Daily Commentary

MarketMinder’s View: China’s Caixin Services purchasing managers’ index (PMI), which tilts more towards the country’s small and private companies than state-owned enterprises, eased slightly from 52.7 to 52.5 in April, marking the gauge’s 16^th straight month in expansionary territory. The details: “Overall new business hit the highest since May last year, while better overseas demand and growth in tourism activity helped propel growth in new export orders to their fastest pace in ten months. That in turn helped lift business confidence among Chinese service providers in the 12 months ahead to the highest this year.” Some solid developments worth noting here, though the country’s official PMI (which focuses on the larger aforementioned state-owned companies) notched a lower 50.4 reading in April. Still, both surveys point to an expanding services sector that contributes around 72% of Chinese GDP (per the World Bank). Now, PMIs show growth’s breadth only—not depth—so they don’t tell the whole story. But we see this as further evidence that the world’s second-largest economy is probably in better shape than many think.

MarketMinder’s View: “Proceeds for the Russian budget from oil-related taxes jumped to 1.053 trillion rubles ($11.5 billion) last month compared to nearly 497 billion rubles in April 2023, according to Bloomberg calculations based on Finance Ministry data. Total oil and gas revenues in April increased nearly 90% year-on-year, to 1.23 trillion rubles, according to the data.” This is partially due to weak Russian ruble—as the article notes, “… the April tax calculations are based on an exchange rate of 91.69 rubles per dollar, 20.5% weaker than a year before, according to the tax service data”—but the bigger contributor is that Russian crude has kept flowing to global markets. That touches an important point: Don’t overrate economic sanctions’ impact. Rewind to December 2022, when G7 leaders implemented a price cap on Russian oil in an effort to hamstring funding for Russia’s war efforts. But as we wrote at the time, such measures were mostly symbolic—global markets are far too complex for a single variable, particularly one as ineffective as economic sanctions, to override all other supply and demand factors. Yes, sanctions impacted Russian oil revenues initially, but they didn’t keep Russian crude products off the market, either. Instead, Russian producers found ready buyers in non-sanctioning countries (namely, India and China). As this piece points out, not much has changed since—India’s top refinery resumed Russian oil imports last month, despite the US tightening sanctions earlier this year. For investors, keep this lesson in mind: Economic sanctions don’t automatically take products off the market—instead, they tend to re-route commerce as companies adapt to keep business humming along.

MarketMinder’s View: This piece cites recent data (the BLS’ April jobs report, corporate earnings calls and the Institute for Supply Management’s services PMI) to argue the American economy is slowing. (As a reminder, MarketMinder doesn’t make individual security recommendations, and any mentioned herein are coincident to a broader theme we wish to highlight) We aren’t sure why this is a big deal now, as US GDP growth has slowed in the not-too-distant past (e.g., from Q3 2022 – Q2 2023). Unsurprisingly, the article posits that a slower economy means a Fed rate cut is more likely. “A move at the Fed’s next meeting in June still seems to be off the table. But the likelihood of a cut by September as implied by the Fed Funds futures market rose to 67.1% late Friday from 61.6% a day earlier, according to CME Group. If the economic data cooperates between now and then, the possibility of a sneaky July cut could keep creeping higher.” Many think the Fed is waiting for the data to show a slowdown—at which point it will cut rates to support the economy. In our view, though, this errs in thinking Fed policy is predictable based on what the latest economic data say. Yet the FOMC’s 12 voting members may interpret macroeconomic conditions differently, and trying to guess how a dozen individuals analyze a multitude of unknown variables is a fool’s errand. Combine that with monetary policy having no preset economic impact and all the guessing about what the Fed will or won’t do seems a tad overwrought to us.