| USA The second estimate of Q2 GDP growth came in at +3.0% in annualised terms, a beat above the consensus forecast calling for no change from the advance estimate (+2.8%). Headlines focused on the strength of personal consumption, which jumped to 2.9% from 2.3% in the advance estimate. There were upward revisions for both goods (durable goods to 3.0% from 2.5%; non-durable goods to 4.9% from 4.7%) and services (to 2.9% from 2.2%). Gross private investment sank to +7.5% from +8.4%. Other components were revised downwards, including equipment (to +10.8% from +11.6%), intellectual property (to +2.6% from +4.5%), and residential investment (to -2.0% from -1.4%). Structures got a boost but remained in contraction territory in Q2 (up to -1.6% from -3.3%). Net exports shrank as exports slid to +1.6% from +2.0% while imports ticked up to +7.0%. Still on an annualised basis, the core PCE index (excluding food and energy) rose 2.8%, compared with 3.7% in Q1. Nominal personal income rose 0.3% in July, one tick more than the median economist forecast calling for a +0.2% print. The wage/salary component of income moved up 0.3%, as did income derived from government transfers. Personal current taxes, meanwhile, jumped 0.7%. All this translated into a 0.3% increase in disposable income. Nominal personal spending, for its part, advanced a consensus-matching 0.5% on increase for both goods (+0.7%) and services outlays (+0.5%). As spending expanded at a faster pace than disposable income, the savings rate fell two ticks to a 2-year low of 2.9%. This level is far below those observed before the pandemic (between 6.5% and 8.5%). Adjusted for inflation, disposable income crept up 0.1%, while personal spending rose 0.4%. In the latter case, the increase reflected gains for both the goods segment (+0.7%) and the services segment (+0.2%). Within goods, the progression was led by motor vehicles and parts, while the improvement in services was driven by health care. The core services PCE deflator excluding housing, a good measure of underlying price pressures, advanced 0.2%. On a 3-month annualised basis, it eased from 2.3% to a 44-month low of 2.0%. The report published last week contained a lot of good news, but also left some question marks. Firstly, on the consumer front, not only was household spending slightly stronger than expected in July, but data for previous months was also revised significantly upwards, confirming the resilience of U.S. consumers. That said, the rise in expenditures was not due to a corollary increase in disposable income, but rather to a reduction in the savings rate, with the latter decreasing to a three-and-a-half year low in July. The savings rate has now been below the 4.5% mark for 11 consecutive months, a streak the length of which has only been surpassed in the run-up to the Great recession and in the post-pandemic period, when consumers could rely on sizeable excess savings to fuel their spending. The Conference Board Consumer Confidence Index rose to 103.3 in August from 101.9 in July (revised up from 100.3). The median estimate called for a 100.7 print. Though the data were positive, it will take continued progress for the series to return to pre-pandemic levels. (Consumer confidence went into a tumble beginning in mid-2021. Consumer assessment of the present situation rose to 134.4 from 133.1. The share of respondents that considered current business conditions bad fell to 17.7% from 18.2%, while those who felt conditions were good rose to 20.8% from 19.2%. The proportion that deemed jobs hard to find slipped to 16.4% from 17.1% (revised down from 19.8%). The S&P CoreLogic Case-Shiller 20-City Home Price Index for June rose 0.42% MoM, surpassing the consensus forecast calling for a 0.30% bump. This marks the 16th consecutive monthly advance and a pickup over the previous month (+0.39%). Seasonally adjusted, prices were up in 16 of the 20 cities tracked, led by Seattle (0.86%), San Diego (0.73%), New York (0.63%), and Los Angeles (0.62%). YoY, prices rose 6.5% at the national level. Directors at the Federal Reserve Banks of New York and Chicago voted in July in favour of lowering the so-called discount lending rate, records released by the Fed Wednesday showed, a further sign that the Fed funds rate will be trimmed in September. The Wall Street Journal reported that looser labor market conditions are now allowing companies to offer workers significantly lower starting salaries than they did a year ago. Signing bonuses are increasingly rare and firms are hiring in lower-cost locales, the paper reported, including overseas. Some firms are laying off entire divisions, renaming them and making new hires at much lower compensation levels. Fitch Ratings affirmed the US’ AA+ rating with a stable outlook. The rating is supported by structural strengths in the US, such as high per capita income, its position as the world’s largest economy and a dynamic business environment. The rating, however, is also constrained by large deficits, a high debt load and substantial interest burden. The major indexes ended mixed in a week of light trading ahead of the holiday weekend; in fact, fewer shares traded hands Monday than on any other trading day so far this year, excluding early closes. The technology-heavy Nasdaq Composite fared the worst, dragged lower in part by chip giant NVIDIA, which lost nearly 10% of its value, or roughly USD 300 billion, at the stock’s low point on Thursday. Relatedly, value stocks outperformed growth shares by the largest margin since late July. Markets were scheduled to be closed the following Monday in observance of the Labor Day holiday. In terms of data release, the employment data is out on Friday. The July jobs report fired a warning shot that the widespread weakening in labor market indicators (to which payrolls until recently seemed immune) should not be ignored. July’s 114K increase in nonfarm employment came in well short of expectations, with yet another narrowly driven increase and downward net revision to the prior two months’ hiring figures. Even more eye-catching was the unemployment rate’s rise to 4.3%, which pushed the increase in the jobless rate over the past year above the Sahm Rule threshold historically associated with a recession. UK The Bank of England‘s Money and Credit release for July has been published and it contains robust numbers on mortgage approvals, a key forward-looking indicator for the housing market that is keenly watched by markets. It shows that there were 62,000 mortgage approvals in July, up from 60,600 in the previous month and exceeding market expectations by 1,500. This means that mortgage approvals are now the highest they have been since September 2022 and are on a trajectory to return to levels seen in the years leading up to the pandemic. The relatively strong mortgage approval number for July supports other data suggesting that the housing market has turned a corner, with average prices in the UK expected to pick up later this year and into next year. The latest published data on household savings rates is for Q1 2024 with Q2’s figure only due to be published in late September. Q1’s household saving rate was 11.1% in Q1, the highest since the Global Financial Crisis if you exclude the pandemic period. There is therefore plenty of scope for this to fall and prop up consumer spending in the economy. The figures on deposits in July’s Bank of England Money and Credit release may suggest that the household savings rate will fall in H2 2024. For example, household deposits with banks and building societies rose by GBP 5.7bn in July, which is down quite considerably from June’s figure of GBP 8.4bn. The Bank of England said net mortgage approvals in the UK rose to 61,985 in July, the highest level since September 2022. Net lending on mortgages grew more than expected to GBP 2.7 billion, the highest since November 2022. Meanwhile, the Nationwide Building Society’s house price index rose an annual 2.4% in August, up from 2.1% in July. EU Headline inflation eased to 2.2 percent from 2.6 percent in July. Inflation’s decline is driven by energy contributions; core inflation fell to 2.8 after remaining at 2.9 percent the last two months. The components are less flattering: Services inflation rose slightly, while core goods fell, widening the gap of the eurozone core components. – German headline inflation eased to 2.0 percent from 2.3 percent in July. – France headline inflation slowed to 2.2 percent compared to 2.7 percent. – Italy’s headline inflation fell to 1.3 percent in July. – Spanish headline inflation dropped to 2.4 percent in July, from 2.9 percent in June. Inflation decline is welcome news for the ECB, and together with wage pressures easing, a September cut must look ever more appetising to Christine Lagarde. There are, however, reasons to tread carefully: the progress in core inflation has stalled in recent months as the contribution from falling goods inflation has faded, and service inflation has remained remarkedly sticky hovering close to 4 percent since the end of last year. With that in mind the ECB will likely remain cautious, the ECB will likely cut in September and advocate for gradual cuts moving forward. In local currency terms, the pan-European STOXX Europe 600 Index gained 1.34%, rising to a record high. The benchmark extended a rally for a fourth week as sharply slower inflation supported the case for the ECB to cut interest rates in September. Among major European stock indexes, Germany’s DAX reached a fresh peak, climbing 1.47%, while Italy’s FTSE MIB added 2.15%, and France’s CAC 40 Index tacked on 0.71%. CHINA The People’s Bank of China injected RMB 300 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.3%. The central bank also supplemented the banking system with RMB 471 billion via its short-term seven-day reverse repos and kept the lending rate at 1.7%. Several China economists reduced their 2024 growth forecasts as the country grapples with a prolonged property sector slump and weak domestic demand. Retail sales, a key consumption indicator, are estimated to grow 4% this year, down from estimates of 4.5% in July, according to a Bloomberg survey of economists. Fixed asset investment is expected to grow 4.2%, lower than the prior month’s projection of 4.4%. Economists also trimmed their consumer price index forecast to 0.5% from 0.6%. The weaker outlook for China raised the prospect that the country may miss its official growth target of about 5% this year. It also raised expectations that the central bank may further loosen policy in the near term, including additional interest rate cuts and a reduction of the reserve requirement ratio for domestic lenders. Chinese stocks fell as a series of corporate earnings reports missed expectations and dampened buying sentiment. The Shanghai Composite Index lost 0.43% while the blue-chip CSI 300 fell 0.17%. In Hong Kong, the benchmark Hang Seng Index gained 2.14%, according to FactSet. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, M. Cassar Derjavets. |
