| USA The ISM Services Index bested consensus expectations and rose to 54.5, hitting the highest reading since February. The monthly upturn highlights ongoing strength in the service sector, which has shown little indication of slowing in response to higher interest rates. The headline index briefly fell into contraction—a reading below 50—in December 2022, but quickly rebounded and has remained in expansion territory every month so far in 2023. August’s improvement was mostly broad-based, with the new orders, employment and production subindexes all rising during the month. Not every component advanced, however. Order backlogs declined during the month, while import orders held steady. The prices paid index ticked up for the second straight month. The recent upturn indicates that, while more subdued, underlying services inflation is far from being fully extinguished In July, the trade deficit widened for the first time in three months, moving from $63.7 billion to $65.0 billion. This was due almost entirely to a 2.1% increase in goods imports (to $258.3 billion), led by cell phones (+$1.4 billion), pharmaceutical preparations (+$1.0 billion), semiconductors (+$0.8 billion), and crude oil (+$0.7 billion). Goods exports, for their part, advanced 2.0% on gains for pharmaceutical preparations (+$1.2 billion), gem diamonds (+$0.9 billion), and passenger cars (+$0.9 billion). As imports outpaced exports, the goods trade deficit swelled from $88.0 billion to $90.0 billion Country by country, the U.S. goods deficit widened with China (from $22.8 billion to $24.0 billion) and Canada (from $3.2 billion to $4.0 billion) but narrowed with the European Union (from $18.2 billion to $17.3 billion) and India (from $3.8 billion to $3.0 billion). The services surplus, meanwhile, widened from $24.3 billion in June to a post-pandemic high of $25.0 billion in July, as exports progressed 0.8% while imports stayed virtually unchanged. Travel exports continued to recover but remained roughly 12% below their pre-pandemic level. Inversely, travel imports, which serve as a proxy for the number of Americans travelling abroad, stood roughly 10% above their pre-pandemic level According to the latest edition of the Fed’s Beige Book, overall economic activity increased modestly in late July and August, an upgrade from the near stagnation reported in the prior iteration of the survey. Consumer spending was buoyed again by the tourism sector in what most contacts described as “the last stage of pent-up demand for leisure travel from the pandemic era”. Spending on other items, however, continued to slow, with some Districts signaling greater reliance on credit to support spending in a context where excess savings are rapidly being depleted. Consumer loan balances continued to rise, as did delinquency rates. Contacts in the manufacturing sector noted a further improvement in supply chain delays, which allowed them to address work backlogs, but they also flagged stagnation in new orders. Residential construction reportedly picked up owing to persistently tight supply on the resale market. Still, multiple Districts noted that construction of affordable housing remained constrained by “higher financing costs and rising insurance premiums”. Employment growth was described as “subdued” across the nation. Worker retention improved but the availability of skilled workers remained constrained. Labour cost pressures persisted, although several Districts expected wage growth to slow down significantly in the second half of the year. On the inflation front, price increases continued to slow, especially in the manufacturing and consumer goods sectors. Input price reportedly increased at a slower pace than selling prices did, thereby compressing profit margins The yield on the US 10-year note has risen more than 20 basis points since last Friday’s employment report, reaching as high as 4.30% on Thursday, as huge amounts of investment-grade corporate issuance came to market after summer drew to a close on Labor Day. Tuesday alone saw $36 billion in new corporate bond supply come to market. But supply was not the only factor influencing yields this week. Also pushing rates higher was a stronger than expected ISM services reading of 54.5, the highest level in six months and higher than any forecasts in the Bloomberg survey of economists. News that Saudi Arabia and Russia will maintain their voluntary oil production cuts through year-end contributed as well, sending Brent crude above $90 a barrel. Weekly jobless claims, at 216,000, the lowest weekly number since February, belied last week’s softer US employment report and added to upside rate pressures, as did upwardly revised US budget deficit projections The US dollar index reached its highest level since March, when it peaked just prior to the US regional banking crisis. The surge in the greenback has hindered emerging market stocks and bonds in recent weeks and is contributing to downward pressure on US multinationals with outsized overseas earnings. The strength of the dollar has been particularly notable against China’s yuan and the Japanese yen. On Thursday, the yuan traded at its lowest level against the dollar since 2006, and USD/JPY has reached levels close to those reached when the Bank of Japan was forced to intervene to strengthen the yen in October of last year. China and Japan remain monetary outliers, maintaining loose (in the case of Japan) or slightly easier (in China’s case) interest rate policy. The surging dollar has limited China’s appetite for easing monetary policy for fear of further widening dollar-supportive rate differentials. While markets anticipate US policy rates to be near or at peak, they also expect them to come down slowly, giving the dollar the edge until the US Federal Reserve pivots in a more dovish direction. Japan’s ministry of finance stepped up verbal intervention this week, warning traders that it would not rule out any options in defending the currency The Wall Street Journal reported on Wednesday that US regional banks are even more exposed to commercial real estate than it appears. Over the past decade, banks have increased their exposure to commercial real estate in ways that aren’t usually counted in their tallies, the paper said. As a group, they lent to financial companies that make loans to some of the same l, and they bought bonds backed by the same types of properties. That indirect lending — along with foreclosed properties, trading portfolios and other assets linked to commercial properties — brings banks’ total exposure to commercial real estate to $3.6 trillion, equivalent to about 20% of their deposits, according to a Journal analysis A number of US monetary policymakers spoke late this week, helping to cement the view that a hike at this month’s FOMC meeting is unlikely. New York Fed President John Williams said Thursday that monetary policy was “in a good place” and that sifting through incoming data will determine whether policy is sufficiently restrictive enough to return inflation to the Fed’s target. A number of Fed hawks noted this week that while additional tightening may ultimately be needed, a move at the next meeting isn’t necessary. Futures markets agreed, pricing in only a 7% chance of a September hike, with the odds of a November hike rising to 46% Stocks closed lower over the holiday-shortened week as some positive economic signals drove an increase in interest rates. Growth stocks fared better than value shares, and large-caps outperformed small-caps by a wider margin. A decline in Apple, the most heavily weighted stock in the S&P 500 Index, drove part of the declines after news that Chinese government employees would no longer be able to use iPhones. Investors also may have been discouraged by reports that the upcoming iPhone 15 will be significantly more expensive than current models. Declines in NVIDIA and other chipmakers also weighed on the indexes. Markets were closed Monday in observance of the Labor Day holiday In terms of data release, the CPI is out of Wednesday. Economists like to think in marginal terms. Although the year-over-year rate of consumer price inflation ticked up in July, it stayed on course for a slow and steady downward march on a monthly basis. July brought the third consecutive monthly bump in headline CPI that was sub 0.2% before rounding. These softer readings brought the three-month annualized headline pace down to only 1.9%, the smallest clip since June 2020. Muted energy price growth explains a big chunk of July’s modesty, given that the CPI survey captured only the very beginning of the recent upturn in gas prices. But even core inflation seems to be pumping the breaks, notching two consecutive monthly upticks of 0.16%. These core prints amount to a three-month annualized rate of 3.1% in July, a steady progression down from 4.1% in June and 5.0% in May Retail sales is out on Thursday. Retail sales turned out an expectation-beating 0.7% uptick in July. To add to the case for madness, control group sales, which factor directly into the calculation of GDP, recorded the strongest monthly growth rate since January’s blowout gain. Enduring consumer strength is certainly head-scratching alongside higher-ticking delinquencies and dwindling savings, especially considering that real incomes dipped in July for the first time in over a year. UK Bank of England (BoE) Governor Andrew Bailey cast doubt on a possible hike in UK interest rates at the upcoming September 21 policy meeting. He told a parliamentary committee: “I think we are much nearer now to the top of the [interest rate] cycle.” Referring to the decision, he said: “The judgments now are much finer [than before].” The BoE’s August business survey suggests that underlying price pressures may be waning. Companies polled in the three months through August expected to raise prices by 4.9% over the coming year, down from 5.2% in the three months to July. They also expected wages to grow by 5.0% over the coming year, unchanged from July British employers concerned about the economic outlook reduced the number of workers they hired via recruitment agencies last month at the fastest pace in more than three years, an industry survey showed on Friday. The Recruitment and Employment Confederation (REC), a trade body, said hiring of permanent staff fell by the most since June 2020, early in the COVID-19 pandemic, while spending on temporary workers dipped for the first time since July 2020. For now, the labour market has more slack than it has since the heights of the first lockdown,” REC Chief Executive Neil Carberry said – though he added there were some signs that employer confidence might improve later this year. REC also reported that starting salaries rose at the joint-slowest pace since March 2021, although this was still a large increase by historic standards. Friday’s figures highlight the dilemma for the Bank of England as it tries to judge if the economy is cooling enough to reduce wage growth – which was a record 7.8% in the three months to June – to a level that will allow inflation to return to its 2% target British house prices have fallen at the fastest pace since 2009 over the past year, reflecting the increasing impact of higher interest rates, mortgage lender Halifax said on Thursday. Halifax said house prices were 4.6% lower last month than in August 2022, when they were close to their peak. This compared with a 2.5% annual fall in July and a median 3.45% decline forecast in a Reuters poll. Prices fell 1.9% in August alone, the biggest monthly fall since November 2022, and also more than the 0.3% poll forecast. “House prices have proven more resilient than expected so far this year. However, there is always a lag-effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs,” said Kim Kinnaird, director at Halifax Mortgages, part of Lloyds Banking Group. The Bank of England has raised interest rates 14 times since December 2021, taking rates to 5.25% in August. Governor Andrew Bailey said on Wednesday that rates were now “much nearer” their peak than before, although financial markets still expect a further increase to 5.5% this month and another rise after. EU A string of economic data provided more signals that the eurozone economy continues to stumble. Gross domestic product (GDP) in the bloc grew 0.1% in the second quarter, as a drop in exports contributed to Eurostat’s downward revision of its initial estimate of a 0.3% expansion. Retail sales volumes in the eurozone fell 0.2% sequentially in July, reflecting weaker automotive fuel purchases. The YoY decline was 1.0% Investor morale in the eurozone fell more than expected at the start of September, with Sentix’s index tumbling to -21.5 from -18.9 in August. Sentix said that a deepening slowdown in Germany was weighing heavily on sentiment. German industrial production in July fell for a third month running, by a greater-than-expected 0.8% sequentially. The decline was driven by a 9% drop in auto manufacturing In local currency terms, the pan-European STOXX Europe 600 Index ended 0.76% lower on fears that elevated interest rates could be pushing the economy into a slowdown. Among major stock indexes, Germany’s DAX declined 0.63%, France’s CAC 40 Index lost 0.77%, and Italy’s FTSE MIB slid 1.46%. CHINA The private Caixin/S&P Global survey of services activity fell to a below-forecast 51.8 in August from July’s 54.1. Although the gauge remained above the 50 threshold, indicating expansion for the eighth consecutive month, it was the slowest increase since December as poor demand continued to drag on China’s economy. The reading was broadly in line with the prior week’s nonmanufacturing Purchasing Managers’ Index (PMI), which also eased to the lowest level this year. The official manufacturing PMI remained in contraction for the fifth consecutive month but came in slightly above expectations. China’s exports fell 8.8% in August from a year earlier, softening from the sharp 14.5% drop in July. Imports shrank by 7.3%. Both readings were above expectations. Some economists viewed the data as a sign that some sectors in China’s economy may be bottoming out after the government recently issued a flurry of policy measures aimed at boosting demand. China’s renminbi currency fell to a record low of 7.36 against the U.S. dollar in overseas trading after the central bank set its yuan fixing rate at a two-month low. The exchange rate fell below the psychologically important level of 7.35 and close to the weakest since the inception of the offshore market in 2010. Pessimism about China’s economic outlook and signs of resilience in the U.S. economy have contributed to the interest rate differential between the two countries, which has increased downward pressure on the renminbi Chinese stocks retreated as the latest economic indicators reinforced concerns about the country’s weakening outlook. The Shanghai Composite Index fell 0.53% while the blue-chip CSI 300 Index gave up 1.36%. In Hong Kong, the benchmark Hang Seng Index declined for the week ended Thursday after financial markets were closed Friday due to a heavy rainstorm that flooded the city. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Reuters, M. Cassar Derjavets. |
