Look Ahead to 1/09: US non-farm payrolls; China Caixin manufacturing PMI; oil price outlook

(Video Transcript)

Chinese economy needs stimulus to grow

Hello and welcome to the IG Look Ahead to 1 September 2023. I'm Angela Barnes.

Firstly, let's take a look at the economic data due out. In the early hours in China, we get the latest pricing manufacturing purchasing managers’ index (PMI) data. It fell to 49.2 in July but is expected to rise to 49.3 in August, which will add to the growth picture in the world's second largest economy.

It comes as the latest official manufacturing PMI survey, which surveys about 3,200 companies across China, showed that China's manufacturing activity contracted for a fifth straight month in August. The official NBS manufacturing PMI rose to 49.7 from 49.3 in July. The reading was above a forecast of 49.4.

New orders show glimmer of hope

But on the brighter side, though, new orders reverted to expansion for the first time in five months. Battery owners indicated that producer prices were improving for the first time in seven months, which led some economists to believe that an uptick in growth is still on the cards in the third quarter, particularly if incoming stimulus starts feeding through to the economy.

Non-manufacturing PMI fell to 51 from July, 51.5, led by the continuing fall in services activity. The country is dealing with slow growth, record youth unemployment, low foreign investment, weak currency and, of course, exports as well, and that property crisis that's been plagued by credit rows and weak sales.

Until recently, its property market accounted for a third of its entire wealth. If we just bring up the Hang Seng chart here, the index was in the red today, but as you can see it has since gained 0.45%. But since the beginning of August, it's actually down about 10%, the sell-off reflecting that current market sentiment. In a bid to bolster that, Beijing has taken a range of measures to try and boost the economy. Measures were also announced to help US-traded companies listed in Hong Kong. However, growth titters do remain.

Let's move on now to Canada, because at 1.30pm we'll get the gross domestic product (GDP) growth rates in Canada for the second quarter. And if we pull up the US dollar and Canadian dollar price charts, the Canadian dollar has been losing ground to the US dollar of late. However, softer US economic data and a decline in tertiary yields continue to exert downward pressure on the greenback. So, we'll also be watching that

Is US labour market softening?

And moving on to the US at 1.30pm, because we're going to be getting non-farm payrolls (NFPs), which will provide again further insight as to whether the labour market is actually softening with a consensus that 170,000 jobs will have been added in August compared to 187,000 the previous month, with unemployment remaining unchanged at 3.5%.

The markets are currently assuming an interest rate pause for September, but the question remains as to whether the end of the Federal Reserve Bank (Fed) hiking cycle has been reached. If we just bring up quickly the US dollar basket, there is potential for further risk on the downside here.

And if we see more weakness on the jobs data coming through, while the Fed might need to keep rates high for longer, as suggested by Jeremy Powell on Friday at the Jackson Hole Symposium in Wyoming. That situation may diminish potentially if we see weaker data coming through. So, further risk on the downside for the dollar possible, but we will be covering NFPs live on the IG platform tomorrow, so do tune in for that and some more on the dollar.

Crude oil stocks take a knock

Moving on as well, and at 6pm we'll be getting the Baker Hughes oil rig count. And that latest data is a pointer to the trends in US crude and natural gas production, and it comes after EIA inventory showed a substantial drop in crude oil stocks last week, confirming Tuesday's API data.

Domestic production remained unchanged at 12.8 million barrels per day, at its highest since March 2020. But strong exports and sustained demand from refineries meant that crude oil inventory fell 10.6 million barrels last week. Meanwhile, US gasoline stocks fell by 200,000 barrels, while district stocks rose by 1.2 million.

Looking at the US crude oil price chart, you can see that the price is up. It's actually gone up now by 1.2% today. Okay, so Brent is also trading higher today. But since the end of June, the price of WTI has climbed by about 21%. But on 10 August, it actually reached $84 a barrel, but has since declined.

But it's far off from that $128 a barrel price level that it hit in March 2022, just after the Russia-Ukraine war began, which subsequently prompted a surge in energy prices, as you will be well aware. Earlier, I spoke to energy analyst and economic analyst, Osama Rizvi, about oil prices and he shared his outlook with us on what he thinks is ahead.

Heading towards a global economic slowdown

OR: Well, Angela, you know that I have remained a bear throughout the start of this year. And I mean, I know there have been some spikes, some extraordinary swings to the upside in the oil prices. But we saw that despite this recent rally, oil prices failed to break the $90 psychological mark. And now, there is a physical market, and then there are paper markets.

When you talk about fundamentals, you see that all the fundamentals, all the major global economic indicators that are significant contributors to our perspective demand increase, they're all down. They're down to extraordinary levels.

For instance, Euro Zone's PMI is at a 38-month lowest level. Germany is about to enter a second recession. The construction activity in the country is going down. You look at China, yesterday, Chinese economic figures came out, and the factory output has shrunk for another month. It's been consecutive, I think, six or seven months that this is happening. The official and non-official PMIs are below 50, indicating a contraction.

If you look at US, the largest economy in the world, their economic indicators, starting from the industrial supply of electricity to ISM manufacturing, to leading economic indicators, to inverse Treasury yields, all of these indicators blatantly point towards a global economic slowdown.

Oil prices predicted to drop

Then you have the other markets, which are the paper markets. And in the paper markets, it happens a lot of times that fundamentals are ignored and sentiment reigns supreme. And at times, there is this thing called over-representativeness of good news, and that is what I think was happening recently.

You had OPEC Plus promising to keep the production cuts. You had China cutting down its interest rates, quelling the fears of investors, and things like that, that led to the rally. And I wrote that at that point, that this rally is not sustainable.

I, for now, in the short term, to the medium to longer run, remain on my bearish stand. I think there might be a spike due to the hurricane we are facing right now. However, from the medium to longer term, I think prices will head down.

I think if there is a proper recession in the major economies in the world, we might see oil heading to mid-60s before the end of the year, or otherwise in the mid-70s for sure.

AB: Okay, well, that was a former energy analyst there, sharing his outlook on crude prices in the short and longer term as well. So, $60 a barrel, that's what he thinks it could fall to. So we will be keeping across oil prices as well.

Thank you very much for watching our Look Ahead. You're watching IGTV. I'm Angela Barnes. Do stay tuned and across all the updates on Instagram. Subscribe to our YouTube channel for daily trading ideas, tips and trends. And thanks for watching.