Economic Outlook – 1 October 2023

USA 
The third estimate of Q2 GDP growth came in at +2.1% in annualized terms, unchanged from the second estimate but a nick shy of the median economist forecast (+2.2%). In addition, the series of historical data has been revised down a tad. Household consumption was revised down sharply (from +1.7% QoQ annualized to +0.8%) on lower spending on services (from +2.2% to +1.0%) and goods (from +0.7% to +0.5%). Offsetting this, gross private investment was revised up (from +3.3% to+5.2%) on stronger growth in non-residential structures (from +11.2% to +16.1%) and intellectual property (from +2.2% to +2.7%) and a less pronounced contraction in residential investment (from -3.6% to -2.2%). On the inflation front, the 12-month change in the Personal Consumption Expenditures Price Index excluding food and energy held firm at 3.7% Nominal personal income increased 0.4% in August, a result in line with the median economist forecast. Amid a labour market that remains healthy, the wage/salary component of income progressed 0.5%, whereas income derived from government transfers fell 0.2%. Personal current taxes, for their part, spiked 1.5%. All this translated into a 0.2% increase in disposable income The headline PCE deflator came in at 3.5% YoY, up from 3.4% the prior month and in line with consensus expectations. The core measure, for its part, cooled from 4.3% to a 2-year low of 3.9%, a result that was also in line with the median economist forecast. On a monthly basis, the headline index advanced 0.4%, while the gauge excluding food and energy edged up 0.1%, marking the smaller progression in nearly 3 years for this indicator Durable goods orders increased 0.2% MoM instead of decreasing 0.5% as expected by consensus. Orders in the transportation category dropped 0.2% as orders for civilian aircraft fell 15.9% after plummeting 45.7% the month before. Excluding transportation, orders advanced 0.4%, double the consensus estimate of 0.2%. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, jumped 0.9% MoM after slipping 0.4% in July. On a three-month annualized basis, core orders were up 4% The Conference Board Consumer Confidence Index slid from 108.7 in August to 103.0 in September. Longer-term expectations deteriorated substantially. The sub-index tracking sentiment towards the next six months fell 9.6 points to 73.7 as a larger proportion of respondents expressed negative opinions about future business conditions (from 17.3% to 18.4%) and employment (from 18.0% to 18.9%). These darker prospects also translated into an increase in the share of respondents who expected to see their income decrease (from 11.9% to 14.4%). Proportionally fewer respondents planned to buy a home (from 6.1% to 4.9%), a car (from 12.3% to 11.0%) or major appliances (from 48.0% to 46.2%) in September. Consumer inflation was expected to stand at 5.7% for the next 12 months, stable compared with the prior month, which had been registered the lowest level since November 2020. Consumer assessment of the current situation improved slightly. The associated index increased from 146.7 to 147.1. The percentage of respondents who deemed jobs plentiful at present climbed from 39.9% to 40.9% The Pending Home Sales Index fell 7.1% in August to its lowest level ever, way more than the median economist forecast called for (-1.0%). YoY, pending transactions were down 18.8%. After slipping in July, sales of new homes plunged 8.7% MoM in August to 675K (seasonally adjusted and annualized), below consensus expectations calling for a 700K print. This decline, combined with the increase in the number of homes available on the market (from 431K to 443K), hoisted the inventory-to-sales ratio up eight ticks to 7.8, even further above historical average (6.1) The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the fifth consecutive month in July, climbing 0.9% MoM to an all-time high. Price increases were observed across all of the markets covered, led by San Diego (+1.52%), Los Angeles (+1.06%), Phoenix (+0.97%), Washington (+0.94%), Miami (+0.90%), and Chicago (+0.88). YoY, prices ticked up 0.1% at the national level, the first increase in five months. Although demand remains weak on the real estate market, very tight supply, combined with a strong labour market, is likely to continue to push prices upward in the coming months Having begun negotiations by asking for a 40% raise and an array of additional benefits, the United Autoworkers have moderated their wage demands to an increase of 30%. The Big Three Detroit automakers have each offered 20% raises over four years, with Ford offering to reinstate a cost-of-living formula it did away with amid the global financial crisis in 2009. The UAW says it will expand the strike, which has gone on for more than two weeks, if the companies do not sweeten their offers. The strike is one of several headwinds facing the US economy as the last quarter begins. Two others are the restart of student loan payments and the impending government shutdown The S&P 500 Index suffered a fourth consecutive weekly pullback, as upward pressure on rates appeared to weigh on investor sentiment. Within the index, utilities lost the most ground. Energy stocks, on the other hand, outperformed. The S&P MidCap 400 Index and the small-cap Russell 2000 Index, which have lagged large-caps meaningfully this year, eked out gains The Federal Reserve Bank of New York’s measure of term premium, the compensation investors require for bearing the risk that interest rates may change over the life of a bond, turned positive this week for the first time since 2021 The US Federal Trade Commission and 17 US states sued Amazon on Tuesday, alleging the online retailer illegally wields monopoly power that keeps prices artificially high, locks sellers into its platform and harms rivals In terms of data release, construction spending is out on Monday. Construction spending appears to be rising on trend, bolstered most recently by an uptick in residential activity. Builders have been largely successful using mortgage rate buydowns and price discounts to sell homes despite the high interest rate environment, prompting new home sales to rise on balance this year. A corresponding upshift in single-family housing starts has led single-family construction outlays to improve for three straight months. The steady pipeline of apartment construction also continues to sustain robust growth in multifamily outlays as the number of apartment units under construction remains near record highs ISM Manufacturing is out on Monday as well. The most rapid tightening cycle since the early 1980s continues to create notable headwinds for the manufacturing sector. According to the ISM Manufacturing Index, the manufacturing industry has already spent 10 straight months in contraction. This bellwether indicator has never remained in contractionary territory for so long outside of a broader recession. Looking under the hood, waning demand for new orders has dragged on the headline for 12 months straight, a sentiment also reflected in weakening hard data on core capital goods orders. Higher interest rates will likely keep the manufacturing sector under pressure for some time, especially as inflation recedes on trend and real interest rates climb higher ISM Services is out on Wednesday. The services sector seems to be more resilient to the run-up in financing costs. The ISM Services Index rose to a six-month high in August, propelled by sturdy employment gains and resilient consumer demand for services. Yet, as credit card delinquencies creep up and excess savings run thin, the momentum propelling consumers is likely unsustainable. The ISM services survey also suggests some upside risk to inflation. In August, 12 of 18 industries reported a bump in their prices paid, the second consecutive monthly increase following more than a year of trend declines. 

UK 
Bank of England money and credit data for August has been published. Net mortgage approvals for house purchases fell from 49,500 to 45,400 in August, registering 2,000 below market expectations. This is the lowest level for six months and means that mortgage approvals remain at around a quarter below their pre-pandemic average. The trend of a slowdown in mortgage activity would support the prediction that the correction in UK house prices still has some way to go. The current peak to trough correction in nominal UK house prices is between 4.9 – 5.4%, depending on whether you look at the Nationwide or Halifax HPI measure Households withdrew GBP 0.3bn from banks and building societies in August. While the previous two months did see net deposits, it is notable that May saw a very significant net withdrawal of deposits. The reasons behind net withdrawals in particular months are varied: for example, there may have been a move into gilts given the attractive returns and suppressed levels of net mortgage lending will reduce liquidity in the system. However, it does also seem to indicate that, for the moment at least, UK consumers are not in “saving mode”. Despite the savings rate rising from 7.9% in Q1 to 9.1% in Q2, the savings rate may fall again in Q3 as consumer confidence has seen some improvement. It is also notable that there were relatively robust numbers on consumer credit: individuals borrowed, on net, an additional GBP 1.6bn in consumer credit in August, up from GBP 1.3bn in July The final prints for UK GDP in Q2 was published by the Office for National Statistics (ONS). QoQ growth in Q2 has been confirmed at 0.2%, although YoY growth has been revised up to 0.6% from a preliminary reading of 0.4%. This confirms a trend of the UK seeing marginal growth but, so far, avoiding recession in 2023. Business investment performed better than initially thought, increasing by 4.1% on the quarter (revised up from 3.4%) and driven by aircraft investment. However, note that investment in information and communication technology equipment declined on the quarter due to the phasing out of the super-deduction. Real household disposable income (RHDI) grew by 1.2% in Q2, according to the latest ONS figures, and there are reasons to suggest that RHDI will continue to see some growth in the coming quarters. Real wages turned positive in the three months to June and the successive falls in Ofgem’s energy price cap will benefit households across the board. By October, the unit price of energy will have fallen by nearly a quarter compared to its peak. This will, of course, help to prop up consumer confidence, which has seen some recent improvement, but the outlook continues to be weighed down by numerous factors. Over 1.2 million households will come off fixed rate mortgages over the next year, and will in turn face a significant squeeze on disposable income. Moreover, business investment is likely to struggle in the coming months as the impact of higher interest rates transmits quickly through to businesses (circa. 80% of business loans are floating rate) and corporations no longer benefit from the super-deduction.

EU  
The flash estimate showed eurozone headline inflation falling to 4.3 percent in September, from 5.2 percent in August, and core inflation falling to 4.5 percent from 5.3 percent. The flash estimate was below market expectations at 4.5 percent for headline and 4.8 percent for core (mean estimates according to Bloomberg). Among the core components, goods inflation (excluding energy and food) continued its downward trend due to fading effects of the price increases originating from supply and demand mismatches, but goods inflation remains elevated at 4.2 percent (4.7 in August). Service inflation, one of the components closely watched by the ECB, dropped to 4.7 percent from 5.5 percent in august. The large drop was partly driven by base effects in Germany, which artificially pushed up inflation during the previous 12.  Among the non-core components, energy inflation was negative at -4.7 percent (-3.3 percent in August) and food inflation (including alcohol and tobacco) eased further to 8.8 percent (9.7 percent in August) as price increases during 2022 keep dropping out of the annual comparison A handful of European Central Bank (ECB) officials—including ECB President Christine Lagarde and Chief Economist Philip Lane—reaffirmed their commitment to maintaining a restrictive monetary policy for an extended period in an effort to bring inflation back to the 2% target. Meanwhile, ECB Executive Board member Frank Elderson said in an interview with Market News International that rates have not necessarily peaked and that future monetary policy decisions would depend on incoming data. Austrian central bank Governor Robert Holzmann went a step further, suggesting in an interview with Bloomberg that persistent inflationary pressures may yet lead to further rate hikes In local currency terms, the pan-European STOXX Europe 600 Index ended 0.67% lower amid concerns about a prolonged period of higher interest rates and a weak Chinese economy. France’s CAC 40 Index slid 0.69%, Germany’s DAX declined 1.10%, and Italy’s FTSE MIB fell 1.16%.   

CHINA 
No official economic indicators in China were released during the week. But a private survey showed that prices in China are recovering, assuaging fears of a prolonged deflation. World Economics reported that its all-sector price index for China rose to a 14-month high in September. “This suggests fears of Chinese price deflation ushering in a Japanese-style period of very low or negative growth have been overblown,” said the London-based data company, which created the widely used Purchasing Managers’ Indexes now owned by S&P Global. “The signs of a resumption of growth in [China] over recent decades are looking a little more positive.” The World Economics survey was the latest data point indicating that China’s economy may have bottomed after losing momentum following a brief post-lockdown recovery in the first quarter. Official data for August released earlier in September also pointed to signs of stabilization in the Chinese economy. Industrial production and retail sales grew more than forecast year on year, while unemployment unexpectedly fell from July. But fixed-asset investment growth missed expectations due to a steeper decline in property investment Chinese stocks fell in a holiday-shortened week as a lack of positive news on the economy dampened investor sentiment. The blue-chip CSI 300 Index and Shanghai Composite Index both fell for the week ended Thursday. Stock markets in mainland China were closed Friday, the start of a 10-day holiday for the Mid-Autumn Festival and National Day, and will reopen Monday, October 9. In Hong Kong, the benchmark Hang Seng Index fell 1.37% for the week ended Friday.         
Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, M. Cassar Derjavets.
2023-10-02T16:19:08+00:00