| USA The trade deficit deepened from $70.8 billion (revised from $70.4 billion) to $84.4 billion in September. This was due to an increase in the goods trade deficit of $14.2 billion to $109.0 billion, which represents the largest goods deficit in a little over two years. The variation was little changed by the services surplus (from $24.0 billion to $24.6 billion). The total trade deficit is the largest of its kind for the last ~2.5 years, dating back to April 2022 when the total deficit was $85.4 billion. Goods imports rose $10.9 billion to $285.0 billion, a 3.0% monthly increase, on larger jumps by consumer goods (+$4.0 billion) and capital goods (+$2.9 billion). The fall in goods exports were driven by similar industries, with consumer goods dropping $1.4 billion capital goods by $1.9 billion. Industrial supplies exports also dropped by $1.4 billion, while imports here rose by $2.2 billion. Service exports were largely unchanged while imports dipped $0.6 billion. Despite smaller nominal impact, food and beverage exports advanced 5.0% in the month after a weaker August (-0.8%), though imports were also strong at 4.7% (from a 2.5% change in August). Automotive imports rose to the tune of 3.1% in September, after declines in each of the previous four months (May to Aug). The ISM Non-Manufacturing PMI rose from 54.9 in September to 56.0 in October, beating expectations of a ~1 point decline. This reading is the highest since July 2022, and marks sector expansion for the 50th time in the past 53 months. The employment gauge signaled a shift from contractionary to growth territory (from 48.1 in September to 53.0 in October). Meanwhile, the new orders (from 59.4 to 57.4) and business activity (from 59.5 to 57.2) measures fell but remained in expansion. The prices paid sub-index told a similar story (from 59.4 prior to 58.1). Of the 18 service industries covered, 14 reported growth in October, up from 12 in September. The PMI has expanded in all but two of the last twenty-two months (dated to January 2022), while this October reading is 3.7 points above 2024’s average of 52.3. Third quarter data on nonfarm productivity was also released this week, which printed at a 2.2% quarterly growth on an annualised basis, a miss from the forecasted number (+2.6%). Adding to the disappointment, Q2 was revised down to 2.1% from the original 2.5%. The preliminary release of the University of Michigan Consumer Sentiment Index for November increased from 70.5 to 73.0, better than expectations of 71.0. The consumer expectations portion jumped from 74.1 to 78.5. Sentiment on current economic conditions dipped slightly from 64.9 to 64.4. Inflation outlooks were mixed, the 1-year expectation dipping from 2.7% previously to 2.6%, while the 5-year expectations rose 10bps, from 3.0% to 3.1%. One thing is for certain under Trump 2.0: tariffs are coming. Once sworn in on January 20th, Trump is expected to use executive powers to act quickly and levy sweeping tariffs on many of the US’s trading partners. China is at the top of the list, but history has shown that Trump isn’t afraid to raise tariffs on allies. While it is possible that Canada and Mexico receive some carve-outs, it would likely be conditional on them following the US’s lead and leveraging similar tariffs on China. Others may also negotiate concessions, but that isn’t likely to happen until after the tariffs are in play. The Federal Open Market Committee unanimously elected to lower the target range for the federal funds rate by 25 bps to 4.50%-4.75%. Even as the economy remains resilient, the restrictive stance of monetary policy combined with easing inflation and a moderating jobs market has motivated the Committee to remove some restriction. The FOMC is expected to reduce rates another 25 bps at its final 2024 meeting in mid-December, but the outlook for 2025 has become unsettled. But to the extent that the incoming Trump administration’s tariff and income tax policies elicit inflation, it could cause a slower reduction in interest rates, potentially closer to bottoming around only 4% next year. That said, the FOMC will wait until policies are more fully formed and their effects better understood before acting. In the press conference Fed Chair Jerome Powell, said the statement changes were not meant to send new signals, but instead natural changes as the FOMC now has the confidence it lacked early this year. However, Powell delivered other hawkish comments that create room for manoeuvre ahead. Perhaps not surprising given continued strong US data, Powell neither rules out nor rules in another rate cut in December. Apart from opening the door to a pause in the near term, Powell also noted that it will be appropriate to slow the cutting pace when the policy rate is close to neutral, and added that the FOMC is “just beginning to think about that”. Is this perceived new caution caused by the inflationary risks from the incoming Trump administration’s policies? Several equity indices, including the S&P 500, Nasdaq and Russell 2000®, posted records this week, with Republicans regaining the White House and potentially winning a majority in both houses of the US Congress. While Trump will return to the White House and the GOP will control Senate, slow vote counting in several western states means control of the House of Representatives has not yet been determined, though Republicans have the edge in most uncalled races. When the dust settles, Republicans will hold at least 53 seats (races in Arizona and Nevada remain too close to call) and perhaps as many as 55. A congressional clean sweep would give Republicans the ability to pass fiscal bills by a simple majority using so-called budget reconciliation, the same tool Democrats used with great effect in the first half of President Joe Biden’s term. Other legislation requires a three-fifths supermajority. Stocks have largely welcomed Trump’s pro-growth, low tax, deregulatory agenda. The tax cuts implemented early in his first term will likely be extended next year, but the prospect of new trade barriers is a cause of uncertainty near term. Small-cap equities are seen as beneficiaries of Trump’s likely policy mix since they tend to be more domestically focused and benefit from lower corporate tax rates and a lighter regulatory touch. US Treasury yields firmed as the election outcome became clear, with the 10-year note approaching 4.50% the day after the vote before easing later in the week. The US dollar rallied, particularly against emerging market currencies, though those losses moderated later in the week. Bitcoin hit a record. From a corporate finance perspective, a second Trump administration is expected to set off a wave of mergers and acquisitions and initial public offerings. UK The MPC has cut the UK base rate by 0.25pp to 4.75% by a majority of 8-1, as was widely expected. This follows September’s YoY CPI inflation print coming in at 1.7%, a level that was both below the BoE’s previous forecast as well as market expectations. While this inflation print was encouraging and meant that a rate cut became a near-certainty, the minutes from the MPC meeting highlight continuing caution about further easing of monetary policy with the committee stressing that “a gradual approach to removing policy restraint remains appropriate”. It is important to stress that, even before recent developments, UK CPI inflation was due to rise by year-end owing to various base effects. The BoE’s latest forecast reinforces the OBR’s assessment that the UK’s expansionary Budget will have a notable inflationary impact. The Budget is expected to boost YoY CPI by just under 0.5pp at the peak and the BoE’s medium-term inflation forecasts (based on market expectations for interest rates) have increased since its previous inflation report: the current forecast, for example, is no longer expecting UK inflation to be at or below target in 2026. Growth forecasts by the BoE potentially spell out more trouble for Chancellor Rachel Reeves, with its projections for medium-term GDP growth undershooting the OBR’s assumptions. This is significant given the OBR predicted that Reeves only had just over a 50% chance of meeting her fiscal targets, and since then gilt yields have risen and the US election results have a potential downside risk to growth in light of prospective tariffs being implemented. S&P Global’s services PMI for the United Kingdom fell to 52.0 in October from 52.4 in September while the composite index fell to 51.8 from 52.6. In the eurozone, the services PMI edged up to 51.6 from 51.4, and the composite went up to 50.0 from 49.6. In Japan, the service index slumped to 49.7 from 53.1, dragging the composite index down to 49.6 from 52.0. EU The HCOB eurozone composite purchasing managers’ index (PMI) was revised higher to 50 in October from an early estimate of 49.7, S&P Global said. The reading now indicates that overall business activity was unchanged. (PMI readings greater than 50 indicate an expansion in activity; readings less than 50 indicate contraction.) Manufacturing contracted at a slower pace than first estimated, while services sector output expanded at a slightly faster rate. However, business confidence fell to its lowest level so far this year. Eurozone retail sales advanced 0.5% in September, which beat the consensus forecast of 0.4%. That miss was compounded by a revision to August’s data (from 0.2% to 1.1%). On a year-over-year reading, retail sales increased by 2.9% in September, up from 2.4% a month prior In local currency terms, the pan-European STOXX Europe 600 Index ended 0.84% lower. Worries about the impact of US President-elect Donald Trump’s trade policies on European economic growth and central bank policy weighed on sentiment. Major stock indexes weakened, with Italy’s FTSE MIB losing 2.48%, France’s CAC 40 Index declining 0.95%, and Germany’s DAX softening 0.21% CHINA Exports rose an above-forecast 12.7% in October from a year earlier, up sharply from 2.4% in September, marking the fastest rate of growth since July 2022. The rise was largely driven by better weather and steep discounts. Imports fell 2.3%, down from the prior month’s 0.3% growth. The overall trade surplus increased to USD 95.72 billion from USD 81.71 billion in September. While the growth in October’s exports signalled strong demand for Chinese goods, which has been a bright spot for the economy, analysts cautioned that China’s export outlook has grown more uncertain given the possibility of a trade war when Trump takes office in 2025. China’s top legislative body, the standing committee of the National People’s Congress, announced a RMB 10 trillion program to refinance local government debt, which Beijing has flagged as a key economic and financial risk for the country. Policymakers also raised the local government debt ceiling to RMB 35.52 trillion from RMB 29.52 trillion, marking the first time they raised the ceiling midyear since 2015. Finance Minister Lan Fo’an also pledged to take a “more forceful” fiscal policy in 2025 to support growth but did not provide details. Chinese stocks surged as Beijing’s unveiling of fresh stimulus measures offset concerns about potential US tariff hikes. The Shanghai Composite Index gained 5.51%, while the blue-chip CSI 300 added 5.5%. In Hong Kong, the benchmark Hang Seng Index was up 1.08%, according to FactSet |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, TD Economics, M. Cassar Derjavets. |
