-month low.
A separate source of investor anxiety derives from China’s mounting financial sector distress and fears over the health of that economy’s shadow banks.
Aside from not announcing an interest rate increase after this week’s FOMC meeting, just about everything Fed Chairman Powell communicated conveyed a more hawkish message than expected regarding U.S. monetary policy through the end of next year. The soft landing scenario is looking like a longer shot than hoped.
Japan’s monetary policy review gave a mixed message. Once again there was no modification of the extremely accommodative stance, and Govenor Ueda defended the unanimous decision by asserting that bank officials could not yet sign off on the goal of 2% stable and sustainable inflation. While conceding that inflation has lately been stickier than thought, inflation is still expected to decelerate to and below the 2% threshold in the near term, and the longer-term outlook hinges critically on how the growth in wages evolves. Japan’s short-term interest rate target remains negative at -0.1%, and the Japanese 10-year JGB yield target was left at “around 0%” give or take 50 basis points. Presumably if this spring’s annual ritual of wage awards proves generous, a less expansive policy might emerge before mid-2024, but patience is being urged for now.
Japanese data were also mixed. Japanese CPI inflation in August (3.2% overall, 3.1% excluding fresh food, and unchanged 4.3% excluding food and energy) remains well above target. The preliminary composite, manufacturing, and service sector purchasing manager indices dropped to 7-, 7-, and 8-month lows, however.
Australia’s preliminary PMI results also depicted a lack of momentum despite a 4-month high in the composite PMI. Such recovered to stagnant, but not contractioary, 50.2. Manufacturing remained below 50 at 48.2, while the score for services was just slightly above the neutral level at 50.5.
In financial market action overnight,
- The dollar rose 0.5% against the yen, 0.3% versus sterling and 0.2% vis-a-vis the euro and Swiss franc but dropped 0.7% against the New Zealand dollar, 0.5% versus the Aussie dollar, and 0.3% relative to the loonie. The euro touched a fresh 6-month low of $1.0615. The euro’s all-time low was $0.8228 in October of 2000.
- U.S. stock futures show only a modest rebound from the sharp drop late Wednesday and yesterday. Elsewhere, share prices closed up by 2.3% in Hong Kong and 1.6% in China but down 0.5% in Japan. European bourses are modestly in the red, too.
- Prices for gold and bitcoin are 0.3% firmer, and oil has risen 1.1%.
- The 10-year U.S. Treasury yield hit 4.51% just before midnight, exceeding 4.5% for the first time since the subprime mortgage banking crisis first surfaced in the summer of 2007, but is currently a basis point below Thursday’s close. The British and Japanese 10-year sovereign debt yields also ticked slightly lower today, while Germany’s is a basis point firmer.
Second quarter GDP growth in Spain (0.5%) and the Netherlands (-0.2%) has been revised marginally higher. Compared to a year earlier, Spanish GDP climbed 2.2%, while Dutch GDP dipped by 0.2%.
British retail sales in August slightly surpassed expectations, growing 0.4% on month but falling 1.4% on year. The index for British consumer confidence in September improved four points to a 20-month high, albeit still well below zero at -21. The orders index of the CBI monthly industrial trends survey fell 2 index points to a 5-month low of -18.
Malaysian consumer price inflation held steady in August at July’s 23-month low of 2.0% versus a 16-month high of 4.7% in August 2022.
A big rebound in Irish producer prices in August trimmed the 12-month rate of decline to 0.3% from 5.2% in the prior month. June had seen a 0.6% year-on-year slide.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan, Japanese CPI, preliminary purchasing manager surveys
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