Early today we got a “for many” surprisingly weaker Caixin Flash China General Manufacturing PMI, which by the way will from now on replace the HSBC PMI data for China, came in at 48.2 in July vs. expectations of 49.7, and which was a 15-month low and the fifth straight monthly reading below 50(!). The Flash China General Manufacturing Output Index came in at 47.3 in July, which was also a 16-month low, after printing 49.7 in June. Please keep in mind all readings below 50 mean contraction.
The PMI indexes themselves, as well as new orders, exports, employment, output charges and input prices are now all in contraction territory, which raises serious questions about where China’s growth is finally going to come from.
Long-term investors could do well keeping in mind China is after the U.S. the second economy in the world, which GDP, according to the IMF, had a value equal to about 60 percent of the U.S. GDP in 2014.
As China has been by far the largest commodity buyer over the last years it should not come as a surprise e.g. gold and copper, to name only two commodities, early today hit once more new 5- and 6-year lows respectively.
We could ask ourselves if “Dr. Copper” is smelling a rat in the global economy as it has now dropped to its lowest level since 2009.
About gold I’d like to add we probably haven’t seen the end of its downward slope yet as, among other reasons like a stronger dollar, we shouldn’t overlook the fact a big part of leveraged “long” gold positions are desperately seeking for the exits and by doing so they are all getting squeezed.
On gold, once we get clear signals, on technical as well as on physical market based criteria, it could become interesting for starting accumulating gold for the long-term. I personally think that won’t be before the price drops below $1,000 per ounce.
That said, it’s really interesting the see this rather confusing/very unusual global scenario developing whereby the world economy is growing too slowly at best while the U.S., as the only major economy, seems to be on its way to perform a GDP growth number during the second quarter between 2.5- and 3 percent. Goldman Sachs thinks we could see a 3 percent GDP growth rate in Q2 while the Atlanta Fed in its July 17th “GDPNow” forecast expects a GDP growth number of 2.4 percent for Q2.
Next Wednesday, July 29th, we will learn how the FOMC thinks about its path to “normalization.” In the meantime we got several positive signs on the U.S. economy, which the Fed will take into account.
On Thursday we got the initial seasonable adjusted claims for unemployment benefits that dropped to 255,000, which was its lowest level in nearly 42 years.
Also on Thursday we got the Conference Board Leading Economic Index (LEI) for the U.S. that increased 0.6 percent in June to 123.6 (2010 = 100), after increasing 0.8 percent in May and 0.6 percent in April, which puts it well above the level where it stood at the beginning of the crisis in 2008.
All this brings us to a situation where it will become increasingly difficult for the Fed to postpone for "sound" reasons the first Fed funds rate hike that much longer, which in itself shouldn’t be such a big deal if there wasn’t the fact that most of the other important world economies, which include, of course, China, the eurozone, Japan, and so on, will have to continue trying to stimulate their economies with continuous low- and even still lower interest rates.
So, low or lower interest rates elsewhere while interest rates will start rising in the U.S. in the foreseeable future signals we are entering a period, we haven’t experienced during decades. There is no doubt the global search for yield will continue unabated while extremely low financing costs will continue to be available in the eurozone, Japan and to lesser extend China, which is at risk of massive capital exits, Switzerland, Denmark, and so on, but, this is extremely important, as a result of all that we can expect massive inflows into the dollar, which will drive the dollar still higher from here on.
Long-term investors will have to start learning to think completely in the opposite way as they have been used to over at least the past 3 decades and adapt to situations where e.g. the dollar can go up when U.S. stock markets go up.
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