Month: June 2024

By Joe Cash and Ellen Zhang

BEIJING (Reuters) -China’s manufacturing activity fell for a second month in June while services activity slipped to a five-month low, an official survey showed on Sunday, keeping alive calls for further stimulus as the economy struggles to get back on its feet.

The National Bureau of Statistics (NBS) purchasing managers’ index (PMI), at 49.5 in June, was unchanged from May, below the 50-mark separating growth from contraction and in line with a median forecast of 49.5 in a Reuters poll.

“Actual industrial activity should be stronger than the data suggests as our observation is that the official PMI fails to fully capture the current export momentum, which has been the major economic driver this year,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.

Still, Xu added that external and domestic demand remains relatively inadequate to absorb China’s manufacturing capacity and this will prevent a recovery in producer prices.

While a sub-index of production was above 50 in June, other indexes of new orders, raw material stocks, employment, supplier delivery times and new export orders were all in contractionary territory, the NBS survey showed.

China’s exports exceeded forecasts in May, but analysts said the jury is still out on whether export sales are sustainable given growing trade tension between Beijing and Western economies. Meanwhile, a protracted property crisis continues to drag on domestic demand.

With consumers wary and the Labour Day holiday boost fleeting, the non-manufacturing PMI, which includes services and construction, fell to 50.5 from 51.1 in May, the lowest since December.

The services PMI sank to 50.2, a five-month low, and construction PMI slipped to 52.3, the weakest reading since July last year.

Analysts expect China to roll out more policy support measures in the short term, while a government pledge to boost fiscal stimulus is seen helping kick domestic consumption into a higher gear.

“The weak PMI figures naturally call for more supportive policies from the Chinese government. However, the room for monetary policy easing is limited for the time being, as the Chinese currency is under pressure,” said Hao Zhou, chief economist at Guotai Junan International.

“That said, fiscal policy is likely to take the driving seat, suggesting that the central government will need to issue more debt over the foreseeable future to boost the overall domestic demand.”

But high local-government debt and deflationary pressure cast a long shadow over recovery prospects, despite a slew of measures officials have rolled out since last October, tempering investors’ and factory owners’ expectations.

China’s central bank last month announced a relending programme for affordable housing to accelerate sales of unsold housing stock so supply better matches demand.

Officials are under pressure to fire up new growth engines to reduce the economy’s reliance on property.

Premier Li Qiang told a World Economic Forum meeting on Tuesday that growth of new industries was supporting healthy economic development.

“Since the beginning of this year, China’s economy has maintained an upward trend… and is expected to continue to improve steadily over the second quarter,” Li said.

Economists and investors are awaiting for the Third Plenum to be held on July 15-18 with hundreds of China’s top Communist Party officials gathering in Beijing for the five-yearly meeting.

Central banks have been actively and massively buying gold over the last few years. In its report published this week, UBS highlighted the sustained interest in gold by central banks, underscoring its role as a hedge against inflation, a diversifier during market stress, and a credible asset in times of economic turmoil.

In the wake of the Ukraine war and the freezing of approximately $300 billion of Russian foreign holdings, central banks, particularly those from smaller countries vulnerable to Western sanctions, have increased their gold reserves.

This trend, while not immediately impacting the dollar-based status quo, signals a shift in the perception of central bank sovereignty and adds to calls for reform in the international financial system.

As of the end of 2023, central bank holdings of gold stood at around 37,000 metric tons, representing 16.7% of total central bank foreign exchange reserves. Developed countries hold the largest reserves, with the United States, Germany, Italy, and France at the forefront.

Nevertheless, emerging markets are rapidly accumulating gold, with notable increases by Russia and China, UBS strategists said.

These purchases are part of a broader move to diversify assets and reduce reliance on major currencies such as the US dollar, euro, Japanese yen, and British pound.

The World Gold Council’s survey of reserve managers indicated that gold’s long-term value, its role as an inflation hedge, and the lack of counterparty risks are key reasons for its inclusion in reserves. Moreover, gold’s daily liquidity and absence of default risk are crucial amid rising public debts.

Discrepancies in reported gold purchases between the International Monetary Fund (IMF) and other sources like Metals Focus highlight the sensitive nature of reserve disclosures and the likely underreporting of gold acquisitions by sovereign wealth funds.

Historical patterns suggest that central bank actions can significantly influence gold prices. Comparing current dynamics to the mid-1960s, when central banks sold gold to maintain the gold standard, today’s market is more liquid and diverse.

“Looking ahead, demand for gold has solid support from central banks. An additional factor over the next few years could be our outlook for a weaker US dollar. Central banks in emerging market tend to intervene in currency markets when their currency appreciates against the US dollar,” UBS said.

“With emerging market central banks potentially increasing their foreign currency holdings as result of interventions in the currency market, there could be a greater need to buy even more gold.”

UBS maintains a positive outlook on gold, citing central bank demand, geopolitical tensions, high inflation, and potentially lower US interest rates as supportive factors.

The Swiss brokerage firm expects gold prices to reach $2,600 per ounce by the end of the year and $2,700 per ounce by mid-2025, recommending a 5% gold allocation in a USD-based balanced portfolio for individual investors.

(Updated – June 29, 2024 8:08 AM EDT)

JP Morgan’s latest CIO survey showed that Microsoft (NASDAQ:MSFT) is very well-positioned as tech budgets move more toward AI, a category dominated by the tech giant.

The survey, highlighting the views of 166 CIOs responsible for $123B in annual enterprise IT spending, showed that Microsoft had the top position in every major category:

#1 in spending intentions#1 most critical IT mega-vendor#1 in Cloud Computing plans#1 future IaaS market share#1 platform for GenAI activity

“Impressively, expected future share of cloud-based GenAI activity for Microsoft and OpenAI rises y/y from 66% to 68% despite strong investment from other hyperscalers,” analysts highlighted.

Further, CIOs praised Microsoft for its “Domination in AI” and as “the underpinning of our tech stack.”

Analysts at the firm highlighted that while AI spending surges, other tech efforts are being defunded.

“CIOs indicate they currently spend 5% of their IT budgets on AI-accelerated compute hardware, and see this rising at a mid40s CAGR to 14.5% of their IT budgets in the next 3 years,” analysts stated. “As organizations work to formulate their GenAI roadmaps, 33% of CIOs are Defunding other projects, with legacy systems/upgrades and infrastructure taking the biggest hit. Still, 62% of CIOs are Not Defunding other projects, which suggests a majority of AI investments will be fueled by incremental funding.”

In addition to Microsoft, the best-performing companies in the firm’s survey across multiple categories included Amazon AWS (NASDAQ:AMZN), Google (NASDAQ:GOOGL), CrowdStrike (NASDAQ:CRWD), ServiceNow (NYSE:NOW), and Salesforce (NYSE:CRM). SAP (SAP) and Zscaler received “honorable mentions”. Meanwhile, Confluent (CFLT), Zoom Video (NASDAQ:ZM), Oracle (NYSE:ORCL), and IBM (NYSE:IBM) were “underperforming vendors.”

Investing.com — Tech giants and other firms are set to spend roughly $1 trillion in the coming years on developing their artificial intelligence capabilities, including investments in data centers, chips and other AI-related infrastructure, according to analysts at Goldman Sachs.

But they argued that these expenditures have so far failed to yield much “beyond reports of efficiency gains” among AI developers, while Nvidia (NASDAQ:NVDA) — the Wall Street darling and focal point of the craze around the nascent technology — has seen its shares “sharply correct.”

To explore whether heavy corporate spending on AI will deliver meaningful “benefits and returns,” the investment bank spoke with a series of experts, including Daron Acemoglu, a professor at the Massachusetts Institute of Technology who specializes in economics.

AI spending’s potential impact on productivity

Acemoglu took a largely skeptical stance on the outcome of the capital rush, estimating that only a quarter of AI-related actions will be “cost-effective to automate” within 10 years — implying that AI will effect less than 5% of all tasks.

“Over this [10-year] horizon, AI technology will […] primarily increase the efficiency of existing production processes by automating certain tasks or by making workers who perform these tasks more productive,” Acemoglu told Goldman Sachs. “So, estimating the gains in productivity and growth from AI technology on a shorter horizon depends wholly on the number of production processes that the technology will impact and the degree to which this technology increases productivity or reduces costs over this timeframe.”

However, he predicted that there will not be a “massive” number of tasks that will be impacted by AI in the near term, adding that most actions humans currently perform — such as manufacturing or mining — are “multifaceted and require real-world interaction.” Instead, Acemoglu said he expects AI will have the biggest influence in the coming years on “pure mental tasks,” adding that while the amount of these actions will be “non-trivial” it will not be “huge.”

Ultimately, Acemoglu forecast that AI will increase U.S. productivity by only 0.5% and bolster overall economic growth by 0.9% over the next decade.

AI’s “limitations”

Acemoglu added he was “less convinced” that Big Tech’s plans to greatly increase the amount of data and processing power they plug into AI models will lead to faster improvements of these systems.

“Including twice as much data from [social media platform] Reddit into the next version of [OpenAI’s chatbot] [ChatGPT] may improve its ability to predict the next word when engaging in an informal conversation, but it won’t necessarily improve a customer service representative’s ability to help a customer troubleshoot problems with their video service,” he said.

The quality of data is also crucial, Acemoglu noted, flagging that it remains unclear what will be the major sources of high-end information or whether it can be obtained “easily and cheaply.”

Finally, he warned that the current architecture of AI technology itself “may have limitations.”

“Human cognition involves many types of cognitive processes, sensory inputs, and reasoning capabilities. Large language models (LLMs) today have proven more impressive than many people would have predicted, but a big leap of faith is still required to believe that the architecture of predicting the next word in a sentence will achieve capabilities as smart as HAL 9000 in ‘2001: A Space Odyssey,'” Acemoglu said, referring to the fictional artificial intelligence character in a popular 1960s science fiction film.

An AI “bubble” or a “promising” spending cycle? 

The Goldman Sachs analysts assumed a mixed approach to the crush of spending on AI, with some saying the technology has yet to show it can perform the complex problems needed to justify the elevated expenditures.

These researchers also said they do not anticipate that AI costs will ever decline to such an extent that it will be affordable for companies to automate a large portion of tasks. Fundamentally, they said the AI story that has driven an uptick in the benchmark S&P 500 so far this year is “unlikely to hold up.”

Despite these concerns, other Goldman Sachs analysts took a more optimistic stance, forecasting that AI could lead to the automation of a quarter of all work actions. The current uptick in capital expenditures, they argued, seems “more promising” than prior spending cycles because “incumbents with low costs of capital and massive distribution networks and customer bases are leading it.” They also predicted that U.S. productivity would improve by 9% and economic activity would grow by 6.1% cumulatively in the next decade thanks to AI advancements.

Overall, however, the Goldman Sachs analysts concluded that there is “still room for the AI theme to run, either because AI starts to deliver on its promise, or because bubbles take a long time to burst.”