Ormiga Weekly Market Update: 1st December 2023

US

US economic growth was even stronger in the third quarter than previously estimated, underscoring the economy’s remarkable resilience in the face of elevated inflation and high borrowing costs earlier this year. Gross domestic product, the broadest measure of economic output, rose at an annualized rate of 5.2% from July through September, according to the Commerce Department’s second estimate, released Wednesday morning. GDP is adjusted for inflation and seasonal swings. Wednesday’s latest reading reflects an even faster pace of growth than the blistering 4.9% rate the department initially estimated. It factors in greater business investment, government outlays, residential investment and inventory growth.

JPMorgan Chase CEO Jamie Dimon issued a stark warning to Wall Street on Wednesday: Inflation could rise further and recession is not off the table. “A lot of things out there are dangerous and inflationary. Be prepared,” he said at the 2023 New York Times DealBook Summit in New York. “Interest rates may go up and that might lead to recession.” Governments across the globe need more money, he said, to fund the green economy, remilitarize and to address energy crises — and that will all be inflationary. “I’m cautious about the economy,” he said. The labor market in the United States has been resilient, but “inflation is hurting people.” Stimulus money handed out during Covid shutdowns and quantitative easing by the Federal Reserve had injected “drugs directly into our system” and caused an economic “sugar high,” said Dimon. But that’s fading. “I think quantitative easing and tightening and these geopolitical issues can bite,” he said.

Only three years after U.S. oil production collapsed during the pandemic, energy companies are cranking out a record 13.2 million barrels a day, more than Russia or Saudi Arabia. The flow of oil has grown by roughly 800,000 barrels a day since early 2022 and analysts expect the industry to add another 500,000 barrels a day next year. The surge in output has helped push down gasoline prices, which have fallen by close to $2 a gallon since the summer of 2022 and are now back to levels that prevailed in 2021. It has also provided the Biden administration with substantial leverage in its dealings with oil-exporting foes like Russia, Venezuela and Iran while reducing its need to cajole more friendly countries like Saudi Arabia to temper prices.

Mexico

The U.S. quest for dependable alternatives to China's manufacturing landscape has put Mexico in the spotlight as a promising opportunity. With its favorable trade terms, low-cost labor, and the Biden administration's incentives for green energy initiatives, Mexico seems poised for a mutually beneficial partnership. Recent headlines have highlighted Mexico's ascent, surpassing China as the largest source of imports into the U.S. in July. The country also saw a record-high foreign direct investment of $32.9 billion in the first nine months of the year, coupled with burgeoning industrial developments near the U.S. border. Major players like Tesla have announced ambitious plans for multi-billion-dollar facilities in Mexico, signaling a burgeoning trend of relocating U.S. manufacturing southward.

While this shift to Mexico has historical roots dating back to the North American Free Trade Agreement of 1994, recent transformations are attributed more to a decline in Chinese imports than a surge in Mexican exports. However, despite the potential for significant nearshoring opportunities, businesses opine that the current scale remains a fraction of its potential due to lacking government policies. Andrés Manuel López Obrador, Mexico's left-wing president, holds a pivotal role in this context. His nationalist approach and skepticism toward businesses, combined with a penchant for state-led economic structures, have led to missed opportunities. López Obrador's decision to scrap Mexico's investment promotion agency upon taking office further underscores the challenges in fully harnessing Mexico's potential for nearshoring.

In a separate development, Mexico's President announced a 20% increase in the country's minimum wage in 2024, amounting to roughly $14.25 per day. Around one-third of Mexico's registered workforce reportedly earns the minimum wage, which equates to approximately $1.75 per hour starting January 1. The increase in pesos takes minimum wages from 207 MNX to 248 MXN, with a slightly higher level along the border to account for variations in higher living costs.

Europe

European markets demonstrated resilience by rebounding from a midweek decline, closing the week on a strong note driven by a series of robust manufacturing data. The Stoxx 600 index soared to its highest level in four months, propelled by better-than-expected manufacturing purchasing managers' indices (PMIs) from key regions including China, the UK, and the eurozone.

In the UK, house prices continued their upward trajectory for the third consecutive month in November, defying expectations of a decline. Nationwide reported a 0.2% month-on-month increase, following rises of 0.9% in October and 0.1% in September. This sustained growth marks the first time homeowners have witnessed a consistent increase in property values over three consecutive months since the previous summer, spurred by hopes that mortgage rate costs had reached their peak.

Moreover, Europeans found relief as inflation levels dropped more than anticipated, declining to 2.4% in November, the lowest in over two years. Plummeting energy costs alleviated the cost-of-living strain, contributing to the easing of inflation. This reduction from an annual 2.9% in October for the 20 eurozone countries signals a significant departure from the peak of 10.6% in October 2022, during the height of the energy crisis. While this aligns closely with the European Central Bank's (ECB) inflation target of 2%, the trade-off of higher interest rates has curbed economic growth. This scenario heightens expectations that the ECB might maintain steady rates at its upcoming meeting on December 14. Chief Europe economist for Capital Economics, Andrew Kenningham, highlighted the evolving inflationary landscape, indicating a challenge for the ECB in navigating this shift.

ECB President Christine Lagarde reiterated the bank's commitment to decisions based on current data and maintaining elevated rates until inflation goals are achieved. These developments underscore the delicate balance between inflationary control and stimulating economic growth, shaping the ECB's forthcoming monetary policy decisions.

Asia

Analysts observed a mixed picture of factory activity in China for November, indicating a potential need for increased stimulus to support economic growth. The contrast between two surveys on the sector's health—the Caixin/S&P Global manufacturing purchasing managers' index (PMI) and the official PMI—underscored the complexities. While the Caixin index unexpectedly rose to 50.7, signaling the fastest expansion in three months, the official PMI fell to 49.4. These differing figures highlight the challenges facing the economy, including an ailing housing market, risks associated with local government debt, and sluggish global growth. Factory owners continue to grapple with high input costs, overcapacity, subdued demand, and governmental priorities focused on rescuing other sectors of the economy. Sheana Yue, a China economist at Capital Economics, noted that the average of the two indices suggests factory activity likely remained relatively unchanged last month.

In Japan, despite solid corporate profits, capital expenditure growth slowed in July-September, prompting skepticism regarding the central bank's belief that robust corporate spending would underpin the fragile economic recovery. The modest increase of 3.4% in capital expenditure in the third quarter, compared to a 4.5% rise in April-June, casts uncertainty on the extent of increased spending on plant and equipment despite soaring corporate profits, according to Taro Saito, an economist at NLI Research Institute. This development might not significantly revise the preliminary gross domestic product (GDP) data, which previously indicated a contraction in the world's third-largest economy for the first time in three quarters.

Meanwhile, Indian refiners have restarted purchasing Venezuelan oil through intermediaries following the temporary lifting of U.S. sanctions on Venezuela in October. Reliance Industries, India's largest private sector company, is set to engage with executives from state firm PDVSA to discuss direct sales. The renewed trade between the two countries, once a significant destination for Venezuelan oil, could potentially alleviate import costs for India, diversifying its oil sources beyond Russia and reducing reliance on the Middle East. Venezuela's intermittent oil output may limit its export offerings, but access to its heavy oil could play a pivotal role in India's oil import strategy.

[Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. Consult with a qualified financial professional before making any investment decisions.]