MANUFACTURING STILL INCREASING AS HIRING STAGNATES. The Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) rose to 55.4 in September, the fourth consecutive month showing growing strength.
A reading above 50 indicates expansion.
However, the gauge was 7.3 percent below its February pre-pandemic level.
The ISM’s hiring sub-index registered 49.6 in September, indicating factories are still laying off more people than they hire. IHS Markit’s employment survey for September showed a slight gain.
U.S. factories employed about 12.1 million workers in August, roughly 700,000 fewer than a year previous.
IHS Markit’s Eurozone PMI edged up from 51.7 in August to 53.7 in September, largely on the strength of German exports.
Germany is one of China’s major suppliers of machine tools and other capital equipment. Chinese manufacturing has bounced back strongly from the economic shutdown, chiefly due to government subsidies and foreign investment.
Some 251,000 workers in Europe lost their jobs in September, despite ongoing government programs aimed at subsidizing wages and keeping people on payrolls.
The continent’s unemployment rate rose from 8 percent to 8.1 percent for the month.
In India, the manufacturing sector’s PMI climbed from 52.0 in August to 56.8 in September on stronger exports. The number of jobless workers, however, increased during the month.
EUROPE’S CENTRAL BANK MAY LET INFLATION RUN. For the first time, the European Central Bank (ECB) is considering letting inflation exceed the bank’s targeted rate of percent to boost prices on products and services.
The ECB may follow the U.S. Federal Reserve’s lead, the ECB said. In September, the Fed said it may allow inflation to rise above its targeted 2-percent rate to make up for a long period of time when inflation has been below that number.
The Fed’s shift in strategy has contributed to the weakening dollar in recent weeks, making U.S. products cheaper abroad. The strategy pressures other central banks to follow suit, some analysts believe.
“The usefulness of such an approach could be examined” during the bank’s strategy review, said ECB president Christine Lagarde.
“The discussion is whether central banks should explicitly make up for” inflation falling short of central banks’ targeted rates when those rates “have spent quite some time below their inflation goals,” she added.
“If credible, such a strategy could strengthen the capacity of monetary policy to stabilize the economy” if inflation lags “because the promise of inflation overshooting” the bank’s targeted rate “raises inflation expectations and therefore lowers real interest rates.”
The Eurozone’s economy has entered a deflationary period since the economic shutdown; boosting inflation could reverse that.
“Make-up strategies” to nudge inflation upward “may be less successful when people are not perfectly rational in their decisions – which is probably a good approximation of the reality we face.”
The ECB expects to complete its strategy review by September 2021.
TREND FORECAST: Yesterday, despite burgeoning debt levels and declining GDPs, the IMF called on nations around the world to increase fiscal stimulus to generate economic growth.
Their report said countries should not worry about heavy debt loads and should keep borrowing money because interest rates are at historic lows.
We note this sharp reversal of the IMF, which had long been concerned that countries were taking on too much debt but are now telling them to go deeper in debt… as it illustrates the fear they have of global economic meltdown.
Therefore, with the IMF calling for more cheap money pumping, we forecast the more monetary methadone injected into their economies to artificially boost them, the deeper the value of their currencies will sink and the higher gold and silver prices will rise.
And, we maintain our forecast that before their currencies decline into Weimer Republic worthlessness, they will invent a digital currency with a new name that will also be backed by nothing and printed on nothing. (See our 24 March article, “FROM DIRTY CASH TO DIGITAL TRASH.”)
RENMINBI CONTINUES CLIMBING AGAINST THE DOLLAR. The renminbi, China’s internal currency, has risen about 3.6 percent against the dollar during the past three months, rising last week to 6.82 to the dollar and setting it on course for its strongest performance since the third quarter of 2018.
The renminbi’s rise is due to several factors:
- The dollar has undergone a global sell-off.
- Investors are assuming that the worst of the U.S.-China trade war is over.
- Neither nation shows signs of quitting the “phase one” trade treaty signed in January.
- China’s apparently strong industrial economic recovery is an investment magnet; more than $42 billion flowed into the country’s stocks and bonds in 2019’s second quarter.
- China’s ban on outbound tourists during the economic shutdown kept hundreds of millions of renminbi at home instead of being spent outside the country.
- The U.S. Federal Reserve’s decision to hold interest rates on bonds near zero, China’s internal interest rates are about two points higher, so holding renminbi-denominated debt is more lucrative than dollar-denominated debt.
China’s bonds are forecast to draw another $140 billion in investments next year when China’s sovereign debt is included in the FTSE Russell’s government bond index.
But “the main impact on the renminbi has come from the broad-based tariff increases we’ve had over the last couple of years,” said Mansoor Modi-uddin, Bank of Singapore’s Chief Economist.
No new tariffs are expected before the 3 November U.S. presidential election.
TREND FORECAST: As previously noted, we forecast the 20th century belonged to the U.S., whereas the 21st century will be China’s, in part because the business of the U.S. is war and the business of China is business.
It is interesting to note that for years, President Trump blamed rising Chinese imports because their currency, the yuan, was being artificially devalued. Thus, the cheaper their currency, the less cost to buy their products with strong currencies.
China’s exports are still rising, however, as their currency grows stronger and its economy is forecast to be the only one of major nations whose GDP will grow this year.
In part, we attribute the nation’s economic strength as a result of the government stimulus to build its infrastructure, money being pumped into small business sectors, thus creating jobs, and its move toward a self-sustaining economy.
JAPAN’S RECOVERY SLOWER THAN EXPECTED. The Tankan Survey of business outlooks among Japan’s major manufacturers in the third quarter edged closer to positive territory, moving from -34 to -27 but not reaching the -23 analysts had expected.
The key auto industry registered -61, iron and steel -55, and production machinery weakened to -43. Hotels and restaurants reported a near-lethal -81.
Communications and construction each were positive at +21 and retail gained 16 points to +18.
The survey contacted about 10,000 companies and had a response rate of 99 percent.
The slow pace of recovery is dashing hopes of a smooth turnaround and leading more economists to foresee a protracted recession.
The government’s stimulus program includes direct payments to households and a “Go To” campaign promoting domestic tourism, and the Bank of Japan is offering low-interest business loans.
REPORT ON CANADA’S MASSIVE DEFICIT TOO ROSY, CRITICS SAY.
Canada’s $328-billion federal budget deficit is “barely sustainable” but will decline to $73.8 billion in 2021 into 2022 and continue declining after that, a report from Yves Giroux, the nation’s Parliamentary Budget Officer, has concluded.
The forecast estimates $225 billion in pandemic response and economic rescue measures in place or in planning as of 1 September.
It also assumes the country will sustain current public health measures for the next 12 to 18 months as a vaccine is developed and disseminated; government stimulus and rescue spending programs will taper off through 2021 as now planned with no others begun; and the Bank of Canada keeps interest rates low.
“We project that the level of real GDP will reach its pre-crisis level by early-2022,” the report said.
The report does not include new proposed spending for universal prescription coverage and a national childcare initiative.
Canada’s GDP for the first six months of this year lagged pre-pandemic performance by 13.4 percent, the report noted, but expects two-thirds of that drop-off to be recovered before December.
In fact, the report could be outdated already, said Concordia University economist Moshe Lander. The COVID-19 crisis remains unpredictable, and a second wave has begun in places like Ontario and Quebec, he said.
“I think we’re going to have to delay a lot of what they say six months to a year,” said Mr. Lander, “because of the second wave that’s coming and the lockdowns that are going to be connected to it.”
The government also has not yet offered a plan to help laid-off workers in sectors, such as food service, that have permanently shrunk to find jobs in other industries, he noted.