Authors: Zhao Wei, Chen Dafei, Zhao Yu (Zhao Wei is the Chief Economist of Guojin Securities and the Director of the China Chief Economist Forum)
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summary
Since the beginning of this year, the global manufacturing industry has recovered, and resource countries have performed better, while the marginal widening of financial conditions in the United States and the increasing willingness to replenish the warehouse may be the main reasons for the recovery of the global manufacturing industry. Looking ahead, the Fed's high interest rates may remain for a longer time, the repair of upstream and downstream industries in the United States is out of touch, and the prospects for the repair of the global manufacturing industry still need to be observed.
(1) Global manufacturing repair picture: the United States is leading the repair, and resource countries are better than producers and consumers
Since the second half of last year, the recovery momentum of the global manufacturing industry has gradually strengthened. In March 2024, the global manufacturing PMI rebounded to 50.6, standing on the boom and bust line for nearly three consecutive months. The salient feature of this round of global manufacturing repair is that resource countries are better than producers, and producers are better than consumer countries. In the past three months, the average manufacturing PMI in resource countries was 53.7, 51.1 in producing countries, and only 47 in consuming countries. Among the major consuming countries, the recovery situation of the manufacturing industry in the United States is strong, and the euro area and Japan are poor.
The upstream industries of consuming countries are well repaired, while the upstream production of resource countries is weak, resulting in a gap between supply and demand of bulk commodities. Among the consuming countries, the demand of the chemical, primary metal, metal processing, petroleum and other industries in the upstream of the United States has recovered relatively quickly; among the major oil-producing countries, Saudi Arabia's downstream non-crude oil production is relatively prosperous, but the upstream crude oil production has weakened significantly; among the major copper-producing countries, Chile's metal ore production has been weak. The global supply chain shows a pattern of recovery in the upstream industry demand of consuming countries, but weak supply in resource countries.
(2) The reasons for the recovery of the global manufacturing industry: early interest rate cuts in emerging markets + loosening of U.S. financial conditions + the strength of the inventory cycle
On the demand side, U.S. financial conditions have turned loose, and the prospect of replenishment is getting stronger, which may have stimulated the recovery of the global manufacturing industry. Since the beginning of 2023, the US financial conditions FCI-G have shifted from tightening to easing, mainly contributed by rising stock prices, mortgage rates falling from their peaks, and the high level of the US dollar index. Since the middle of last year, the leading indicators of the U.S. inventory cycle have improved, with PPI growth picking up year-on-year, total sales growth picking up, and the U.S. upstream product inventory quantile lower.
On the supply side, some emerging market countries cut interest rates ahead of schedule, boosting manufacturing production in emerging markets. As of the end of last year, the proportion of central banks raising interest rates in the world has peaked and fallen, and the proportion of central banks cutting interest rates has increased. Emerging markets such as Brazil, Mexico, Chile, and Peru took the lead in cutting interest rates, with the Central Bank of Chile starting to cut interest rates in July 2023, Brazil starting to cut interest rates in August 2023, reducing its benchmark interest rate by 50 basis points to 13.25%, and Mexico starting to cut interest rates in March 2024.
(3) How sustainable is the current round of global manufacturing repair? High interest rates and structural imbalances may hinder continuous repair
Looking backwards, the sustainability of this round of global manufacturing repair still needs to be observed. The job market is resilient, commodity prices are rising, and there is rebound pressure on inflation in the United States. Referring to the forecast of the Cleveland Fed, the US CPI in March may rise to 3.3% year-on-year, higher than the CPI growth rate in January and February, and the Fed's interest rate cut may be postponed. The U.S. manufacturing industry is highly sensitive to interest rates, and high interest rates may continue to weigh on manufacturing demand. In January, U.S. manufacturing sales growth slowed to -1.7%.
At the structural level, the repair of the upstream and downstream industries of the U.S. manufacturing industry is disjointed, and the repair of the downstream industry is slow, which may affect the sustainability of the repair of the manufacturing industry. As of January this year, the U.S. manufacturing industry is still in the stage of passive destocking. In the subdivided industries, the areas with better repair of the manufacturing industry are concentrated in the middle and upper reaches of the industry, and the downstream industries such as clothing, leather, beverages, paper products, and furniture are poorly repaired. The repair of upstream and downstream industries is out of touch or the sustainability of the recovery of the manufacturing industry will be dragged down.
From the perspective of inventory scarcity, the U.S. inventory quantile is at the central level, and the overall demand for replenishment in the manufacturing industry may not be strong. From the perspective of nominal inventories, manufacturing inventories are at the 83% quantile in the past decade, of which the durable goods inventory quantile has increased significantly, and the non-durable goods quantile is low, so the current round of manufacturing repair may be more of a structural repair than an overall boost.
Risk warning: escalation of geopolitical conflicts, Fed raising long-term neutral interest rates, marginal contraction of financial conditions;
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The main body of the report
Since the beginning of 2024, the global manufacturing industry has recovered, and resource countries have performed better, while the marginal easing of financial conditions in the United States and the strengthening of the prospect of replenishment may be the main reasons for this round of repair. Looking ahead, the Fed's high interest rates may remain for a longer time, the upstream and downstream industries are out of touch, and the sustainability of the global manufacturing repair still needs to be observed. Hot Thoughts: The Long Wait - Global Manufacturing Recovery in the Face of High Interest Rates
(1) Global manufacturing repair picture: the United States is leading the repair, and resource countries are better than producers and consumers
Since the second half of 2023, the recovery momentum of the global manufacturing industry has gradually established. After 2021, the global manufacturing industry has experienced a two-year downward trend, and since the second half of 2023, the global manufacturing industry has bottomed out, and the repair curve has gradually become clear, with the global manufacturing PMI index rebounding from 48.6 in July 2023 to 50.6 in March 2024, and has stood on the boom and bust line for nearly three consecutive months. From the perspective of sub-items, the global manufacturing PMI both supply and demand improved, the output index rose to 51.9, new orders rebounded to 50.9, the input and output price index fell, and the employment index remained resilient.
The country-by-country characteristics of this round of global manufacturing repair are that resource countries are better than producers, and producers are better than consumer countries. From January to March 2024, the average manufacturing PMI in resource countries was 53.7, 51.1 in producing countries, and only 47 in consuming countries. The manufacturing industry of resource countries is generally relatively high, Saudi Arabia's manufacturing PMI in the past six months has averaged 57.2%, the United Arab Emirates 57.1%, Russia 54.2%, Brazil 52%; the manufacturing repair of the producing countries is slightly weaker, except for the Indian manufacturing industry to maintain a high prosperity, the manufacturing PMI of most other producing countries remains around 50%; among the major consuming countries, only the United States manufacturing repair trend is more significant, the United States Markit manufacturing PMI rose to 51.9% in March, and the ISM manufacturing PMI rose to 50.3% , the euro area, Japan and other countries manufacturing repair is still poor.
In the subdivided industries, the upstream industries of consumer countries are well repaired, while the upstream production of resource countries is weak, resulting in a gap between supply and demand of upstream commodities. In terms of consumer countries, in the manufacturing industry of the United States, the upstream chemical, primary metal, metal processing, petroleum and other industries have recovered their demand relatively quickly; among the major producing countries, China's upstream mining industry has been weakly repaired, and the midstream manufacturing link has been repaired quickly; among the major oil-producing countries, Saudi Arabia's downstream non-crude oil production is booming, but the upstream crude oil production has weakened significantly; and Chile, a major copper-producing country, has been weak since mid-2023. The global supply chain presents a pattern of recovery in the upstream industry demand of consuming countries and correspondingly weak supply in producing countries and resource countries.
(2) The reasons for the recovery of the global manufacturing industry: early interest rate cuts in emerging markets + loosening of U.S. financial conditions + the strength of the inventory cycle
On the demand side, the marginal shift in financial conditions in the United States has turned loose, which has led to the recovery of the manufacturing industry. U.S. financial conditions lead the manufacturing PMI and manufacturing PMI new orders. Since the beginning of 2023, the US financial conditions FCI-G have shifted from tightening to easing, mainly contributing to rising stock prices, mortgage rates falling from their peaks, and the U.S. dollar index falling from their highs. Among them, the share price increase was the highest contributor, explaining the 41% FCI margin relaxation. In terms of debt financing, since the third quarter of 2023, the credit crunch of the U.S. banking industry for medium and large enterprises has eased, which has also led to the recovery of the manufacturing industry.
On the supply side, some resource and producing countries in emerging markets cut interest rates ahead of schedule, which boosted manufacturing production in emerging markets. As of the end of last year, the proportion of central banks raising interest rates has peaked and fallen, and the proportion of central banks that cut interest rates has increased. The central bank of Chile cut interest rates by 100 basis points to 10.25% in July 2023, Brazil started cutting interest rates by 50 basis points to 13.25% in August 2023, and Mexico started cutting interest rates by 25 basis points to 11% in March 2024. In August 2023, the People's Bank of China (PBOC) lowered the 7-day OMO rate to 1.8%, and in February 2024, the PBOC lowered the 5-year LPR rate to 3.95%.
On the inventory side, the prospect of replenishment in the United States is getting stronger, and the inventory quantile of some upstream products is lower, which has a boosting effect on the global manufacturing industry. Since the middle of last year, leading indicators of the U.S. inventory cycle have improved. On the cost side, the year-on-year growth rate of PPI bottomed out in the third quarter of 2023, leading the growth rate of U.S. inventories by about 6 months. On the demand side, total sales growth is 3 to 12 months ahead of U.S. inventory growth, which bottomed out in mid-2023, while the OECD Composite Leading Indicator is about 6 to 12 months ahead of U.S. inventory growth, which bottomed out in June 2023. In terms of products, the inventory quantile of upstream products in the United States is lower, and the willingness to replenish the inventory may be higher, and the prospect of the United States replenishment has boosted global manufacturing production.
(3) How sustainable is the current round of global manufacturing repair? High interest rates and structural imbalances may hinder continuous repair
Looking backwards, the sustainability and resilience of this round of global manufacturing repair still need to be observed. On the one hand, the resilience of the U.S. job market, rising commodity prices, and rebounding pressure on U.S. inflation. Referring to the Cleveland Fed forecast, the US CPI in March may rise to 3.3% year-on-year, and the market has been expecting 3.5%, both higher than the CPI growth rate in January and February. Since April, Fed officials have intensively released hawkish remarks, and the timing of interest rate cuts this year may be postponed, and high interest rates may remain for a longer time. The U.S. manufacturing industry is highly sensitive to interest rates, and high interest rates may continue to weigh on manufacturing demand. In January this year, the growth rate of U.S. manufacturing sales has slowed, from 0% in December to -1.7%, and the subsequent recovery of the global manufacturing industry remains to be seen.
At the structural level, the repair of the upstream and downstream industries of the U.S. manufacturing industry is disjointed, and the repair of the downstream industry is slow, which may drag down the sustainability of the repair of the manufacturing industry. As of January this year, the U.S. manufacturing industry was in the stage of passive destocking, with the growth rate of manufacturing sales rebounding slightly, and the growth rate of real and nominal inventories declining. In the subdivided industries, the better repair areas of the U.S. manufacturing industry are concentrated in the middle and upper reaches of the chemical, metal, crude oil and transportation industries, and the downstream industries such as beverages, paper products, and furniture are poorly repaired. The repair of upstream and downstream industries is out of touch or the sustainability of the recovery of the manufacturing industry will be dragged down.
From the perspective of inventory scarcity, the U.S. inventory quantile is at the central level, and the overall demand for replenishment in the manufacturing industry may not be strong. The sales-to-inventory ratio reflects whether the inventory is located reasonably relative to demand. At present, the actual sales-to-inventory ratio in the United States is at the historical pivot level, and the real inventory level is still sufficient, and in terms of nominal inventories, the overall manufacturing inventory is at the 83% percentile in the past decade, higher than the pivot level of 75% from 2008 to 2019. At present, the durable goods inventory quantile has increased significantly, and the non-durable goods quantile is low, so this round of manufacturing repair may be more of a structural repair than an overall boost.
Risk Warning
1. Escalation of geopolitical conflicts. The conflict between Russia and Ukraine has not yet ended, and the Palestinian-Israeli conflict has made waves again. Geopolitical conflicts could exacerbate crude oil price volatility and disrupt the global "disflation" process and "soft landing" expectations.
2. The Federal Reserve raised the level of long-term neutral interest rates. The Fed's summary of economic projections shows the long-term neutral rate at 2.5%, but the distribution of the dot plot has begun to shift to the right, and it only takes 2 members to revise upwards to change the median estimate.
3. Marginal contraction of financial conditions. Since October 2023, financial conditions have eased sharply with the sharp decline in the 10Y Treasury rate, but the recent changes in the form of the economy and inflation may lead to a marginal tightening of financial conditions.