Friday's Markets Update (December 1, 2023)

01 Dec 2023 by rate3

On Friday, the PMI Index indicated that factory activity contracted more than anticipated. However, major stock indexes, including Nasdaq, traded higher as investors interpreted comments from Powell. He suggested that current monetary policy is "sufficiently" tight, implying a potential end to interest rate hikes. Tesla's stock price corrected after a recent price increase on its Cybertruck. Both BTC and ETH pushed higher, with Bitcoin reaching above 39K and Ethereum closing above 2.1K on hourly charts.

Details

According to Powell, the risk of excessively raising interest rates now balances the risk of not increasing them enough to curb inflation. He implied the full effects of rate hikes likely haven't emerged yet. Maintaining the Fed's anti-inflation credibility helped keep public inflation expectations anchored. Powell aligned with other Fed officials that it's premature to declare victory over inflation, since price increases remain above the Fed's 3% target. Core inflation rose 3.5% in October. He reiterated preparedness to tighten policy further if appropriate, though the need to restrain the economy excessively has moderated.

The ISM Manufacturing PMI remained at 46.7 in November, below expectations of 47.6, indicating continued contraction in the manufacturing sector. Production, employment, and supplier deliveries deteriorated, while new orders, inventories, and prices decreased at a slower pace. Prices stabilized due to easing energy markets, but steel market increases offset this. Manufacturing supplier lead times are decreasing, which is positive for future economic activity.

Macroeconomics

The November 2023 S&P Global Mexico Manufacturing PMI rose to 52.5, the highest since July, indicating improving business conditions. Demand significantly increased, driving job creation, more input purchasing, and greater production volumes. New orders saw the joint-strongest upturn in nearly 5 years, although international sales continued falling due to global economic uncertainty.

Comment

Why hasn't re-shoring mitigated the effect of rising interest rates in the manufacturing sector, which continues to shrink?

The state of re-shoring (moving production back to the USA) is experiencing a significant shift due to the continuing disruption of international supply chains caused by factors such as the Ukraine war, China's economic slowdown, and the ongoing impact of the global lock dawn. This trend is reflected in the increasing mentions of "re-shoring" in S&P 500 earnings transcripts, which were up 128% in the first quarter of the year compared to the same period a year ago.

However, despite this trend, the latest Purchasing Managers' Index (PMI) has shown a reduction in manufacturing in the USA, indicating that re-shoring alone may not be sufficient to offset the overall decline in the sector

One possible reason for the limited re-shoring is that some companies find it easier to move production to countries such as Mexico, whose imports to the USA have recently equaled those of China.

In summary, while there is a growing interest in re-shoring manufacturing to the USA, the decision to do so is influenced by a wide range of factors, and the overall reduction in manufacturing in the USA suggests that re-shoring alone may not be enough to reverse the trend.