Is manufacturing growth slowing in China?
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the latest developments around U.S. infrastructure, the slowdown in the pace of Chinese manufacturing and the global rise in oil prices.
Bipartisan agreement reached on U.S. infrastructure plan
Ever since U.S. President Joe Biden unveiled his plan to overhaul the nation’s infrastructure system at the end of March, negotiations in Congress had mostly come in fits and starts, Cousley said. That all changed with the president’s June 24 announcement that he had reached a bipartisan deal with a group of senators on a US$1.2 trillion infrastructure package, Cousley stated.
“Approximately half of the deal involves spending on new infrastructure, and the other half involves spending to upgrade existing infrastructure,” he explained, noting that Biden recently clarified that the package will be separate from the proposed American Families Plan announced in April.
In the wake of the bipartisan agreement with Republican senators, the House of Representatives passed a US$715 billion transportation and water infrastructure bill on July 1, which House Democrats hope to fold into the Senate’s infrastructure package, Cousley said. “The bill now goes to the Senate, where there’s room to adjust the price-tag closer to the US$1.2 trillion amount agreed upon in the bipartisan deal,” he noted. Ultimately, a final piece of legislation could be approved by both the House and the Senate sometime in September, Cousley said. He noted that equity markets have generally reacted favorably to these recent developments, as a new infrastructure bill would add to the fiscal thrust in the U.S.
Chinese credit growth, manufacturing activity slows
Turning to China, Cousley said the country has experienced a recent slowdown in credit growth as the government dials back on fiscal stimulus. While the slowdown has occurred faster than anticipated, he noted that it’s likely been brought forward—or front-loaded—to the first five months of the year. “At this time, our base-case scenario is that the credit impulse starts to bottom out, with no further acceleration in the rate of slowing,” he stated. That said, Cousley believes the slowdown over the last several months may trigger a shift in policy response during the second half of the year.
Meanwhile, China’s official manufacturing PMI (purchasing managers’ index) survey from the National Bureau of Statistics for June fell slightly, Cousley said, with a reading of 50.9—a slight dip from May’s reading of 51.0. A reading above 50 indicates expansionary conditions, and a reading below 50 indicates contractionary conditions. The privately-run Caixin manufacturing PMI for June was 51.3, he noted, down from a level of 52.0 in May.
Unpacking the data further, Cousley said that new export orders dropped during June, while new domestic orders remained solid. “As the world reopens and moves more from the consumption of goods to the consumption of services, there’s naturally going to be a bit of a drag on Chinese exports—given that China is the world’s largest exporter,” he stated.
Outlook for oil markets
Shifting to oil, Cousley noted that as parts of the world slowly return to normal, the demand for oil is increasing, helping power a surge in oil prices. The cost of a barrel of West Texas Intermediate crude has risen to approximately US$75, which he characterized as an amazing move in the wake of the negative oil prices experienced during the onset of the pandemic.
Moving forward, Cousley said that the rise in demand has led members of OPEC+ (the Organization of Petroleum Exporting Countries plus other major oil-producing nations) to consider loosening restrictions on production, which were put in place in the spring of 2020 due to the diminished demand triggered by government-mandated lockdowns.
“The original OPEC+ plan had been to increase production to 500,000 barrels a day beginning in August, but during a July 1 meeting, some discomfort within the group arose over this, particularly from the United Arab Emirates,” he said. As a result of the discomfort, Cousley believes there will probably be a little less supply coming back online than previously expected. All in all, this will likely add to the constructive outlook for oil markets, he concluded.