Weekly Wisdom – January 25, 2024

By Hightower Great Lakes on January 25, 2024

China News

The tide appears to be changing in China with regards to its monetary policy. The news that the People’s Bank of China (PBOC) will cut its reserve requirement ratio (RRR) by 50 bps in two weeks is a much-needed move to boost the Chinese economy.

This is the largest move in two years and will inject $140 billion of cash into China’s banking system. It’s no secret that the world’s second-largest economy has faced enormous pressure as a result of Covid and the path to economic recovery.

While it remains to be seen whether or not this will have an impact and whether the government will provide additional stimulus, the action prompted a 6.5% rally in the Hang Seng Index (HSI) as confidence builds that the bottom is in. To put into perspective, the HSI is still down 27.9% over the last 52 weeks and the economy has grown to one of the slowest levels in years.

In addition to the RRR cuts ahead, PBOC governor Pan Gongsheng said the bank would release additional policies to help relieve its ailing commercial property market. Stay tuned.

Commodity Impact

Despite the real estate issues in China, demand for key commodities is still robust within the nation. Freeport McMoran (FCX), a key supplier of copper, spoke to the strength of China during its fourth-quarter earnings call.

Specifically, it said that, “there was stronger-than-expected demand for copper in the United States and China, despite all the issues with China’s property business, other sectors created notable growth for copper in China.”^[1]

Not only was China’s copper demand strong in the fourth quarter for Freeport McMoran, but China’s imports of copper ore and concentrate hit a record high of 27.54 million tons in 2023. This figure is up 9.1% from the year prior.^[2]

This surge in copper imports was a product of China relaxing its Covid restrictions and allowing industrial production to resume as normal. This strong demand from China does not account for the new $140 billion that will be unleashed into its economy by the RRR cuts. It can be assumed that the country’s demand for copper should accelerate because of the extra funds available.

It is also worth noting that China is the world’s largest consumer of refined copper, consuming nearly 8.7 million metric tons in 2022. Therefore, sufficient demand from China is significant for copper’s price and general supply/demand dynamics.

Freeport McMoran stressed that the 2023 copper supply deficit market will continue into 2024 which sets up tight market conditions in the near term. This tight market may be further exacerbated by a potential increase in demand from China because of this stimulus.

This is a similar story for crude oil, another key commodity in China. Crude oil can be made into key fuels that power industrial production as well as transportation. In 2023, China imported 563.99 million tons of crude oil, which grew a whopping 11% when compared to the year prior.^[3] Domestic production was also up 2% year-over-year. ^[4]

Again, this is significant for the overall crude oil market due to China being the world’s second-largest consumer of crude oil, accounting for about 13% of the world’s consumption.^[5] However, crude oil doesn’t tell the whole story here since it is useless unless refined into some sort of product.

The refinery data completes the theme of strong oil demand, with China’s refinery throughput raising 9% from the year prior. China has the second most refinery capacity in the world, therefore it has the power to process a vast amount of crude oil.^[6] Crude oil imports, domestic production and refinery throughput may also tick up because of this stimulus, just like copper demand.

Chart 1: Chinese Refinery Throughput 2023[7]

Manufacturing Expansion

U.S. economic data continues to surprise to the upside, as the January S&P global PMI readings beat expectations and both reports showed expansion – S&P global Manufacturing in the U.S. rose to 50.3 versus 47.9 in the prior month and S&G Global Services in the U.S. rose to 52.9 versus 51.4 last month.

Note that any reading over the 50 level is considered the expansionary phase and speaks to the overall strength of the U.S. economy. Services strength has been a common theme we’ve seen and highlighted post-Covid, and it’s encouraging to see the manufacturing segment is starting to show signs of strength.

We have highlighted a manufacturing renaissance consistently over the last year as onshoring comes back to the U.S. and supply chains are fixed.   

Important economic readings, Q4 GDP and PCE, will be released later this week. These data points will be heavily scrutinized by the market and the Federal Reserve, as PCE is one of its main indicators for the U.S. economy and its battle with inflation.

Chart 2: Consumer Discretionary vs. Consumer Staples vs. S&P 500 Performance[8]

Consumer Services Winning, Again

Another theme we have been observing is the dichotomy between U.S. consumer services and U.S. consumer goods. There has been vast outperformance between the XLY and XLP when looking back at the last 52 weeks. The Consumer Discretionary Index (XLY) is up over +24%, while the Consumer Staples Index (XLP) is only up 1.4%.

Services have outperformed post-Covid due to pent-up demand, which continued last year. So far, we are seeing the results of this pent-up demand in earnings results. United Airlines (UAL) is [CH1] a good example as it experienced a record holiday season with 8.2 million customers in the last three weeks of December 2023.

This strength boosted its revenue by +10% year-over-year. On the flip side, last week’s December retail sales report was driven by strength in food services and drinking places, with a reading of +11.1% year-over-year. This was the strongest sector in the report, further highlighting the broad strength we are seeing in services.

Contrasting the services side of the economy is the goods side, as Proctor & Gamble (PG) and Kimberly Clark (KMB) both reported earnings both suffered from lackluster volume growth in the face of the aggressive pricing actions both have taken over the past few years. 

One last point: the strength of non-store retailers, or e-commerce. Companies like Amazon (AMZN) have benefitted from the scale of their delivery networks. Amazon was able to capture 29% of the 55 million online orders before Christmas as consumers heavily relied on its two-day delivery service.

Amazon has been a strong performer over the last year, driving performance for the consumer discretionary index, as it has a 24% weighting in the index. As always, we are excited to see earnings season progress and to continue learning how companies are faring in the economy.

Click here to read last week’s Weekly Wisdom (1/18).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Freeport McMoran. As of January 24, 2024.

[2] Nasdaq. As of January 11, 2024.

[3] Hellenic Shipping News. As of January 23, 2024.

[4] Reuters. As of January 16, 2024.

[5] Worldometer. As of January 24, 2024.

[6] Statista. As of August 25, 2023.

[7] Reuters. As of January 16, 2024.

[8] FactSet. As of January 24, 2024.