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Money & Cycles Weekly Bulletin

Manufacturing recovery hopes are premature

December 4, 2023 by Simon Ward

PMI orders upticks probably temporary. Global PMI and ISM manufacturing new orders indices rose in November but remain sub-50, with monetary trends and likely resumption of a stockbuilding downswing suggesting further weakness (see charts).

US / Eurozone core inflation well below central bank forecasts. The latest year-on-year readings are 0.25 pp and 0.5 pp beneath FOMC and ECB Q4 projections made as recently as September (see charts).

Weak US Q3 income growth. Income-based GDP again lagged the headline expenditure measure significantly in Q3, with a fall in real operating profits suggesting downside risk to business capex (see charts).

Eurozone / UK broad money / bank lending stagnant. Medium-term deflation risk is rising as monetary weakness extends (see charts).

PMI orders upticks probably temporary

Global manufacturing PMI new orders rose for a fourth month, while ISM new orders rebounded

Hopes that manufacturing has turned the corner contributed to further outperformance of DM cyclical sectors – but EM cyclicals still aren’t confirming

The November rise in global manufacturing PMI new orders partly reflected a rebound in China – but the official Chinese PMI survey weakened further

The US ISM new orders uptick was probably due to an auto strike effect, while breadth deteriorated

Only 2 out of 18 industries reported rising orders, the smallest number since January.

Orders have been supported by an interruption of the downswing in stockbuilding – but a further decline is likely

Global six-month real narrow money momentum made a new low in September, suggesting PMI weakness into c.end-Q1

Real money momentum recovered in October – was September the bottom?

The October rise in real money momentum was driven by the US

The US recovery suggests less bad economic prospects for later in 2024 but doesn’t imply a reduced risk of a near-term hard landing

Real money momentum often bottoms before or at the start of hard landings / recessions. Why? Recessions are triggered by a shift from spending to saving, with the latter reflected in accumulation of liquid assets.

US / Eurozone core inflation well below central bank forecasts

US annual core PCE inflation is on course to be 3.3-3.4% in Q4 vs. a FOMC median forecast of 3.7% in September.

Eurozone annual core CPI inflation is on course to be 3.7-3.8% in Q4 vs. an ECB staff forecast of 4.1% in September

Weak US Q3 income growth

US six-month core PCE inflation slowed further to 2.5% annualised

The income-based US GDP measure continues to suggest a much softer economy than the headline expenditure-based series

From the income side, real operating profits have fallen over the past year, suggesting weak prospects for business capex

Forward-looking orders responses in regional Fed manufacturing surveys weakened further last month

The Chinese NBS non-manufacturing PMI survey remained weak

S&P Global / Caixin survey tomorrow.

The NBS manufacturing PMI output price index remained below 50

Chinese competition will continue to drag on global pricing power.

Eurozone / UK broad money / bank lending stagnant

Eurozone six-month headline / core CPI momentum continues to track an earlier broad money slowdown

6m core down to 2.3% annualised.

Unemployment is on a rising trend

Three-month broad money / bank lending growth has stabilised at

Ditto in the UK, suggesting weak economic prospects and rising medium-term deflation risk

Indian GDP grew by 7.6% year-on-year in Q3 but is still lagging China since before the pandemic

Real growth has recently been boosted by a suspiciously weak deflator

NS Partners Ltd.
December 4th, 2023