| USA The Consumer Price Index progressed 0.4% in September, a tick more than the +0.3% print expected by consensus. Prices in the energy segment advanced 1.5% as gains for fuel oil (+8.5%), gasoline (+2.1%), and electricity (+1.3%) were only partially offset by a 1.9% drop in the utility gas services segment. The cost of food, meanwhile, rose 0.2%. The core CPI, which excludes food and energy, was up a consensus-matching 0.3%. Prices for ex-energy services jumped 0.6%, marking the biggest monthly increase in seven months for this indicator. This reflected strong advances in the shelter (+0.6%) and motor vehicle insurance (+1.3%) categories. Prices in the medical care services segment rose 0.3%, as did airline fares. The cost of core goods fell for the fourth month in a row, dropping 0.4%. Used vehicles saw another big drop (-2.5%), which was only partially offset by a 0.3% increase in the new vehicles segment. Finally, prices in the apparel category cooled 0.8%, while those in the alcoholic beverages segment rose 0.8% The core goods component registered its fourth consecutive monthly decline in September and was tracking a 3.2% annualized drop over the past three months, the steepest since the early days of the pandemic. This bout of weakness reflects a host of factors, including a rebalancing of consumer demand towards services, lower international shipping costs, a loosening of supply chain constraints, and a drop in producer prices in China, which is helping to pull import prices down Even if the Fed’s inflation target is based on another measure (PCE), this data is likely to startle some FOMC members, who will continue to argue in favor of another rate hike. It’s unclear if they’ll get their way, as they’re likely to be opposed by other policymakers who believe that recent developments in the bond market will suffice to slow down economic activity and bring down inflation. The violent rise in interest rates in the long end of the curve led to a much greater tightening of financial conditions than could have been expected in a context where policy rates would have increased by 25 basis points in isolation. Still, the risks of seeing the Fed proceed with another rate hike between now and the end of the year cannot be ruled out entirely, especially not in a context where job creation remains as resilient as it is now. The strength of the labour market will obviously exert upward pressure on prices in the coming months, as will other factors. Besides the aforementioned UAW strike, which could affect the price of vehicles, there are risks associated with a possible escalation of the conflict in the Middle East The NFIB Small Business Optimism Index slid 0.5 point to 90.8, a very low level on a historical basis. The net percentage of firms that expected business conditions to improve over the next six months deteriorated from -37% to -43%. Meanwhile, the percentage of firms that expected real sales to rise essentially stagnated (from a net -14% in August to a net -13% in September), as did the net percentage of firms planning to increase capital spending (24%). On the employment front, the proportion of firms planning to hire increased a tick to 18%, while the percentage of firms not able to fill positions rebounded from 40% in August to 43% in September. On the salary front, 36% of small firms indicated that they had sweetened employee compensation in the past 3 to 6 months, unchanged from last month but down from 38% in July. However, the proportion of businesses that planned to do the same again in the coming months decreased from 26% to 23%. This deceleration is consistent with the fact that a net 23% of firms still reported inflation as their single most important problem, down from the peak of 37% reached in July 2022 but way above the pre-pandemic level (2%) The Producer Price Index for final demand advanced 0.5% in September, overshooting the 0.3% increase expected by consensus. Goods prices were up 0.9% as energy sprang 3.3% and food increased 0.9%. Prices in the services category, meanwhile, rose 0.3%. The core PPI, which excludes food and energy, was up 0.3% in the month, a tick more than expected by economists. YOY, the headline PPI went from +2.0% to +2.2%, a third consecutive increase but in line with pre-pandemic levels. Excluding foods and energy, the PPI increased from +2.5% to +2.7 The University of Michigan Consumer Sentiment index decreased from 68.1 in September to 63.0 in October. The deterioration of sentiment in October was due to a worse assessment of both longer-term perspectives (from 66.0 to 60.7) and current conditions (from 71.4 to 66.7). Twelve-month inflation expectations jumped from 3.2% to 3.8%, while 5/10-year expectations crawled up two ticks from 2.8% to 3.0% The Federal Reserve published the minutes of its two-day policy meeting held September 19-20. Recall that what emerged from the meeting was the decision to maintain the status quo on the policy rate, as per consensus expectations, and the dot plot showing more restrictive interest rates throughout the forecast horizon. At the press conference, Fed Chair Jerome Powell explained that both the decision and the accompanying projections were motivated by the fact that the economy was proving more resilient than expected and the acknowledgement that recent progress on inflation was encouraging The relatively higher yields have prompted some Fed officials to acknowledge that higher longer-term yields may be helping to achieve their policy objective. Dallas Fed President Lorie Logan remarked that “if long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate.” Similar sentiments were echoed by Fed governor Christopher Waller who said that “financial markets are tightening up and they are going to do some of the work for us”. Fed Vice Chair Philip Jefferson said that he would “remain cognizant of the tightening in financial conditions through higher bond yields” when assessing the path for interest rates. That sentiment was also echoed by Minneapolis Fed president Neel Kashkari The major indexes ended mixed as investors weighed inflation data against dovish signals from Federal Reserve officials. Large-cap value stocks outperformed, helped by earnings beats from Citigroup, Wells Fargo, and JPMorgan Chase. The banking giants kicked off the unofficial start to third-quarter earnings reporting season on a positive note, as their profits got a boost from higher interest rates. The prospect of a widening war in the Middle East following last weekend’s Hamas attacks against Israel boosted energy shares and defense stocks while weighing on airlines and cruise operators The US House of Representatives remains without a speaker more than a week after Republicans deposed Kevin McCarthy (R-CA). In a vote by members of the Republican caucus Tuesday, Representative Steve Scalise (R-LA), the House majority leader, narrowly beat Representative Jim Jordan (R-OH) but bowed out of the contest on Thursday after a he determined he did not have the votes to secure a majority of the House given the GOP’s razor-thin majority. It is unclear what the party’s next steps will be, though time is of the essence as legislation cannot be advanced until a new speaker is in place The Wall Street Journal reported this week that Americans 65 and older accounted for 22% of spending in 2022, the highest percentage of any age cohort. That’s up from 15% in 2010 and the highest total since records began in 1972. Spending by well-heeled seniors helps explain why consumer outlays have remained resilient despite rising interest rates The US Congressional Budget Office estimated this week that the US budget deficit reached $1.7 trillion in fiscal year 2023, which ended in September. Spending on mandatory programs such as Social Security, Medicare and Medicaid rose 11% while outlays for interest on the public debt jumped 33%. UK Monthly figures for UK GDP have been released this morning. Real GDP is estimated to have grown by 0.2% in August 2023, which matches market expectations. The UK’s GDP on a monthly basis is now 1.7pp higher than its pre-pandemic peak. Monthly growth in GDP has, of course, followed a choppy path over the past year and the most recent months are no exception. While growth was positive in August, it follows a fall of 0.6% in July 2023, a figure that has been revised down from 0.5% in the Office for National Statistics’ (ONS) previous publication. Services output as a whole rose by 0.4% although consumer-facing services saw a contraction of 0.6% and remain 4.3% below pre-covid levels. Production and construction also saw a negative m-o-m print for growth in August, falling by 0.7% and 0.5% respectively. Observers can take some comfort from the fact that heavy rainfall and lower-than-average temperatures led to delays in planned construction work Prior to this release, indicators were suggesting that the UK economy is in a period of flatlining growth. The UK’s composite PMI is just below 50, according to Markit’s latest reading, which indicates businesses see a marginal contraction in the near term. Of course, PMIs do not include all sectors (for example, construction and retail sales are not captured by the metric), but the latest release on GDP does not suggest that these sectors are particularly buoyant at the moment. Real household disposable income is being propped up by factors including real wage growth turning positive and a fall in energy prices in July (with a further circa. 7% decrease in October). However, stagnant to slow growth is likely to be a feature of the UK economy in the short term. EU The minutes of the European Central Bank’s (ECB) September meeting revealed that “a solid majority” of policymakers voted to raise the key deposit rate to a record high of 4.0%. The decision appeared to be a close call, given the “considerable uncertainty.” Pausing the rate increases “risked being interpreted as a weakening of the ECB’s determination, especially at a time when headline and core inflation was still above 5%,” the minutes said The German government joined a string of other forecasters and sharply lowered its outlook for the country’s economy this year. According to this updated view, the economy is now projected to shrink by 0.4% due to higher energy prices and weaker demand from major markets like China. Estimates released in April had called for Germany’s economy to grow by 0.4%. The Economy Ministry said it expects economic growth to pick up at the start of next year and then accelerate amid a recovery in consumer demand In local currency terms, the pan-European STOXX Europe 600 Index ended 0.95% higher, snapping three weeks of losses after dovish comments from Fed policymakers and reports that China was considering more economic stimulus measures. Major stock indexes were mixed. Italy’s FTSE MIB rose 1.53%, Germany’s DAX slipped 0.28%, and France’s CAC 40 Index fell 0.80%. CHINA Trade and lending data came in above expectations but remained weak. Overseas exports fell 6.2% in September from a year earlier, slower than the 8.8% drop in August. Imports also shrank by 6.2%, better than the 7.3% contraction in August and marking the seventh straight month of declines. Separately, new bank loans rose to a lower-than-expected RMB 2.31 trillion in September, up from August’s 1.36 trillion. While the above-consensus results signaled that some parts of China’s economy are stabilizing, it was not enough to dispel fears about the country’s weakening growth outlookThe China Securities Regulatory Commission (CSRC) announced a ban on domestic brokerages and their overseas units from accepting new mainland clients for offshore trading. Any new investments made by existing clients are to also be “strictly monitored,” according to the statement released on Thursday. In another sign that Beijing is ramping up measures to shore up China’s stock markets, financial regulators -including the CSRC—submitted a plan to launch a state-backed stabilization fund, Bloomberg reported Financial markets in China declined in the first full week of trading after the Golden Week holiday, as softer inflation and trade data renewed concerns that the economy may slip back into deflation. In Hong Kong, the benchmark Hang Seng Index gained 1.87%, according to FactSet. China’s CPI remained unchanged in September from a year earlier, following August’s 0.1% rise, largely due to weaker food prices. Producer prices fell an above-consensus 2.5% from a year ago but eased from the 3% drop the previous month. |
| Sources: T. Rowe Price, MFS Investments, National Bank of Canada, Handelsbanken Capital Markets, TD Economic, M. Cassar Derjavets. |
