By LBPAM

The S&P 500 saw its biggest drop since the beginning of August yesterday (-2.1%) due to Nvidia’s almost 10% decline. The artificial intelligence specialist is among the companies subpoenaed by the Department of Justice for possible antitrust violations. And markets remain bearish this morning. This confirms our cautious stance on US markets, which are suffering from a high degree of concentration, while sector leadership could change.

All the more so as the market is already incorporating strong support from the Fed, with a cut of over 200bp in the key rate expected within a year. While such a cut is not impossible in the event of a marked deterioration in the US economy, it seems too aggressive to us in the absence of a recession. In this context, Friday’s US employment figures will be crucial.

In the meantime, we have learned that the industrial cycle is stagnating again this summer, even though it had finally begun to pick up a little in Q2. Indeed, the global manufacturing PMI fell again in August to 49.5pt, after dropping below 50pt in July. While this does not indicate a turnaround in the cycle for the worse, it does suggest that global growth is likely to remain limited in the months ahead.

While industrial activity stagnated in Asia and continued to contract in the Eurozone, it slowed again in the United States. Indeed, the ISM Manufacturing PMI remains clearly in contraction territory in August at 47.2pt, only slightly above last month’s level, and the New Orders – Inventories leading indicator falls to a one-and-a-half-year low. What’s more, the overall S&P manufacturing PMI is converging towards the level of the ISM and regional surveys, whereas it had been holding up a little better until now. At least from an industrial point of view, there is no American exceptionalism.

France is still looking for a government, which will in any case have limited room for manoeuvre. But it will immediately be faced with complicated budgetary choices. With France due to propose a budget in early October and prove to the European Commission that it is adjusting its “excessive deficit”, Bercy is warning that the public deficit could reach 5.6% of GDP this year, instead of the 5.1% forecast. This new budgetary slippage is a stain, especially when compared with Italy, which looks set to meet its deficit reduction target of 4.3% this year. This justifies a degree of caution regarding French debt compared with that of southern European countries, despite the persistent premium.

Germany is facing a worsening economic situation and growing political uncertainty, which in part reflects structural problems, particularly in its industry. Against this backdrop, Volkswagen, Germany’s largest carmaker, has announced plans to close plants in Germany for the first time, and to end a job guarantee that has been in place since the 1990s.

World: global industrial activity stagnates again this summer

After moving into contraction for the first time this year in July, the global manufacturing PMI fell again in August, from 49.7 to 49.5pt. Both production and employment components moved into contraction territory in August. This is consistent with a stagnation in global industrial production this summer, which had risen slightly in Q2. The new orders component stagnated at 48.8pt in August, and industrial confidence remains limited, suggesting no clear improvement in the months ahead.

World: manufacturing PMIs generally in contraction in August

That said, the geographical breakdown does not suggest a collapse in the industrial cycle, since manufacturing PMIs are rising (and falling) in half the countries covered by the survey.
In particular, the manufacturing PMI has stagnated in the eurozone for the past 3 months, albeit at a very low level (45.8pt). This is slightly better than the decline indicated in the initial estimate. The manufacturing PMI falls again in Germany (42.4) but stabilizes in France (43.9) and rebounds in Italy (by 2pt to 49.4).
Outside the Eurozone, the manufacturing PMI improved slightly in Japan (49.8) and China (50.4), where it indicates a stabilization of activity. And it remains surprisingly solid in the UK (52.5). On the other hand, it falls sharply in the USA, where it converges in the contraction zone with the other US industrial indicators (cf. Infra).

United States: ISM manufacturing index not encouraging for industry

The weakness of the industrial cycle is also affecting the United States. The ISM manufacturing index remained clearly in contraction territory in August at 47.2pt, recovering only marginally from its 46.8pt drop in July. Above all, the details of the survey are not encouraging for the outlook. The slight rise in August came from employment, which contracted slightly less sharply than last month, but still significantly (ISM employment at 46pt). Above all, production and orders fell more sharply and inventories rose. All in all, the leading indicator for new orders and inventories fell to its lowest level for a year and a half. This does not bode well for a rapid improvement in the ISM over the coming months.

This is not a catastrophic indicator for the US economy. Indeed, the ISM manufacturing index remains above its usual levels during recessions (i.e. below 45pt). And industry accounts for only 10% of the US economy. With this in mind, Thursday’s ISM services release will be more important for judging US growth in August. But it confirms that the industrial cycle is in decline, even in the US where demand is solid, which is not encouraging for growth dynamism.

France: budget outlook deteriorates further

Bruno Le Maire, the resigning Minister of the Economy, has warned that the French public deficit could reach 5.6% of GDP this year. This is a far cry from the 5.1% forecast by the government in April (15 billion), and would be higher than last year’s budget slippage (-5.5% of GDP). This would make it even more difficult to achieve the 4.1% deficit target the government had presented to the European authorities for next year.
And this budgetary slippage is not, as usual, due to slower growth than forecast by the government, since French growth is on track to reach the 1% forecast for this year. Rather, it’s mainly due to lower-than-expected budget revenues, as in 2023.

Italy: budget execution looks on track this year

France’s budgetary situation is worse than that of Italy, which is on track to achieve the 4.3% of GDP deficit forecast by the government. The central government’s cash deficit at the end of August stood at 87 billion euros, “only” 10% above the 2023 level, whereas the government had forecast an increase of almost 40% (due to Superbonus tax credits). This makes it credible that the budget target announced for this year will be met, which seemed optimistic just a few months ago. And this is good news, since Italy, which has also been placed under the excessive deficit procedure by the Commission, has pledged to reduce its deficit to 3.6% next year, and to return to a deficit below 3% by 2026.