July 28, 2023

Weekly Update
Managing Director

Germany’s PMI contracts to 38.1, US CB consumer confidence soars to 117

Weekly Update | July 28, 2023

It has been a productive week in the Frame Funds offices, work on reversion strategies has continued to be the focus.

Let’s hop straight into five of the biggest developments this week. 

    1.    Germany’s flash manufacturing PMI contracts to 38.1 

The sustained decline in Germany’s manufacturing output took another turn for the worse with a sharp decline for the month of June. The 38.1 report marked the lowest figure since the peak of the COVID-19 pandemic in May 2020, a continued fall from last month’s figure of 40.6. Market expectations were at 40.9. The slump in manufacturing continues to demonstrate that Germany is sliding quickly into a recession.  

    2.    French flash services PMI shrank to 47.4 

Business activity in France deteriorated further, with the important service sector contracting at the fastest rate since November 2020. Productivity shrunk further to 47.4 in June, from 48.0 reported last month. This decline missed market expectations which were for a slight improvement to 48.5. Depletion in demand which could be attributed to the internal unrest was the primary driver. 

    3.   US CB consumer confidence soars to 117 

Optimism in the US economy rose further to 117 in July, the highest reading in two years. Americans are feeling bullish about the present and short-term outlook of the economy on business, income and labour conditions. The upbeat assessment is of significance in light of the prevailing high interest rates. However, these solid number continue to show that consumers are happy to spend, which will mean an uptick in inflation is just around the corner.  

    4.    ECB hiked interest rates by 25 basis points   

The ECB raised interest rates further in the Eurozone by a further 25 basis points to 4.25%. Despite inflation having eased across the block, the central bank continued to increase interest rates, quite the opposite of here in Australia. It remains to be seen whether this raise marks the end of the current tightening cycle or if more hikes can be expected in future. 

    5.    US FED raised interest rates by 25 basis points  

After pausing in June, the FED resumed increasing interest rates, this 25-bps increase brought their interest rate to 5.5%. The rise was in line with market expectations, which took their rates to the highest in 22 years. The FOMC policy statement posited that despite rates being at historic highs, the bank would not hold back from further interventions as long as inflation targets and timelines had not been met, effectively leaving the door open to future hikes as dictated by inflation data.  

Below shows the performance of a range of futures markets we track. Some of these are included within the universe of our multi-strategy hedge fund. 

It has been a relatively quiet week across the board. The gains in the energy complex being the most notable. The moves in heating oil, crude oil, brent oil and gasoline being significant due to their relationship to inflation. The Black Sea debacle (Ukraine, Russia transportation line) continued to provide volatility to cereal prices. Adverse weather conditions in the East Coast of the US supported orange juice prices further. 

If there is to be a hard landing, then broadly commodities should experience demand destruction (price declines), which is the inverse to what we are presently seeing. A soft landing is not conducive to stable or declining inflation. 

Here is the week’s heatmap for the largest companies in the ASX. 

Another broadly positive week for the ASX. Financials led as expectations for further rate rises in Australia reduced after the Australian CPI numbers earlier in the week. Woodside and Santos performed well, supported by rising energy prices. Materials were solid as iron ore and copper had a stable week.  

*Historically there is a positive correlation between the number of constituents experiencing both short and long-term trends and the performance of the strategy. 

Please reach out if you’d like to find out more about how our quantitative approach captures the price action covered above, or if you would like to receive these updates directly to your inbox, please email admin@framefunds.com.au.