Economy in Brief

In this week’s newsletter, we explore regional monetary policy, China’s Golden Week holidays, and Japan’s political landscape. Despite the Fed's 50 bps cut in September, many central banks in the Asia opted to maintain their current policy rates, largely due to domestic factors (Chart 1). However, we may see more exceptions this week, as both New Zealand and potentially South Korea appear poised to reduce rates (Chart 2). Inflation trends are also crucial, with recent price pressures easing thanks to declining energy costs. Nevertheless, escalating geopolitical tensions in the Middle East could hamper progress toward disinflation (Chart 3). Turning to China, recent easing measures have been positively received by markets. However, we observed preliminary signs of price stabilization in Hong Kong markets as Chinese markets undergo the Golden Week holidays (Chart 4). We also examine the potential spillover effects of China’s easing, particularly through currency fluctuations (see Chart 5) and the impact of the easing measures on consumer sentiment and spending. Finally, we examine Japan’s political landscape, focusing on market reactions to Ishiba’s appointment as Prime Minister. His dovish remarks have bolstered Japanese equities while contributing to renewed weakness in the yen (see Chart 6).

Updates on monetary policy While the Fed's 50 bps cut in September opened the door for central banks in the Asia-Pacific region to follow suit, many chose to maintain their current policy rates (Chart 1), primarily due to domestic considerations. Notably, the central banks of Japan, Australia, Taiwan, and Malaysia left their rates unchanged in September. For instance, Australia's central bank remains concerned about inflation, while Taiwan's central bank is focused on issues like household debt and the property market. Meanwhile, Malaysia's central bank sees no immediate need to begin an easing cycle, as inflation is under control and growth remains steady. Additionally, maintaining the current policy rates may be beneficial for some economies from a yield perspective, as yield differentials have either become more favourable (or less unfavourable) for their respective currencies.

French industrial output rose sharply in August, a gain of 1.6% after declining by 0.2% in July. Output in August was led by consumer goods; nondurable goods output increased 4.2% month-to-month in August while consumer durable goods output increased by 3% month-to-month. Output of capital goods was also strong during the month, with a 1.6% gain, although intermediate goods output continued to be weak, falling by 0.4% in August and dropping for the second month in a row.

Sequentially French output explodes over three months although it's relatively mild mannered over 12 months and over six months. The strength in French output is relatively recent. Manufacturing output gains 0.3% over 12 months; over six months it is falling at a 0.5% annual rate but that transforms into a 31.1% annual rate over three months as output sharply recovered in June and in August.

Sequential growth for MFG components Components find consumer durable goods output falling by 6.3% over 12 months, gaining at a 4% annual rate over six months then rising at a strong 14.9% annual rate over three months showing steady acceleration. Consumer nondurable goods output rises by 5.9% over 12 months; output slows to gain at a 4.3% annual rate over six months then it expands sharply to grow at a 19% annual rate over three months. French capital goods output is up only 0.3% over 12 months, but it then expands at a 1.5% annual rate over six months and gains at a 14.2% annual rate over three months showing steadily accelerating growth on this time sequence. Intermediate goods output falls by 3.4% over 12 months, falls more sharply, at a 6.6% annual rate over six months, then cuts that weakness to only a 0.2% annual rate drop over three months.

Quarter-to-date With two months into the third quarter, manufacturing output is rising at 1.6% annual rate, with consumer nondurable output up at a 7% annual rate and consumer durable goods output up at a 3.8% annual rate. Capital goods output is up at a 4.3% annual rate; intermediate goods output is falling at a 5% annual rate in the quarter-to-date.

During this period when output has been experiencing some mild increases, they have transformed into strong increases over three months. Yet, motor vehicle registrations have been consistently weak. That important big ticket consumer item has not taken off.

It has been a weak month for the S&P PMI readings. S&P previously reported manufacturing’s slide lower and with the services PMIs now engaged in a general topping formation and easing this month the composite PMI is continuing to slide and currently is embraced in a downtrend.

September assessments The sample of 25 countries that report PMI data show 13 of these reporters with composite PMI values below 50 that indicates an economic contraction since the composite is a comprehensive score.

76% of the reporters in September showed a slowing month-to-month; that is a decline in the PMI value compared to the month before. This compares to 20% slowing in August which had been a month of some improvement; however, August compared to July when 60% of the reporters had weakened month-to-month. And so, the data see-saw goes.

The unweighted average of the PMI readings among the 25 reporters in September is down to 51.5 from 52.4 in August; the 51.5 average is below the 51.7 average for July. The median reading for September slips more sharply to 49.8 from 52.5 in August whereas August had been an improvement from 51.3 in July. Of course, the September value at 49.8 is below the July value as well. While the average score in September shows a slight expansion at a PMI average of 51.5, the median shows there is a slight contraction in place at a median value of 49.8.

Sequential patterns The sequential readings are based on the average observations over three months, six months, and 12 months. Very little changes looking at either the average or the median metrics on these horizons. The average readings over these 3 periods have clustered around or just below the diffusion value of 52 while the median readings have clustered about a point lower around the median reading of 51; but both have been very consistent around these markers with no indication of anything that we could call a trend change. Over these periods, the number of reporters with diffusion below value of 50 which indicates contraction has been at six to seven members for 12-months, six-months and three-months. These sequential statistics also show that the proportion slowing over 12 months compared to 12 months ago is 56.5%, just slightly above half. Over six months, about 34.8% are slowing compared to their 12-month average, representing about 1/3 of the reporters. However, over the recent three months, the proportion slowing compared to six-month values is up closer to 2/3 of the reporters.

Standings The queue percentile standings which are presented in the final column give us the rankings of the level of the PMI readings since January 2020. The average ranking has been at its 43rd percentile while the median ranking has been at its 38th percentile. Both aggregate statistics, of course, are weak. Since we're looking at percentile standings, the median for any member in the group would occur at a 50-percentile standing. We can see that by a large margin the prototypical reporter is below its median, below the 50% standing mark. Only six members have rankings above their 50th percentile mark. Those are Egypt, with a 66-percentile standing, Japan, with a 71-percentile standing, Singapore, with an 80th percentile standing, Spain with an 80th percentile standing, and India & Brazil both with 84-percentile standings. Similarly, there are six members with percentile standings below the 25th percentile mark.

Conclusion: The clear conclusion from this is that the global economy remains weak and it's clear from the graphic above that we have weakness in manufacturing and in services although on the data back to 2021 quite clearly the manufacturing sector is relatively much weaker while the services sector has fared better despite its recent weakness. Still, both these sectors are undergoing downward pressure currently even though central banks engaged in easing patterns. Those easing patterns have been either put on hold or slowed given the reality of inflation that continues to run above targets that central banks have set.

Trends for the Better vs. Worse Worse- The grey backgrounds in the table identify countries where there has been persistent weakness over the designated periods with PMI reading below 50. For sequential data, there has been persistent contraction over three months, six months, and 12 months in Germany, France, Hong Kong, Zambia, Egypt, and Kenya. Over the most recent three-month period, there is persistent month-to-month contraction in each of these months in Germany, Hong Kong, Zambia, and Nigeria.

Better- Only Brazil and Egypt show progression of better readings over 12 months, six months, and three months; however, for Egypt the readings have remained below 50 indicating contraction. Conditions are persistently worsening for oil producers Saudi Arabia and United Arab Emirates, as well as in Zambia, Ghana, and Nigeria. That list is weighted to all producers and less developed economies and focuses attention on how the rest of the world is eager to see the money center economies continue their progression to cut rates to provide relief to these peripheral areas.