Global Factory Check-Up Is About to
Reveal Extent of Nascent Recovery
Enda Curran and Alexander Weber
(Bloomberg) -- Manufacturing will get a temperature check from closely-watched measures of activity for Europe and Asia, an opportunity to gauge whether a nascent recovery in factory output is gaining traction.
A recent uptick in a global index of manufacturing — to the highest level since mid-2022 — has spurred expectations the sector has reached a turning point after a broad consumer shift away from purchases of goods in favor of services.
“We believe that manufacturing activity has troughed and should improve on the back of resilient global growth and the arrival of central bank rate cuts in 2024,” Goldman Sachs Group Inc. economists led by Jan Hatzius wrote in a note.
Purchasing managers indexes are due in the coming week for the UK, euro zone and Japan. While still projected to remain in contraction territory, economists expect a modest improvement in the February PMIs for the euro zone and the UK.
“The Covid pandemic created big swings in the manufacturing cycle, with the pendulum swinging from a huge boost in goods demand to a subsequent bust,” economists at Danske Bank wrote earlier this month. “We now believe the pendulum is starting to swing back, supported by a turn in the inventory cycle and a moderate improvement in goods demand.”
Still, in a sign that the industrial sector remains under pressure, US factory production decreased in January for the first time in three months, reflecting declines in the output of motor vehicles, machinery and metals. S&P Global’s index of US manufacturing in February is seen coming close to stagnating.
Elsewhere, the Federal Reserve and European Central Bank publish minutes of their January deliberations, European finance chiefs meet in Belgium, and monetary policy authorities in Turkey, South Korea and Indonesia are predicted to keep interest rates unchanged.
Click here for what happened last week and below is our wrap of what’s coming up in the global economy.
US Economy and Canada
The US economic data calendar is sparse this holiday-shortened week. In addition to February manufacturing and services figures from S&P Global, the National Association of Realtors on Thursday will release data on sales of previously owned homes. Economists forecast a modest increase in closings as mortgage rates remained below 7%.
Investors will monitor comments from Federal Reserve officials including Vice Chair Philip Jefferson and governors Lisa Cook and Christopher Waller, among others, to gauge the appetite for rate cuts in the wake of strong inflation data.
Many policymakers, including Chair Jerome Powell, have said they’re not in a rush to start lowering rates until they’re convinced that inflation is on a sustainable path back to their 2% target.
On Wednesday, the Fed will release the minutes of its Jan. 30-31 policy gathering, at which officials left borrowing costs unchanged and signaled that a cut wasn’t likely at the March meeting.
Further north, Canada’s consumer-price growth is expected to have inched down to a yearly 3.3% rate from 3.4% in January. The hotter-than-expected US inflation print already pushed back market bets on rate cuts by the Bank of Canada, with a first move now fully priced in by September. Markets will keep an especially close eye on the core figure.
Data on Canadian retail trade for December and a flash estimate for January are also due.
For more, read Bloomberg Economics’ full Week Ahead for the US
Asia
The Year of the Dragon gets underway in China, with markets looking for help via rate cuts or liquidity injections. The People’s Bank of China disappointed on Sunday, opting to keep its one-year policy rate steady to keep a floor under the yuan after US CPI data cooled expectations about a near-term rate cut by the Fed.
Commercial banks are forecast to trim their benchmark lending rates two days later, with the 5-year loan prime rate expected to slip to 4.10%.
Meanwhile, Chinese travel and spending during the Lunar New Year holiday exceeded levels from before the pandemic, adding to signs that consumption in the world’s second-largest economy is improving.
Elsewhere, the Bank of Korea will probably stand pat on policy, with a focus on how dovish officials sound after inflation slowed more than expected in January.
The Bank of Indonesia is seen holding its benchmark rate steady to maintain support for the rupiah, while the Reserve Bank of Australia releases minutes from its February meeting — where its tone was surprisingly hawkish.
Thailand’s GDP growth probably accelerated year-on-year in the fourth quarter. Australia gets wage data that may show growth picking up again. Japan, South Korea, Malaysia and New Zealand see trade figures, and Singapore, Hong Kong and Malaysia report consumer inflation data.
For more, read Bloomberg Economics’ full Week Ahead for Asia
Europe, Middle East, Africa
ECB data on Tuesday will show whether growth in negotiated wages eased from a record high at the end of 2023. Policymakers are highly focused on workers’ pay as they debate whether to start cutting rates in April or June. Consumers’ inflation expectations for the euro area are due on Friday.
An account of the ECB’s January policy meeting due on Thursday will be parsed for more insight into the governing council’s thinking. Additional comments may emerge from a gathering of euro-area finance ministers and central bankers in the Belgian city of Ghent at the end of the week.
Financial statements from the ECB and the Bundesbank due Thursday and Friday will probably show pressure on their bottom lines resulting from their rapid rate-hiking campaign.
Germany’s monthly Ifo survey isn’t predicted to brighten the mood as business confidence is seen hovering around the current low level. That may feed expectations that Europe’s biggest economy is headed for a another contraction in the first quarter.
Outside of the currency bloc, UK Parliament’s Treasury committee questions Bank of England Governor Andrew Bailey and his colleagues on inflation and interest rates. Swedish inflation data is about to reveal a rebound in January while Denmark publishes figures on fourth-quarter growth. Further east, Poland is expected to report improving consumer confidence and industrial output.
In the Middle East, Israel releases gross domestic product numbers for the fourth quarter on Monday, a period almost entirely shaped by the war against Hamas. Analysts estimate the economy contracted around 15% year-on-year as the government called up hundreds of thousands of military reservists and consumer spending slumped.
Two days later, in South Africa, Finance Minister Enoch Godongwana will deliver his budget speech. With revenue collection undershooting targets, and demands growing on the public purse ahead of elections later this year, it will likely be his toughest spending plan yet. Investors will watch to see if he taps foreign reserves and raises taxes to close the funding gap and rein in debt.
On the same day, data will likely show inflation quickened for the first time in three months in January, to 5.3%, amid higher gasoline prices. The rate is currently at 5.1%.
A day later, Rwanda is set to hold its key rate at 7.5%, with inflation back within the central bank’s 2% to 8% target band since December.
In Turkey, the central bank will make its first rate decision under new Governor Fatih Karahan. Analysts expect him to follow the guidance of the MPC at the previous meeting, which signaled that an aggressive period of monetary tightening since June was over. The key rate will probably be kept at 45%.
For more, read Bloomberg Economics’ full Week Ahead for EMEA
Latin America
Brazil’s economy has been slowing since the first half of 2023 but GDP-proxy data for December on Monday may show a slight year-end uptick. Analysts surveyed by Brazil’s central bank expect Latin America’s biggest economy to grow 1.6% in 2024, down from a forecast 3% expansion last year.
By contrast, activity figures from Argentina may show the steepest month-on-month contraction since the pandemic as President Javier Milei begins to deliver on his promised “shock therapy” for South America’s No. 2 economy, which is seen shrinking for a second year in 2024.
In Mexico, the final fourth-quarter output report, February mid-month consumer prices data and Banco de Mexico’s Feb. 8 meeting minutes are the standouts from a raft of data and reports due over the coming week.
The post-decision communique of the meeting — where Banxico kept its key rate at 11.25% — appeared to put a cut on the table for the March meeting provided data in the meantime was supportive.
All of which is to say that there’ll be considerable focus on the bi-weekly CPI report. The early consensus is for a slight deceleration in the headline print from 4.87%, while the core reading down-shifts from 4.75%.
The central banks of Uruguay and Paraguay have both been cutting rates since mid-2023 but a recent uptick of inflation may give policymakers pause at their respective meetings.
--With assistance from Robert Jameson, Laura Dhillon Kane, Brian Fowler, Vince Golle and Catarina Saraiva.
(Updates with BOE in EMEA section)
Bloomberg Businessweek
NOT HIGH ENOUGH
Latin America’s Troubled State Companies Lure Bond Investors
Maria Elena Vizcaino and Carolina Wilson
Sun, February 18, 2024 
(Bloomberg) -- State-owned companies across Latin America face falling output, cash woes and expensive investment plans. Yet bondholders can’t get enough.
Companies such as Petroleos Mexicanos SA, Petroleos de Peru SA and Chile’s Codelco are luring investors by offering much higher yields than debt from their respective governments for what is proving essentially the same risk. The argument, it goes, is if the sovereign is doing well, it won’t let the company go under.
“The government won’t want to make a political crisis. Nobody is interested in that,” said Peter Varga, a senior portfolio manager at Erste Asset Management GmbH. “It’s cheaper to kick down the can on the road, so they’ll always help a bit just to avoid default.”
Betting on their bonds has paid off. Debt from Pemex, PetroPeru and Codelco beat the average 5.7% return for a Bloomberg index of emerging-market credits in the last three months by at least 1.3 percentage points. While investors have long been touting Pemex’s eye-popping yields, bets on state-backed giants in Peru and Chile are only now making a comeback on the expectation of government support after their weakening finances sent spreads to historical highs.
‘Bizarre’
Examples of inadequate investment and poor management among state-run companies abound worldwide, with South Africa’s Eskom Holdings SOC Ltd. a prime example after years of crippling blackouts. In Latin America, what stands out is not just the ability of governments to back them — Mexico, Peru and Chile are all investment grade credits with a fraction of the debt-to-GDP ratio seen in many developed nations — but their willingness to do so.
“These entities are really quite bizarre,” Philip Fielding, co-head of emerging markets at Mackay Shields in London. Pemex, for instance, “is quite an unusual monster that sits atop of an otherwise quite normal, investment-grade sovereign.”
PetroPeru started to build a refinery 10 years ago that ended up costing over twice the original budget, straining its finances and saddling it with $5.2 billion of debt. The company is running out of cash, executives have said, and needs over $1 billion in the next few months to pay suppliers. Codelco’s production is running at the lowest level in a quarter century while its debt load is the largest among major copper producers tracked by Bloomberg. Pemex, which was downgraded last week by Moody’s Investors Service, has $11 billion due this year and a total debt burden of $106 billion, making it the world’s most indebted oil company.
Yet bonds for all three companies are far from distressed — Codelco’s most liquid notes, due in 2036, are trading above par — largely on the expectation of continued government backing. When it downgraded the company late last year, S&P Global Ratings cited it as a reason for a stable outlook. While Fitch slashed PetroPeru’s credit score by three notches on concern about wavering support, the government reassured investors earlier this month saying the oil producer will get liquidity in the short term and meet all payments to bondholders.
Mexico’s President Andres Manuel Lopez Obrador, who proved much more fiscally responsible than investors feared, has repeatedly put money into Pemex over the years to keep it afloat. In its latest assessment of the sovereign rating, S&P said the government is, in effect, “formally raising debt on behalf of Pemex” this year, “given a line item in the budget to cover 90% of the company’s amortizations.”
“Mexico tends to a very nationalistic country and Pemex is like the eldest child within the family,” said Jennifer Gorgoll, an Atlanta-based portfolio manager at Neuberger Berman Group LLC, which owns Pemex bonds. “It’s so incredibly important to Mexico to maintain that stability and I don’t think a default will ever happen.”
That rings true across the region. Mexico actually has an oil expropriation day — March 18 — to mark the date it seized the nation’s oil fields in 1938. Nationalizing the copper industry in the early 1970s in Chile was so popular that even free-market dictator Augusto Pinochet refused to backtrack on it.
“They’re connected at the hip,” said Aaron Gifford, an analyst at T Rowe Price in Baltimore, said of the relationship between the region’s sovereigns and the state-backed companies. “I don’t think these governments could let them go under.”
What to Watch
In Brazil and Argentina, December activity prints will shed light on fourth-quarter GDP data
Mexico’s revised GDP numbers and data for December should signal activity sharply lost momentum, according to Bloomberg Economics
Turkey’s central bank will likely hold interest rates steady while providing hawkish forward guidance
People’s Bank of China should lower its one-year rate by 10 basis points, the first reduction since last August
Bank Indonesia is likely to keep rates on hold to maintain support for the rupiah
--With assistance from Robert Brand, James Attwood, Marcelo Rochabrun, VinÃcius Andrade and Karl Lester M. Yap.
Record US Stock Rally Is Under Threat From a World in Turmoil
Farah Elbahrawy
Sun, February 18, 2024
(Bloomberg) -- Investors and firms are flagging that the war in the Middle East poses a major risk for earnings as boycotts dampen sales and Red Sea shipping chaos threatens their supply chains.
Those headwinds pose a danger to the record rally in US stocks, according to a Bloomberg analysis of hundreds of earnings calls. By the halfway mark in the first quarter, the number of references to the Red Sea or “geopolitics” has almost matched the total for the previous three months.
Expectations for profits at S&P 500 companies for the next 12 months are at a record high, suggesting analysts are pricing in a blue-sky scenario with the US economy growing more than expected and the Federal Reserve cutting rates. Any major threat to earnings, or signs that inflation is returning, could impact the months-long rally which has sent the US benchmark to record highs.
Crude prices have already climbed this year in part due to fears the Israel-Hamas war could grow into a wider conflict. At the same time, container ships are being forced to avoid the Red Sea and Suez Canal after attacks by Iran-backed Houthi rebels as part of a campaign against Israel.
“The geopolitical backdrop is a risk,” said Nicole Kornitzer, portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc. “If the pressure continues for longer, this could weigh on corporate margins and be inflationary as costs are passed on through price increases. This kind of scenario is not in estimates.”
From consumer goods companies, to social media, to freight firms, Bank of America Corp.’s latest fund manager survey also showed that investors see geopolitics as the second biggest risk to share prices after inflation, although the two dangers are connected — participants expect a further escalation in the Red Sea or Middle East to add new price pressures higher oil and freight rates.
In Europe, alcoholic beverages producer Heineken NV said macroeconomic and geopolitical developments will remain a factor of uncertainty that could impact its business. Adidas AG said tension in the Red Sea is leading to higher supply costs in the short term.
Tesla Inc. in January announced production suspensions at its German plant, citing disruptions in supplies. Medical equipment supplier ResMed Inc. said it’s seeing an impact on freight rates and lead times. Computer networking equipment giant Cisco Systems Inc. also said shipping rates have gone up. Chemicals company Albemarle Corp., tobacco firm Philip Morris International Inc. and rail services provider CSX Corp. are among S&P 500 firms also monitoring the situation in the Red Sea.
Some firms have benefited from the situation. The Dutch firm Royal Vopak NV saw a rise in demand for its storage facilities due to the disruption in the Red Sea and uncertainty in the oil market. A.P. Moller-Maersk A/S had rallied in the lead up to its results, but disappointed after saying it expects renewed gloom in the industry later this year when the current boost to freight rates from the Red Sea conflict evaporates.
Meanwhile, many shoppers in the Middle East as well as Muslim nations like Pakistan are shunning big foreign brands driven by anger against the US and Europe for not doing more to get Israel to end its offensive in Gaza. That’s weighed on the earnings of major US businesses.
McDonald’s Corp.’s sales missed investor expectations, hurt in part by the boycotts. It expects no meaningful improvement for the segment that includes the region until there’s a resolution to the war, which also hit Starbucks Corp.’s results. Even Snap Inc. sees the conflict as a headwind.
The Israel-Hamas war continues to rage with no end in sight, and the Houthis continue to disrupt shipping in the Red Sea, even as the US and UK are targeting the militant group in Yemen and a multinational naval operation patrols the waters.
“Geopolitics is the tail risk which has the most short-term market impact,” said Rajeev De Mello, a global macro portfolio manager at GAMA.
--With assistance from Sagarika Jaisinghani.
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