Ear to the Ground

09 February 2024

After the excitement of the US jobs data last Friday, where 353,000 jobs were added, way above the consensus forecast of 180,000, this week has been very quiet on the economic data front.  This has been reflected by relatively sanguine equity and bond markets.  In the UK the Nationwide House Price Index was the only data of note.  This was above consensus forecast, with prices rising 1.3% month on month compared to an expected rise of 0.8%.  Year on year prices are therefore up 2.5%.

Data was on the thin side from the US also.  Of note was the release of the ISM Services Purchasing Managers Index (PMI).  Unlike the manufacturing equivalent, which remains in contraction, the service sector continues to expand, as indicated by a reading above 50.  The index for January stood at 53.4, which was above the consensus forecast of 52 and above December’s reading of 50.5.  The jump was due to a pick up in new orders.  An item to watch however was pricing pressures, which rose the most of all the components.  Overall, the US companies remain optimistic about the economy due to expected interest rate cuts, but still remain cautious about inflation.

Meanwhile, inflation, or rather the lack of it, remains a concern in China.  Year on year to January the rate was -0.8%, therefore deflation.  This was worse than the market expected, where a fall of -0.5% was predicted.  Food was a major contributor here, falling 5.9%.  Chinese consumer prices have now posted their fourth consecutive year on year decline.

Chinese producer prices, or factory gates prices as they are also known, also remain in negative territory.  Whilst this is perhaps not helping the cause in China, it is potentially good news for western economies importing goods.  Lower goods prices means that these economies are, in effect, importing deflation.  This potentially, moving forward, strengthens the disinflation story in western economies.

Deflation, along with concerns regarding economic growth, debt levels and the property sector, means that the equity market continues to languish.  Over the last 12 months the CSI 300 index is down -17.45% on a price only, local currency terms basis.  The MSCI All Countries World Index, meanwhile, on the same basis, is up 15.26%.  To make these returns more comparable, in US dollar terms the Chinese index is down over 22%, whilst the MSCI index is up nearly 14.5%.  This differentiation is huge by any standards and will certainly be adding to the negative sentiment of investors.  The Chinese authorities have reacted, but the market is clearly wanting more.  High debt levels, woes in the property sector, equities now some distance off their highs, the authorities will no doubt be determined to ensure that China does not become the Japan of the early 1990’s and beyond.

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