The Morning After… Kicking Off a New Month
February 1, 2024
U.S. share prices reacted poorly to Fed Chairman Powell’s press conference, ending January’s stellar month on a downbeat. Pre-market futures trading today suggest yesterday’s loss will be partly trimmed. Powell didn’t explicitly rule out a rate cut in March but indicated that a reduction then is not in the baseline forecast. More generally, he applauded the recent U.S. economic performance as “good news” of solid growth with continuing disinflation. Trends don’t have to become even more favorable to elicit a less restrictive stance as 2024 unfolds. Fed officials merely want to see the progress continue so that they can be more confident in securing the mandates of 2% price stability and maximized employment. Decisions will be made on a meeting to meeting basis.
In overnight market action, the dollar is narrowly mixed. Share prices closed down 1.2% in Australia, 0.8% in Japan, 0.6% in China but up 1.8% in South Korea, 0.5% in Hong Kong, and 0.4% in Taiwan. The Paris CAC (-0.6% thus far) has slipped more sharply than other major European stock markets. The ten-year Treasury yield edged a basis point lower to 3.90%, bringing its drop since the close on January 24 to 27 basis points. The 10-year Japanese JGB and British gilt yields are 4 and 2 basis points lower so far today. The price of WTI oil has risen 1.1% on concerns of a widening Mideast war, while the cost of bitcoin and oil are down 0.9% and 0.7%.
Manufacturing purchasing manager surveys for January released today reflect a troubled sector that’s coping with the additional challenge of dangerous shipping in the Red Sea which raises shipping costs while creating fresh supply imbalances. Among European economies, the manufacturing indices posted sub-50 readings for the most part, implying an extended contraction of activity in early 2024. However, respondents also expressed rising confidence that better output conditions will emerge later this year.
Euroland’s purchasing managers index matched the 10-month high 46.6 reading estimated initially. That’s a significantly slower pace of contraction that six months earlier when the reading was at a 3-year low of 38.8. Within the euro area, PMIs ranged from 43.0 in Austria (which nevertheless was its highest score in ten months) to 54.7 in Greece, a 21-month high and the only country in the group with a score above the 50 neutral threshold. France owned the second weakest reading, 43.1, followed by Germany’s 11-month high of 46.5. Spain (49.2) and Italy (48.5) recorded ten-month highs. Despite some encouraging developments in the region’s factory sector, the report concluded that, “there is a real chance that the manufacturing sector’s year-long recession in the eurozone could stretch into the first quarter of this year.”
Elsewhere in Europe, the Swiss and Swedish PMI readings of 43.1 and 47.1 were also south of the expansionary zone. Ditto for the U.K. (a 2-month high of 47.0), Poland (a 3-month low of 47.1), the Czech Republic (a 2-month high of 41.8), Turkey (a 4-month high of 49.2) and Hungary (a 4-month low of 49.9 after three straight readings above 50). Russia’s PMI dropped 2.2 points to a 6-month low of 52.4.
Japan’s manufacturing PMI was unrevised from its preliminary reading of 48.0 and barely better than December’s 10-month low of 47.9. The Caixin-compiled Chinese manufacturing purchasing managers index matched December’s 50.8 reading, signaling a positive trend but only barely. The South Korean and Malaysian PMI indices rose to a 19-month high of 51.2 and a 17-month peak of 49.0, respectively. Readings of 50.8 in Vietnam and 52.9 in Indonesia were at 5-month highs. The Filipino reading for January of 50.9 was above 50 but at its lowest in four months. Taiwan’s 48.8 score was below 50 for its twentieth straight time but its best reading in 11 months. Thailand’s PMI bounced of December’s 42-month low of 45.1 to check in at a 2-month high of 46.7. In India, whose economy for some time now has outpaced China’s, the manufacturing PMI jumped 2.1 points to a 4-month peak of 56.5.
Australia’s January manufacturing PMI reading got revised a tad lower to 50.1 but still represented an 11-month high. Brazil scored a 52.8, its best manufacturing result in a year and a half. But the Absa-compiled South African PMI hit an air pocket, relapsing from 50.9 in December to 43.6 in January, its worst level since early 2020.
Among other data out this Thursday, Euroland’s jobless rate remained at a record low of 6.4%, and CPI inflation in the joint-currency area slipped back 0.1 percentage point to a 2-month low of 2.8%, above November’s low of 2.4% but well below the peak of 10.6% in October 2022.
Indonesian CPI inflation of 2.57% in January fell to a 3-month low and was associated with a 25-month low of 1.7% among core items in the index.
Fast productivity partly explains how the U.S. managed to achieve such a sharp deceleration of inflation while growing solidly with its lowest unemployment in decades. Labor productivity posted successive quarterly advances last year of 3.6% in the second quarter, 4.9% in 3Q and 3.2% in the final quarter. Productivity growth in 2023 rebounded 1.1% after dropping 1.9% on average in 2022. Unit labor costs, which had leaped 5.6% in 2022 consequently cooled to 2.9% on average last year, including -1.1% and +0.5% on year in the two most recent quarters.
U.S. new jobless insurance claims rose to an 11-week high last week of 224k.
The Bank of England’s decision to leave its base rate unchanged at 5.25% conceals a mixed 6-2-1 vote in which monetary policy committee members Haskell and Mann favored a 25-basis point rate hike and Dhingra voted to cut by 25 basis points. British CPI inflation has fallen from 11.1% in October 2022 to 4.0% last month. The base rate had been 0.10% from March 2020 to December 2021 when it returned to 0.25%. 325 basis points of rate hikes in 2022 followed, and another 175 bps had been done by September 2023 when it reached the current level. A statement from the central bank no longer mentions the possibility of a further rate hike. But “the Committee judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated.”
The Swedish Riksbank also reviewed monetary policy today and decided to make no change to its 4.0% repo rate. Like the Bank of England, an easing cycle has not yet begun. The rate has been 4.0% since a 25-basis point hike last September and was at zero percent when the pandemic began. A statement released today summarizes the latest thinking of policymakers:
There is less risk of inflation becoming entrenched at levels that are too high. Following a longer period during which inflation was much higher than expected, inflation has recently fallen in line with the Riksbank’s forecasts. This creates greater certainty in the assessment of inflation. Activity in the Swedish economy has slowed down, and inflation has fallen significantly. In addition, inflation expectations are close to the target and wages are increasing moderately. The policy rate can therefore probably be cut sooner than was indicated in the November forecast. If the prospects for inflation remain favorable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of England, Euroland unemployment and CPI, January 2024 manufacturing purchasing manager surveys, Swedish Riksbank
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