Friday's Markets Update (August 4, 2023)

05 Aug 2023 by rate3

On Friday, the unemployment rate decreased. NASDAQ closed lower, dragged down by Apple's quarterly results. BTC edged downwards a bit more in an attempt to break the 29K support level. Other: A poll showed that only 16% of Americans support CBDC; Auto exports from Mexico skyrocketed; PPI in Columbia's mining sector fell sharply due to increased competition and high rates.

Details: The unemployment rate in the US fell to 3.5% in July, below market expectations. The number of unemployed people decreased by 116 thousand and employment levels rose by 268 thousand.

Comment:

The US labor market is a bit of a puzzle right now. On the one hand, we have a number of indicators that suggest that the economy is slowing down, including:

Falling corporate profits
Layoffs at tech companies
Declining PMI
Falling consumer confidence
On the other hand, the unemployment rate is still very low, and job growth is still happening. So why is this?

There are a few possible explanations. One is that the labor market is simply lagging behind the rest of the economy. It takes time for businesses to adjust to changes in the economic environment, and it's possible that the labor market is still adjusting to the Fed's rate hikes.

Another possibility is that the labor market is being supported by some temporary factors. For example, the government's stimulus programs are still providing some support to the economy, and this may be helping to keep people employed.

It's also possible that the labor market is simply more resilient than we thought. The US economy has a long history of creating jobs even during periods of economic slowdown, and it's possible that this trend will continue.

Of course, it's also possible that the labor market is about to change. If the economy continues to slow down, we may start to see a decline in job growth. However, for now, the labor market remains a bright spot in the US economy.

Here are some additional factors that may be contributing to the stubborn increase in US employment:

The strong demand for labor from businesses that are still expanding.
The tight labor market, which is making it difficult for businesses to find qualified workers.
The government's efforts to support the labor market, such as the extension of unemployment benefits.
It's important to note that the labor market is not immune to the economic slowdown. If the economy continues to slow down, we may start to see a decline in job growth.

Crypto

Report: Cato Institute poll, conducted in Mar - Feb 2023, found that most Americans (74%) oppose a central bank digital currency (CBDC) if it means the government could control how they spend their money. The poll also found that 68% of Americans oppose a CBDC if it means the government could track how they spend their money, and 59% oppose a CBDC if it would allow the state to freeze the bank accounts of American protesters. Only 16% of Americans support the issuance of a CBDC.

Macroeconomics
Mexico: Auto exports from Mexico hit a record high in July 2023, up 31% year-on-year. Ford, Nissan and Audi saw the biggest gains, while General Motors and KIA saw declines.

Comment:

It is possible that the sharp increase in auto exports from Mexico is due to reshoring, as auto corporations shift their production from sanctioned countries like Russia and from China to Mexico.

Russia was a major exporter of autos to the United States, but the country was sanctioned after its invasion of Ukraine. This led to a decrease in the supply of autos from Russia, which created an opportunity for Mexico to increase its exports.

China is also a major exporter of autos to the United States, but the country has been facing increasing trade tensions with the United States. This has led some auto corporations to consider reshoring their production to Mexico, where labor costs are lower and the regulatory environment is more favorable.

In addition to reshoring, the sharp increase in auto exports from Mexico could also be due to other factors, such as the strong demand for Mexican-made autos in the United States. The United States is Mexico's largest trading partner, and the demand for Mexican-made autos has been increasing in recent years.

It is difficult to say definitively whether the sharp increase in auto exports from Mexico is due to reshoring. However, it is certainly a possibility, and it is one that will be worth monitoring in the coming months and years.

Additional factors contributing to the increase in auto exports from Mexico:
The United States-Mexico-Canada Agreement (USMCA), which went into effect in 2020, has made it easier for auto corporations to produce and export autos from Mexico to the United States.
The Mexican government has been investing in infrastructure and education in recent years, which has made Mexico a more attractive destination for auto investment.
The cost of labor in Mexico is lower than in the United States, which makes it an attractive location for auto production.
Overall, it is likely that a combination of factors is contributing to the increase in auto exports from Mexico. Reshoring is certainly a possibility, but it is not the only factor at play.

Columbia: Producer prices in Colombia fell by a record 6.55% in July from a year earlier, which, some say, is reflecting the central bank's aggressive interest rate hikes. Prices in the mining and quarrying sector fell sharply, while prices in agriculture, livestock, forestry, hunting, and fishing rose at a slower pace. On a monthly basis, producers' deflation was recorded at 0.74%, up from 2.71% in the previous month.

Comments: An alternative, more plausible explanation for the sharp price drop in the mining sector, rather than a rates policy, is the increased competition from other countries during times when demand for resources is slowing down across the world. Other countries, such as China, Peru, and Chile, are also world's major miners. These countries are often able to extract resources more cheaply than Colombia, which puts intense pressure on prices locally.

Weeks 32: Next week, investors will be focused on a number of key economic releases, including the US inflation report (Thursday, August 10), producer prices, and the Michigan Consumer Sentiment (both on Friday, August 11). In addition to these US releases, investors will also be watching China's inflation and trade data, GDP growth figures for the UK and the Philippines, an interest rate decision from the Reserve Bank of India, and inflation for Brazil and Mexico.