Ormiga Weekly Market Update: 30th June 2023

Mexico

Mexico's monthly GDP, as measured by Banco de México, grew by an annualized rate of 5.4% in April 2023, surpassing the revised first-quarter growth of 4.1%. Due to the stronger-than-expected performance, the consensus forecast for Mexico's GDP growth in 2023 (fourth quarter to fourth quarter) increased to 1.1% according to Banco de México's compilation in May.

Recent data show a mixed picture for the Mexican economy, with growth in employment and retail sales, while industrial production remained flat and exports experienced a slight decline. Inflation shows signs of moderation, and the peso continues to strengthen against the dollar.

Formal sector employment, which includes government benefits and pensions, increased by 7.6% in May, following a 6.5% rise in April. Total employment, including informal sector jobs, grew by 4.3% year-on-year in the first quarter of 2023. The unemployment rate remained unchanged at 2.8% in April, compared to March.

US

Strong economic data reported on Tuesday and Thursday helped pull the US stocks and the Dow Jones Industrial Average out of a 6 day slump and allay fears that the US economy is not verging on collapse or recession.

The US economy experienced stronger growth than initially estimated in the first quarter of this year, as reported by the Bureau of Economic Analysis (BEA). In their third reading of gross domestic product (GDP), the BEA revealed that the economy expanded by 2%, a significant increase compared to the previous reading of 1.3%. However, this figure still indicates a slowdown from the robust growth rates of 3.2% and 2.9% seen in the third and fourth quarters of 2022. This upward revision in GDP is part of a series of positive economic indicators that have surpassed economists' expectations. Recent data shows that the labor market is exhibiting resilience, with jobless claims reaching their lowest levels since May, standing at 239,000 claims in the week ending June 24.

Furthermore, consumer confidence in June reached its highest level in 18 months, suggesting optimism among households. Additionally, durable goods orders experienced growth in May, defying predictions of a decline, and new home sales in May exceeded expectations.

These promising economic indicators are encouraging signs for the US economy, indicating a potential rebound from the challenges faced during the pandemic. However, it remains crucial to monitor future developments to assess the sustainability of this positive momentum.

Europe In the eurozone, core inflation has rebounded, signaling that price pressures are persistent in the region despite some indications of momentum slowing. The core inflation measure, which excludes fuel and food prices, rose to 5.4% in June from 5.3% in May, primarily driven by an increase in the cost of services.

Economists have noted the potential risk that core inflation might not settle at the European Central Bank's (ECB) target of 2%. Nomura highlighted the significant wage increases, with compensation per employee rising by 5.2% year-on-year in the first quarter of 2023. This raises concerns about the need for further interest rate hikes.

According to Capital Economics, the latest inflation data does not deter the ECB from raising interest rates by another 25 basis points at its upcoming meeting in July. Additionally, there is a good chance of another rate hike in September.

Although core inflation rose, headline inflation dipped from 6.1% to 5.5%, marking the lowest level since the war in Ukraine broke out.

The ECB recently revised its inflation forecasts, anticipating inflation rates of 5.4% in 2023, 3% in 2024, and 2.2% in 2025 across the eurozone. ECB President Christine Lagarde acknowledged that inflation remains persistently high and warned that it is expected to persist into 2024. These developments highlight the ongoing challenge faced by the ECB in managing inflationary pressures in the eurozone.

Asia

China's anticipated economic rebound in 2023 has encountered multiple challenges, impacting global growth. The country faces sluggish consumer spending, a crisis-ridden property market, declining exports, high youth unemployment, and mounting local government debt. These issues are causing repercussions globally, affecting commodity prices and equity markets.

Furthermore, President Xi Jinping's government lacks effective solutions to address these problems. Prior strategies of large-scale stimulus have resulted in excessive supply in the property and industrial sectors, as well as soaring debt levels for local governments. This situation has sparked concerns about China entering a prolonged economic stagnation akin to Japan's experience after years of unprecedented growth.

Pakistan has reached a staff-level agreement with the IMF for $3 billion of funding to address its severe economic crisis. The deal is subject to approval from the IMF's board after an eight-month delay. Pakistan's central bank raised its key interest rate to a record 22% in an effort to bolster its chances of securing the agreement. The nation is grappling with its most significant economic challenges since gaining independence from Britain in 1947, and the funding will be crucial in implementing necessary reforms and stabilizing the economy. The final approval from the IMF's board remains a key milestone for Pakistan's economic recovery.

South Korea's export downturn slowed in June, with auto exports extending robust rises and semiconductors narrowing their decline, as the bellwether Asian economy posted its first trade surplus since early last year. Shipments from Asia's fourth-largest economy, offering one of the earliest snapshots of monthly global trade, fell 6.0% in June from a year earlier to $54.24 billion in June, narrowing from a 15.2% drop in May, trade ministry data showed this week.