Reshoring Revival of U.S. Manufacturing
Overall manufacturing indicators have shown signs of slowing, but that hasn’t stopped U.S. corporations from looking ahead. Construction spending on manufacturing facilities has seen a revival over the past three years. From September 2020 through May 2023, construction spending on manufacturing facilities increased from $73 billion to $194 billion. This is small relative to the U.S. economy, but nonetheless a meaningful trend. Specifically, new construction spending has been concentrated in advanced manufacturing of computer, electronic, and electrical facilities. Government subsidies have helped, but growth accelerated well before the announcement of the Inflation Reduction Act. Reshoring (companies relocating manufacturing to the U.S.) of manufacturing can be somewhat attributed to supply chain diversification post-COVID. The number of companies announcing reshoring and increased domestic production has nearly doubled over the past three years.
Economic momentum in China is facing headwinds. Second-quarter economic growth expanded only 6.3% year-over-year, as quarter-over-quarter growth slowed to 0.8% from 2.2% in the first quarter. Weaker domestic and global demand were two significant factors to the slowdown. Exports declined double digits, continuing a weaker trend from earlier this year. A falling consumption trajectory has followed declining personal income growth. China’s leadership acknowledged insufficient domestic demand, signaling proactive future fiscal and monetary policy.
Bonds: Riskiest Bonds Outperform
Overall bond market performance declined last month, but the riskier bond components followed equity trends. The U.S. Treasury Index declined -0.35% last month, as the Bloomberg U.S. Corporate Index (investment grade bonds) advanced +0.34% and Bloomberg U.S. Corporate High Yield Index increased +1.38%. Investors took comfort with the economic trajectory, willing to seek bonds with more risky profiles in exchange for higher relative interest rates. Since the end of March, the interest rate from a high yield bond relative to a Treasury narrowed nearly 1.50%, underscoring the shift in risk sentiment.
Equities: Nine straight years of gains in July
The market advanced in the month of July for the ninth consecutive year. The specific components behind the risk-on sentiment for equities differed slightly from the drivers year-to-date. Mega-capitalization, technology companies were responsible for performance this year, however small-capitalization equities took the lead in July. While small-cap equities are riskier given limited business diversification, improving economic sentiment tends to be supportive. In addition, small-caps are inexpensive relative to large-cap equities and are exhibiting an improvement in growth as earnings revisions have increased over the past three months.
Federal Reserve hikes rates by 0.25%
The Federal Reserve (Fed) raised its benchmark rate to a range of 5.25%-5.50%, the 11th rate increase since March 2022. Fed Chair Jay Powell noted future monetary policy will be “data dependent,” waiting for clarity on incoming economic data before committing to a policy course. Market participants share the viewpoint of near-term economic opaqueness with the Fed, expecting rates to be held steady over the next couple of months and a 40% possibility of another 0.25% hike at the beginning of November. Policymakers’ wait-and-see approach is possible because of calm capital markets and the inflation rate trending towards its long-term target.
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