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Money & Cycles Weekly Bulletin

Is the OECD’s US leading indicator rolling over?

juin 24, 2024 par Simon Ward

US leading indicator warning. A recovery in the OECD’s US composite leading indicator from early 2023 signalled that recession risk was receding but the latest numbers suggest a stall / reversal, consistent with recent weaker performance of cyclical equity market sectors (see charts).

Surprise falls in European / Japanese flash PMIs. Eurozone weakness wasn’t just due to France, while the Japanese reversal is another indication that policy tightening is misguided (see charts).

Chinese monetary weakness only partly explained by portfolio shift. A regulatory clampdown on supplementary interest has triggered an outflow from bank deposits into wealth management products but money momentum has weakened even accounting for this switch (see charts).

Rapid UK non-supercore disinflation. The MPC’s focus on the lagging core services ex. rents measure may be waning, with annual inflation of the rest of the core basket – with a higher weight – converging with the 2% target last month (see charts).

US leading indicator warning

The OECD’s US composite leading indicator may have stalled in June, incorporating data for four of the seven components:

Chart 1 showing OECD US Leading Indicator* *Relative to Trend

Last year’s recovery in the indicator – in contrast to the Conference Board leading index – signalled that recession risk was (temporarily?) receding.

The indicator correlates directionally with the relative performance of (non-tech) cyclical sectors, which have started to lag:

Chart 2 showing OECD US Leading Indicator & MSCI World Cyclical Sectors ex Tech* Relative to Defensive Sectors *Tech = IT & Communication Services

A fall in housing starts to a new post-covid low contributed to the suggested June stall in the leading indicator:

Chart 3 showing US Housing Starts & Permits (000s, annual rate) & NAHB Housing Market Index

Caveat: the final June reading will depend on durable goods orders (this week) and the ISM manufacturing PMI / manufacturing average weekly hours (next week).

The Congressional Budget Office revised up its projection of the FY 2024 federal deficit to 7.0% of GDP, partly reflecting an increased cost of student loans:

Chart 4 showing US Federal Budget Balance (% of GDP)

Surprise falls in European / Japanese flash PMIs.

European / Japanese June flash PMIs missed significantly:

Chart 5 showing Composite PMI Output Indices

The Eurozone fall partly reflected French political turmoil but intensified weakness in Germany was a bigger factor (no Euro 2024 lift yet!):

Chart 6 showing Manufacturing PMIs

Chinese monetary weakness only partly explained by portfolio shift

Chinese money momentum has weakened even allowing for a portfolio shift into wealth management products:

Chart 7 showing China Narrow / Broad Money with Adjustment for WMPs (% 6m)

A clampdown on the practice of banks paying interest above regulatory ceilings triggered an outflow of corporate cash into WMPs, excluded from M1 / M2.

F/x settlement numbers suggest that PBoC intervention to support the RMB was lower but still significant in May:

Chart 8 showing China Net F/x Settlment by Banks Adjusted for Forwards ($ bn) & Forward Premium / Discount on Offshore RMB (%)

The forward discount on the offshore RMB has widened again in June, suggesting no let-up in downward pressure.

Japanese headline CPI inflation was boosted by reversal of a temporary cut in the renewable energy charge but core momentum continued to moderate:

Chart 9 showing Japan Consumer Prices & Broad Money (% 6m annualised)

Exports remain soft despite the weak yen:

Chart 10 showing Japan Export & Import Volumes (2015 = 100)

Rapid UK non-supercore disinflation

The UK MPC has been focused on “supercore” (i.e. core services ex. rent) prices but annual inflation of the rest of the core basket – with a higher weight – is back at target:

Chart 11 showing UK Consumer Prices (% yoy)

Statistical tests indicate that non-supercore prices lead supercore but not vice versa.

Catering services is a third of the supercore basket and momentum is following food inflation lower:

Chart 12 showing UK CPI Catering Services (% yoy) & CPI Food, Alchohol & Tobacco / PPI Output Food, Beverages & Tobacco (% yoy)

Consumer confidence recovered further but spending plans remain weak:

Chart 13 showing UK Consumer Confidence (Gfk)

The German Ifo manufacturing survey mirrored the relapse in the PMI:

Chart 14 showing Germany Manufacturing PMI & Ifo Manufacturing Business Expectations (PMI basis)

Non-US developed markets are now lagging both China and EM ex. China YTD:

Chart 15 showing MSCI Price Indices USD Terms, 31 December 2023 = 100

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juin 24th, 2024