| USA The Consumer Price Index rose 0.2% in September, more than the median economist forecast calling for a +0.1% print. This came in the wake of another 0.2% gain the prior month. Price in the energy segment fell 1.9% on declines for fuel oil (-6.0%) and gasoline (-4.1%). The sub-indices tracking the cost of electricity and piped gas services both rose 0.7% in the month. The cost of food, meanwhile, jumped 0.4%, the most in 20 months. The core CPI, which excludes food and energy, rose 0.3% for the second month in a row, whereas consensus expectations were for a +0.2% print. The price of core goods (+0.2%) increased for just the second time in the past 16 months, supported by gains for apparel (+1.1%) as well as used (+0.3%) and new vehicles (+0.2%). The cost of medical care commodities, on the other hand, cooled 0.7%. Prices in the ex-energy services segment, for their part, moved up 0.4%. The shelter component saw just a 0.2% increase, but the latter was complemented by steeper gains for airline fares (+3.2%), motor vehicles insurance (+1.2%) and motor vehicle maintenance (+1.0%).YoY, headline inflation came in at a 43-month low of 2.4%, down from 2.5% the prior month but nonetheless one tick above consensus estimate. The 12-month core measure was also one tick stronger than expected, as it rose from 3.2% in August to 3.3% in September. In September, headline inflation exceeded expectations, driven by the largest food price increase in 20 months, despite a decline in energy prices. The core inflation index also surprised analysts with a 0.3% monthly rise, marking its first increase in core goods prices in seven months. Core services continued to rise, primarily due to volatile airline fares, while motor vehicle insurance saw a significant 16.3% annual increase. As a result, core services inflation, excluding shelter, remained at 4.3% year-on-year. This persistent inflation reduces the likelihood of significant interest rate cuts by the Federal Reserve, with smaller, gradual cuts expected in the upcoming meetings. The Producer Price Index for total final demand was unchanged in September, one tick below the consensus estimate. This follows a two-tick increase in the prior month. The core measure, which excludes food and energy, was up 0.2% in line with the consensus forecast. The goods PPI was down 0.2% in September following a flat result in August. Energy fell 2.7% in the month. For the services index, prices rose 0.2% in the month, with the largest increase coming from transportation/ warehousing (+0.3% m/m). On a 12-month basis, the headline PPI increased 1.8%, a slight improvement from 1.9% the previous month. The core PPI, however, rose from +2.6% in August to +2.8% in September. The Trade Deficit narrowed by 10.8% to $70.4 billion in August from $78.9 billion (revised from $78.8 billion) the prior month. This was due to a decrease in the goods trade deficit of $8.4 billion to $94.9 billion from $103.2 billion (the largest goods deficit in a little over two years). The variation was little changed by the services surplus (to $24.4 billion from $24.3 billion). Goods imports contracted $3.9 billion to $274.3 billion on negative changes industrial supplies and materials (-3.9 bn) and autos/parts (-1.3 bn). Goods exports were fuelled mainly by an increase in capital goods (1.7 bn), consumer goods (1.0 bn), industrial supplies/materials (0.9 bn) while autos/parts also increased (0.8 bn). Service imports rose $0.7 billion but set another record high, while exports increased $0.8 billion. Travel exports (spending by visitors in the United States) rose by $0.5 billion, and imports (spending by Americans abroad) rose to slightly lower extent of $0.4 billion. The NFIB Small Business Optimism Index edged up from 91.2 to 91.5 in September, following a decline in the previous month. Despite the result, the index remained well below its historical average. The net percentage of firms expecting an improvement in the economic situation rose slightly from -13% in August to -12% in September. Perhaps a little ambitious, hiring intentions rose two points to 15%, matching the previous highs of this year. Net sales expectations, for their part, surged from -18% to -9%. The percentage of polled businesses that planned to make capital outlays in the next three months fell from 24% to 19%, a level far below the long-term average for this indicator (≈29%). While a recovery in investment would be desirable for stronger productivity, this seems unlikely in the short term as financing conditions remain difficult and the political situation strenuous. Among stock market volatility, the imminent election and the gloomier economic outlook, the uncertainty index surged to 103, its highest level on record. The preliminary release of the University of Michigan Consumer Sentiment Index for October showed a downturn from 70.1 to 68.9, below expectations (71.0). A deterioration was seen in current economic conditions (from 63.3 to 62.7) and in consumer expectations (from 74.4 to 72.9). The inflation outlook also worsened in the 12-month outlook (from 2.7% to 2.9%), while the 5-10 year outlook improved a tick to 3.0 %. Details of the report, however, showed some signs that consumers were feeling a bit more positive about the economy, notably regarding interest rate sensitive purchases. Indeed, the index of those thinking it is a good time to buy a house rose to 40, its highest level since April of this year. The Federal Reserve published the minutes from the FOMC’s two-day policy meeting that concluded September 18th. Of course, this meeting marked the start of the long-awaited easing cycle as policymakers delivered a 50 bp cut to get things underway. Powell tried to impress upon the public that this didn’t mean that larger cuts will be the norm from here, although markets were skeptical at first. That changed after last week’s rock-solid jobs report and markets have now effectively adopted the median ‘dot plot’ projection. There was not much new information here as the minutes largely confirm what Powell said. While all participants were in favour of a cut, there were ‘some’ who would’ve preferred taking the more gradual approach (i.e., a 25 bp cut). Even for the 50 bp camp though, it was seen as important to emphasize that the larger move wasn’t due to a rapidly worsening outlook. As such, policymakers plan to gradually remove monetary policy restraint over time. There was understandably a bit more uneasiness about the labour market situation though, as some noted there’s an increasing risk of a more serious deterioration. Of course, this meeting was held before the latest jobs report which may have helped assuage some concerns. Speaking of the jobs report, it cannot be declared that the soft landing has been achieved or that the U.S. economy is out of the woods. There could be major risks to unemployment and a single report doesn’t change that assessment. In any case, the Fed’s outlook for two 25 bp cuts at the last two meetings of the year and is likely. The S&P 500 Index, Dow Jones Industrial Average, and S&P MidCap 400 Index all moved to record highs over the week, helped by some upside surprises to kick off earnings season. Shares in JPMorgan Chase and Wells Fargo rose on Friday after the banking giants reported smaller-than-feared declines in third-quarter profits, while the former managed a small increase in revenues. A solid rise in NVIDIA shares helped growth stocks outperform value stocks and compensate for a decline in Google parent Alphabet, following reports that the Justice Department was considering asking a federal judge to order a breakup of the company. Tesla was also weak following a skeptical response to the company’s highly anticipated unveiling of its new “robotaxis” and “robovans.” UK GDP has come in at 0.2% MoM for August, 1% YoY, Industrial production has bounced back on a monthly basis to grow by 0.5% MoM, but is down by 1.6% YoY. Trade as ever remains problematic although it is not as bad as expected at GBP -15.06bn compared with consensus expectations of GBP -19.3bn. On a quarterly basis the Q2 figures have been revised down by 0.1% to 0.5%. (The quarterly and monthly GDP data is calculated separately). There was good growth across both service and manufacturing in August. In output terms, services grew by 0.6% in Quarter 2 2024, with widespread growth across the sector; this was partially offset by falls in both the production and construction sectors. Overall, non-consumer-facing services (business-facing services) grew by 0.9% in Q2 2024, while consumer-facing services fell by 0.3% following growth of 0.6% in Q1 2024, with much of the decline being due to declines in the property sector. Real households’ disposable income is estimated to have grown by 1.3% in Q2 2024, down from 1.6% in the previous quarter. Provided these gains are not taxed away later this month, these will provide a basis for growth over the next two years. EU French Prime Minister Michel Barnier, in a speech to the National Assembly, outlined his budget plan for 2025. Barnier proposes to cut spending and raise taxes by about €60 billion, or 2% of GDP. Two-thirds of the deficit reduction would come from lower spending and the rest from higher taxes. The budget also calls for a reduction of France’s civil service payroll, as well as a freeze on regular increases in pensions. Spreads between French government bonds and their German counterparts remain rangebound with French debt yielding about 0.77% more than a 10-year bund. With France’s public finances in the spotlight, the potential remains for credit ratings agencies to take a dim view of the reforms as insufficient. Barnier survived a confidence motion brought by left-wing deputies. Germany’s Federal Ministry for Economic Affairs and Climate Action forecast that the economy would contract 0.2% this year, a meaningful downward adjustment from its previous estimate for a 0.3% expansion. The ministry also called for stronger consumption to fuel a resumption of economic growth early in 2025. Factory orders dropped by 5.8% sequentially in August, a sharper downdraft than the consensus forecast for a decline of 2.0%. Industrial production surprised to the upside, increasing 2.9% as automotive industry output rebounded. The ECB (European Central Bank) reiterated that it expects inflation to slow toward the 2% target by year-end, according to the minutes from the September meeting. The ECB suggested that a gradual reduction of borrowing costs would be appropriate if incoming inflation data points align with its projections. Still, policymakers said they would not pre-commit to a particular rate path. Recent comments from ECB officials, however, appeared to align with the market’s view that the pace of policy easing could quicken as inflation slows and the economy weakens. Greek central bank governor Yannis Stournaras told the Financial Times newspaper: “Even if we have one cut of 25 basis points now and another one in December, we will be back to just 3%, still in highly restrictive territory.” Banque de France Governor Francois Villeroy de Galhau said in a France Info interview that another reduction was “very likely” in October and that there would probably be more. I n addition, the Bundesbank’s Joachim Nagel appeared to soften his hawkishness and said he was open to a move lower in October. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.66% higher amid hopes that the ECB could cut interest rates more quickly and that China could increase its economic stimulus. Major stock indexes rose. Italy’s FTSE MIB climbed 2.13%, Germany’s DAX gained 1.32%, and France’s CAC 40 Index added 0.48%. CHINA Spending by Chinese consumers over the long holiday that ended Monday lagged pre-pandemic levels. Passenger traffic rose by 5.9%, while spending increased by 6.3% year on year. Box office sales totaled RMB 2.1 billion, down from RMB 2.7 billion reported a year earlier. However, average daily spending per trip was approximately RMB 131, up from RMB 113 during the five-day Labor Day holiday in May. The People’s Bank of China launched a RMB 500 billion swap facility to provide liquidity to institutional investors to buy stocks. Under the mechanism, the central bank will accept applications from nonbank financial institutions such as securities firms, funds, and insurers to obtain highly liquid assets, such as government bonds and central bank bills, if they provide certain collateral. The facility was part of a sweeping stimulus package announced by the central bank in late September that included interest rate cuts and other measures aimed at jumpstarting China’s economy. The National Development and Reform Commission, the country’s economic planning agency, announced that China would speed up countercyclical measures to support growth. The speech largely reiterated plans to boost investment and increase direct support to low-income groups and new graduates. Officials also stated that the central government will continue issuing ultra-long special sovereign bonds in 2025 to fund major projects and invest RMB 100 billion in strategic areas Chinese equities fell over a holiday-shortened week as optimism about Beijing’s stimulus measures waned. The Shanghai Composite Index lost 3.56%, while the blue-chip CSI 300 gave up 3.25%. In Hong Kong, the benchmark Hang Seng Index fell 6.53%. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Reuters, TD Economics, M. Cassar Derjavets. |
