Ormiga Weekly Market Update: 14th July 2023

US

After enduring two years of soaring prices, Americans finally received some respite as inflation reached its lowest point since early 2021. The government reported on Wednesday that inflation stood at 3% in June compared to the previous year, a significant drop from May's 4% annual rate. While still above the Federal Reserve's 2% target, this decrease was primarily driven by easing prices in key sectors such as gasoline, airline fares, used cars, and groceries. The decline in inflation offers much-needed relief to households grappling with the impact of rising costs.

A widely monitored indicator of consumer sentiment in the US economy reached its highest level since September 2021, fueling optimism about economic recovery. The University of Michigan Consumer Sentiment Index for July's initial reading came in at 72.6 on Friday, surpassing economists' expectations of 65.5. This figure reflects a remarkable 13% increase from the previous month, marking the swiftest pace since December 2005 when the economy was rebounding from the aftermath of Hurricane Katrina. The surge in consumer confidence indicates growing faith in the nation's economic prospects and suggests a potential boost to consumer spending.

This week, the Dow Jones Industrial Average and S&P 500 witnessed a notable lift, thanks to strong quarterly earnings reports from Wall Street giants. Investors closely monitored the financial sector updates, particularly in light of the bank failures earlier this year and the subsequent drain on deposits across the system. Encouragingly, both JPMorgan and Wells Fargo reported a surge in profits during the second quarter, leading to an uptick in their respective share prices. These positive financial results have instilled confidence in the market, demonstrating resilience in the face of recent challenges.

As we move forward, the US economy shows signs of recovery and stabilization. The decrease in inflation provides relief for American consumers, potentially allowing for increased spending and economic activity. The surge in consumer confidence signals a renewed sense of optimism among households, which bodes well for future growth. Additionally, the strong performance of the financial sector in the second quarter contributes to positive market sentiment.

Mexico

The Mexican peso made significant gains against the US dollar, reaching a rate of 16.73 on Friday. This surge was attributed to data showing a slowdown in annual inflation in the United St

ates, which dropped to 3% in June, the lowest level in over two years. This marks the fourth time within a week that the USD-MXN exchange rate has fallen below 17, with the peso currently enjoying its strongest position since 2015. The strengthening peso reflects improved confidence in Mexico's economic stability and resilience.

According to a recent report from Luis Torres at the Federal Reserve Bank of Dallas, Mexico has reaffirmed its status as the United States' leading trading partner. In the first four months of 2023, trade between the two countries amounted to a staggering $263 billion. This trade volume accounted for 15.4% of all goods exported and imported by the US, surpassing both Canada (15.2%) and China (12.0%). Mexico's ability to surpass China in trade volume is indicative of the ongoing economic repercussions of the tumultuous year of 2020. Even as the world emerges from the height of the pandemic, the effects of the economic upheaval continue to shape the global economy. The report highlights that this shift in trade dynamics had already begun prior to the pandemic, spurred by former President Donald Trump's tariffs on certain Chinese goods and the signing of the updated US-Canada-Mexico trade deal, which modified the long-standing NAFTA agreement. Furthermore, the shift towards "nearshoring," bringing supply chains closer both geographically and politically, has contributed to Mexico's growing prominence as a trading partner.

President López Obrador expressed optimism about Mexico's economic prospects, stating that the country is projected to become one of the world's top 10 economies in the coming decades. Citing recent statistics, he emphasized Mexico's potential for significant economic strength in the future. This positive outlook underscores the confidence in Mexico's ability to foster growth and attract investment.

Mexico's economy demonstrates encouraging signs of progress, with the strengthening peso and the country's expanding trade partnership with the United States. The favorable exchange rate benefits trade and promotes economic stability. As Mexico solidifies its position as America's top trading partner, it opens doors for increased collaboration and economic opportunities. President López Obrador's optimistic vision for Mexico's future further bolsters investor confidence. We will closely monitor these developments, providing you with timely insights on Mexico's evolving economic landscape.

Europe Despite challenges such as a bank holiday to commemorate King Charles' coronation and ongoing strikes, the British economy experienced a milder contraction in May than initially anticipated. The Office for National Statistics (ONS) reported a 0.1% decrease in economic output compared to April, following a 0.2% growth the previous month. Economists surveyed by Reuters had projected a more significant contraction of 0.3%. This data suggests that the widely predicted recession driven by high inflation and surging interest rates has not yet taken hold. As a result, the British pound reached a fresh 15-month high, trading at $1.31 against the US dollar for the first time since April 2022. The pound's rally reflects market optimism surrounding the UK economy's resilience in the face of challenges.

Germany made an important announcement this week, revealing plans to decrease its reliance on China in critical sectors. The government published its inaugural "Strategy on China," a comprehensive 40-page document outlining its approach to managing dependencies on the world's second-largest economy. The strategy specifically focuses on sectors such as medicine, lithium batteries for electric cars, and essential elements for chipmaking. This move comes amidst growing concerns over China's human rights record and its adherence to international law. Germany, recognizing China as its most vital trading partner, with imports and exports between the two nations reaching nearly €300 billion ($335 billion) in 2022, seeks to strike a balance between economic ties and protecting its interests.

Europe's economic landscape reveals a mix of encouraging resilience and cautious recalibration. The UK's economy showcased more resilience than anticipated in May, mitigating concerns of an imminent recession. The resulting strength of the pound is a positive indicator for market sentiment. However, challenges persist, including high inflation and surging interest rates, which warrant continued monitoring. Germany's strategic shift highlights the country's efforts to diversify and reduce dependence on China while navigating complex geopolitical dynamics.

Asia

Positive economic data from China indicates a recovery in the country's consumer market after the impact of the pandemic. Offline service industries, particularly domestic tourism, which were severely affected by COVID-19, have experienced a swift rebound. Total retail sales for the first five months of the year reached 18.76 trillion yuan ($2.6 trillion), marking a 9.3% growth compared to the previous year, with more recent data reflecting double-digit expansion. Notably, food and beverage sales increased by 22.6% through May. Encouraged by these promising signs, various regions in the country are launching new promotions to further stimulate economic activity. Furthermore, in response to the 8.9% rise in total car sales during the first five months, China announced in June that it would extend tax breaks for electric and green vehicles until the end of 2027. The government aims to promote sales of durable goods, such as automobiles and appliances, to stimulate consumption and factory output, recognizing the extensive industrial chains involved in their production.

Japan's export growth has slowed significantly, reflecting a global economic slowdown and adding to uncertainties about the country's growth outlook. In May, the value of exports rose by a modest 0.6% compared to the same period the previous year, representing the slowest pace since February 2021. While this figure surpassed analysts' expectations of a 1.2% decline, it highlights the ongoing weakening trend in global trade. Export declines in mineral fuel, chip-making machinery, and semiconductor parts contributed to Japan's sluggish shipments abroad. Additionally, imports were down by 9.9%, largely influenced by a drop in fuel prices. This decline in imports was the most substantial in over two years, aligning with economists' predictions.

According to Goldman Sachs, India is projected to become the world's second-largest economy by 2075, surpassing not only Japan and Germany but also the United States. Presently, India ranks as the world's fifth-largest economy, trailing behind Germany, Japan, China, and the US. Goldman Sachs attributes this forecast to India's burgeoning population, progress in innovation and technology, higher capital investment, and rising worker productivity. The investment bank's recent report emphasizes India's favorable demographics, noting that the country's dependency ratio is expected to be one of the lowest among regional economies in the next two decades. These factors collectively contribute to India's potential for sustained economic growth.

Asia's economic landscape reflects a mixed picture of recovery, challenges, and long-term growth potential. China's consumer market rebounds, fueling optimism about economic activity. However, global economic slowdown impacts Japan's exports, adding uncertainty to its growth outlook. Meanwhile, India's positive long-term prospects position it as a significant player in the global economy.

We will continue to monitor these developments closely, providing you with timely insights on the evolving landscape of the global economy.