Global Macro Monitor

They will beat their swords into plowshares
and their spears into pruning hooks. – Book of Isaiah

• The global manufacturing sector remained mired in contraction at the start of the second half of the year. July saw output decline further as the downturn in new order intakes was extended to a thirteenth consecutive month.
• Manufacturing production decreased for the second month in a row in July, with the rate of contraction gathering pace. The main drag on output was a severe downturn in activity in the euro area, where production contracted to the greatest extent since the height of the global pandemic in spring 2020. The performances of Austria, Germany and Italy were especially weak. There were also signs of weakness developing in Asia. Japan, mainland China, South Korea, Taiwan, Vietnam and Malaysia all saw output contract. North America was a comparative bright spot, with mild growth in Canada and Mexico. A slight expansion of output in the US represented a stabilisation following June’s marked retrenchment.
• The downturn at global manufacturers was driven by several factors, including weak new order intakes, deteriorating international trade flows and a correction in stock levels in response to the weak demand environment. – S&P Global

QOTD = Quote of the Day

We’ve been sounding the alarm every month and were definitely a lone wolf.

Deficits don’t matter…until they do. – GMM, May ‘23

Yes.  And it’s significant and intuitive. 

The table analyzes daily returns for the S&P500 since 1950 and illustrates the first of the month has returned on average 17.7 bps.  That is 14 bps more than the daily average of 3.5 bps.  Day one is followed closely by the second day of the month. 

Explanation?  Our priors are that it results from money flowing into stocks at the beginning of the month, and probably more so if we controlled for quarterly data.  We also suspect the 19th day is last and distorted by the huge outlier of the 20 percent plus October 19, 1987 crash. Captain Obvious.  

Shouldn’t efficient markets deem such large disparities in day of the month returns impossible, however?  

Upshot?  Don’t be short stocks on average at the beginning of the month. 

Wow,  climate change is one helluva a hot “Chinese Hoax.”

We are amazed that even after over 500 bps of policy rate increases, financial conditions, as measured by the Chicago Fed’s NFCI,  are as loose as they were back in March 2022, when the Fed Funds rate was around 25 bps.  

It’s also quite surprising that household wealth, our preferred “loose”  measure of the aggregate “money” supply stock, is turning up again.  We estimate the current level is around 5.8x nominal GDP.  In theory, this metric should be mean reverting as it was for almost fifty years before the mid-1990s. 

Our priors are globalization, technological advances, China and Eastern European labor forces entering the global labor market, among other things, have hallowed U.S. aggregate demand, and the Fed has been forced to use monetary policy, primarily through quantitative easing,  to inflate asset prices above historical norms to keep demand above the waterline.  

Furthermore, our working hypothesis is that the Fed’s inflated balance sheet still supports the asset markets and keeps household wealth, which is grossly skewed to the top 10 percent of households, at the extreme levels driven up by the emergency COVID  monetary injections.   At some point, quantitative tightening will begin to bite the asset markets. Thus far, however, they have yet to be chastened. 

Upshot = Hawkish Fed

The Fed is going to have to remain hawkish, as they even understand that “wealth without work” or production is one of the deadly sins of monetary policy, which was painfully discovered during the past few years. 

We wouldn’t be surprised to hear Chairman Powell express his frustrations and highlight, in red, the easing of monetary conditions, which is a headwind to the Fed’s effort to slow aggregate demand, at the FOMC meeting this week.  Wait for it.   

Alan Greenspan had a similar dilemma in the mid-aughts, which he labeled the bond market conundrum, where the yield curve wouldn’t cooperate with the Fed’s tightening cycle, allowing the housing and credit bubble to expand even further.  Monetary policymakers were forced to keep tightening until the markets and the economy broke.    

As always, we are contrarian and reserve the right to be wrong, as we often are, but love the thought experiment.