| USA The Consumer Price Index rose 0.2% in July after declining 0.1% the prior month. More precisely, prices advanced 0.15% on an unrounded basis, which allowed year-over-year inflation (2.9%) to print one-tick below consensus (3.0%). Overall energy prices stagnated as increases in fuel oil/other fuels (+1.9%) and electricity (+0.1%) were offset by declines in utility gas services (-0.7%). The cost of food, meanwhile, rose 0.2%. The core CPI, which excludes food and energy, edged up 0.2%, in line with the median economist forecast. Although this was up a tick from June, the monthly pace of July’s gain was exactly consistent with a 2.0% annual increase in core inflation. The price of core goods retraced 0.3% month on month as increases for education (+0.4%), alcoholic beverages (+0.3%), and medical care commodities (+0.2%) were offset by declines for used cars (-2.3%), apparel (-0.4%), recreation (-0.3%), and new vehicles (-0.2%). Prices in the ex-energy services segment, for their part, moved up 0.3% after inching up 0.1% in June. The shelter component rose 0.4% (after increasing 0.2% in June), as both rent and owners’ equivalent rent accelerated. Meanwhile, transportation services were up 0.4% as an increase in motor vehicle insurance (+1.2%) outweighed a decline in airline fares (-1.6%). These increases were partially offset by a drop in the cost of medical care services (-0.3%). YoY, headline inflation came in at 2.9%, down from 3.0% the prior month and one tick below consensus expectations. The 12-month core measure, meanwhile, eased from 3.3% to a 39-month low of 3.2%. This was in line with the median economist forecast. Excluding shelter, recent developments have been more encouraging. In this case, though inflation rebounded in July (+0.21%) after declining in May (-0.04%) and June (-0.05%), the pace of the increase was moderate. On a three-month annualized basis, this translated into just 0.5% inflation The Producer Price Index for final demand rose 0.1% MoM in July, a tick short of the consensus estimate. This follows a +0.2% print the prior month. The core measure, which excludes food and energy, was flat instead of rising 0.2% MoM as per the consensus forecast. The goods PPI climbed 0.6% in July, a rebound from the previous month (-0.5% MoM). Energy was a driving factor once again, advancing 1.9%. For the services index, prices slid 0.2% in the month, with the largest decline coming from trade (-1.3% MoM). On a 12-month basis, the headline PPI increased 2.3%, a sharp improvement from 2.7% the previous month. The core PPI, too, moderated substantially, moving from +3.0% in June to +2.4% in July Retail sales rose in July by 1.0%, easily surpassing the 0.4% increase expected by consensus. Removing some of the shine, the prior month’s result was revised downward from flat to -0.2%. Sales of motor vehicles and parts contributed positively to the headline print in the seventh month of the year as they surged 3.6%. Without autos, outlays rose 0.4% as gains for food/beverage retailers (+0.9%), general merchandise (+0.5%), and building materials (+0.9%) were only partially offset by declines for miscellaneous stores (-2.5%) and sporting goods (-0.7%). Sales were up in 10 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, increased a decent 0.3%, two ticks more than the +0.1% print expected by consensus. Overall, the details of the report were positive. Sales diffusion was strong, with most of the offset stemming from a single sector (i.e., miscellaneous stores). It need be said that the latest gain followed three months of relative listless retail spending. Moreover, autos were the top driver of growth in the month as they rebounded from a sizeable decline the month before. The headline figure may also have been impacted by a rise in goods prices (recall that the data published does not take price changes into account). Spending on goods could look slightly worse when volume data are released by the BEA at the end of the month. Still, core spending (which excludes the most volatile elements) posted a decent progression, and discretionary spending (which excludes gas, groceries and health items) saw its largest increase in 18 months. Outlays at restaurants and bars were another positive element, as they rose in the month. These are a bellwether for spending on services (which is a larger determinant of GDP than is spending on goods) Building permits slowed for the month of July, reducing to 1,396K from 1,454K (revised from 1,446K). This reading fell below expectation, as economists forecasted a relatively unchanged reading (1,425K). The decline was attributable to a downturn in the multi-family sector, which fell to 458K from 515K, while the single-family sector went nearly unchanged (938K). This reading gives nod to a downward trend experienced in 2024, and July’s print is the lowest since May 2020. There remains to be clear signs of malaise in the residential sector. Interest rates remain very high by the standards of recent years, making for one of the least affordable real estate markets ever. As a result, it is not surprising that homebuilder confidence remains very low. High interest rates affect more than just demand, however. Combined with rising labour and material costs, they also render many development plans economically unviable. This explains why builders are reluctant to take on new projects. High inventories on the new-home market are another reason. All is not doom and gloom in the residential sector, however, as there are good reasons to be cautiously optimistic. Strong population growth is certainly one of them. Lack of supply on the resale market, which leaves potential buyers’ little choice but to turn to the new-home market, is another. But despite these tailwinds, any meaningful rebound in residential construction is not realistic until the Fed eases monetary policy. Housing starts in July shrunk 6.8% compared to the previous month, printing in at 1,238K, short of the median forecast (1,333K). This print continues a downward trend observed since late 2023 and marks the lowest reading since May 2020. As for the underlying data, a boost in the multi-family segment (to 387K from 338K) could not offset the more prominent decline in the single-family sector (to 851K from 991K). The decline in properties under construction was minimal (to 1,539K from 1,564K), but most of the decline can be credited to a spike in the number of permits not yet started (to 279K from 272K): the highest reading this year The NAHB Housing Index slipped to 39 in August from 41 the prior month (revised down from 42). The median economist forecast called for 41. As a reminder, a reading below 50 indicates pessimism towards the housing market in the near term, while a reading above 50 indicates optimism. It is safe to say that homebuilders have a negative outlook after the lowest reading of the year came through. Present single-family sales (to 39 from 41) and prospective buyers’ traffic (to 25 from 27) were down during the month while future single-family sales were marginally up (to 49 from 48) Industrial production in July fell 0.6%, twice the decrease forecast by consensus. What’s more, the previous month’s print of +0.6% was revised down to +0.3%. Manufacturing output fell three ticks (-0.3%) owing to declines in motor vehicles and parts (-7.8%), which were partially offset by gains for machinery (+1.4%) and computers and electronics (+1.5%). Utilities saw a decline of 3.7% while mining was unchanged. All three market groups also decelerated, with final products (-0.8%) leading the way, followed by materials (-0.7%) and business equipment (-0.2%). In annualized terms, industrial production shrank by 0.2% The NFIB Small Business Optimism Index rose from 91.5 to 93.7 in July, its fourth consecutive monthly increase. The median economist estimate was for a flat reading. This indicator has not been higher since February 2022 and seems to be trending towards its historical average of 98.0. With rate cuts approaching and becoming increasingly certain, the July reading revealed that small firms are less pessimistic about the future of the economy. The net percentage of firms that expected the economic situation to improve jumped from -25% to -7%, the best print since November 2020. However, the net percentage of firms expecting a positive earnings trend was practically unchanged (-30% from -29%). As for inflation, firms were proportionally fewer to report higher selling prices (down to 22% from 27%), citing confidence in the path to disinflation. Other indicators showed minimal or no change. These included positions not able to fill (down to 37% from 38%), increased capital spending (unchanged at 23%), easing of credit conditions (unchanged at -7%), and good time to expand (up to 5% from 4%). The net percentage of firms that reported inventory was too low declined to -4% from -2%, steering back to May’s release, which was the lowest since October 1981 The Empire State Manufacturing Index of general business conditions showed that manufacturing activity improved in New York State and surrounding areas in August from the month before (up to -4.7 from -6.6). However, the underlying data showed that there were positive changes in only a few areas, notably, delivery times (up to -3.2 from -9.2), unfilled orders (up to -7.4 from -11.2), and number of employees (up to -6.7 from – 7.9). Average work week (down to -17.8 from -0.1), inventories (down to -10.6 from -6.1), and shipments (down to 0.3 from 3.9) were negative. For the six months ahead, the index sank to 22.9 from 25.8 The Philadelphia Fed Business Outlook Survey printed in at -7.0 for the month of August, down from 13.9 in July. This marks the biggest month-over-month change since last year and the biggest negative change since the pandemic (20.9 points). The massive decline was attributable to new orders (down to 14.6 from 20.7), shipments (down to 8.5 from 27.8), unfilled orders (down to 3.2 from 9.1), number of employees (down to -5.7 from 15.2), and other minor changes across the survey. Inventories (up to -4.8 from -9.4) was the sole category to improve of the nine surveyed (excluding headline). Finally, the general business outlook for the next six months in the Northeast deteriorated to 15.4 from 38.7, another sizeable change but still only the third-lowest print in 2024 so far (7.2 in February and 13.8 in June) The University of Michigan Consumer Sentiment Index preliminary release rebounded to 67.8 in the August, up from 66.4 in July (which was the lowest reading in 8 months) and going nearly a point above expectations (66.9). Despite the positive change, a deterioration was seen for in current economic conditions for the fifth month in a row (to 60.9 from 62.7). On the flip side, consumer expectations improved to 72.1, up from 68.8 last month. The inflation outlook remained the same, however, going unchanged in both the 12-month outlook and 5–10-year outlook (2.9% and 3.0%, respectively) n the leadup to the Federal Reserve’s annual Jackson Hole Symposium next week, the slate of Fed speakers was relatively light this week. Governor Bowman, who is the only voting member of the FOMC who spoke this week, noted that upside risks to inflation remain and that caution would be warranted in considering future policy adjustments. Fed Presidents Bostic (Atlanta) and Musalem (St. Louis) broadly echoed these concerns, although both noted that interest rates would likely be lower in the second half of the year. Financial markets pared back their expectations for an outsized 50 basis-point (bps) cut in September this week, converging closer to expectation for a 25bps cut, while they await further guidance from Chair Powell’s remarks scheduled for next Friday Some 40% of the biggest US manufacturing investments announced in the first year of US President Joe Biden’s flagship industrial and climate policies have been delayed or paused, according to a Financial Times investigation. Companies said deteriorating market conditions, slowing demand and lack of policy certainty in a high-stakes election year have caused them to change their plans. According to the paper, $84 billion worth of projects have experienced a slowdown US consumers are increasingly concerned about falling behind on their bills, with delinquency expectations rising to the highest level since the onset of the pandemic. The average likelihood that consumers would miss a minimum debt payment in the next three months rose to 13.3%, the highest level since April 2020, according to a Federal Reserve Bank of New York survey released Monday. That stress increased the most for people earning less than $50,000 a year and for those with a high school degree or less Stocks recorded a solid week of gains, as investors appeared to celebrate positive news on both the inflation and growth fronts, which together bolstered hopes that the economy might achieve a “soft landing.” The technology-heavy Nasdaq Composite led the gains and ended the week up 12.24% off its intraday lows amid the sell-off on August 5. Artificial intelligence chip giant NVIDIA was especially strong, gaining 18.93% over the week. Relatedly, growth stocks handily outpaced value shares, according to various Russell indexes. Consumer discretionary stocks also performed well, with Starbucks surging 24.50% on Tuesday on news that it was replacing its CEO with one credited with engineering a turnaround at Chipotle. Likewise, Walmart gained 6.58% on Thursday following its earnings report, which beat consensus expectations. The company also surprised analysts by raising its profit and revenue outlook for the remainder of the year. Shares of Google parent Alphabet fell at midweek, however, following reports that the Justice Department was investigating breaking up the company, which would mark the largest such action since AT&T was dismantled in the 1980s In terms of data release, Leading Economic Index is out on Monday. Recent trends in the LEI appear divorced from reality. This historical bellwether of recessions has been on the downswing since March 2022, when the Fed first started raising interest rates. After the 28th consecutive slip in June (save for one month when the index was unchanged), it is now sitting eerily close to the low point hit during the pandemic downturn. Although July’s labor market deterioration suggests that recession risks are elevated, the long downdraft in LEI overstates recent weakness. Keep in mind that real GDP expanded by 2.8% in the second quarter. Looking closer, however, the decline in LEI has softened in recent months, prompting the index to stop signaling recession on a six-month annualized basis Existing Home Sales is out on Thursday. An unsavory combination of high mortgage rates and rising prices have kept the housing market in a lull. Existing home sales have waned for four consecutive months as of June. At 3.89 million, the annual pace of resales is only a stone’s throw away from the 3.83-million pace low point reached in 2010. The Fed is expected to begin its easing cycle this September, which would put downward pressure on mortgage rates and potentially incentivize buyers to come back from the sidelines. However, sturdy price appreciation alongside slower income growth will likely keep a lid on resales. UK After two inflation prints at the Bank of England’s 2% target, YoY CPI has risen to 2.2% in July. This has been driven by a base effect in the energy component of inflation: the price of electricity and gas fell less in July this year compared to the drop in July last year. From June 2024 to July 2024, electricity and gas has gone from contributing -1.06pp to -0.67pp to the headline rate of inflation, adding roughly 0.4pp to YoY CPI. This impact was somewhat offset by changes in other items. For example, the contribution of restaurants and hotels to YoY CPI fell by 0.14pp when comparing June and July. While the headline rate of inflation has nudged above target, the increase was less than expected. Markets had expected a jump in YoY CPI to 2.3%. The undershoot of market expectations was driven by a bigger than expected disinflation trend in services inflation. Services inflation, highly influenced by wage costs, was 5.7% YoY in June but has observed a notable drop down to 5.2% in July, far lower than market expectations of 5.5%. This will be viewed as significant by the Bank of England’s Monetary Policy Committee (MPC), potentially emboldening more dovish members of the committee who have argued that high services inflation is partly being driven by one-off factors Provisional growth figures for Q2 have been published this morning. QoQ GDP in Q2 rose by 0.6%, matching what was expected by markets. This is a relatively robust print on the back of a strong Q1 figure of 0.7%. Quarterly growth in Q1 and Q2 has been higher in the UK compared to other major European economies. The growth in Q1 has come from the services sector, which grew by 0.8% on the quarter. This was driven by a broad range of services: 11 out of the 14 subsectors saw an increase in activity, with the professional, scientific and technical sector seeing the biggest growth gains. Production and construction activity shrank slightly on the quarter, dropping by 0.1% in each case. While the headline quarterly growth GDP figure is strong, the figures for business investment were lackluster. Markets were expecting a modest rise in business investment but these provisional figures suggest it fell by 0.1% on the quarter. On the other hand, government consumption expenditure advanced by 1.4% due to higher activity in public administration, defence and education. This may indicate that the relatively strong growth print for Q2 is somewhat being driven by the government expenditure component of GDP. It should be stressed, however, that these figures are provisional and are subject to revisions at a later stage. EU The eurozone economy expanded 0.3% sequentially in the second quarter, the same rate as in the first quarter. GDP growth in France, Italy, and Spain offset an unexpected contraction in Germany. Still, industrial production contracted 0.1% in June, falling short of a consensus estimate for a 0.5% increase. A purchasing managers’ survey suggested that business activity stalled in July as well. Even so, the labor market remains resilient. Eurostat data showed that employment in the second quarter expanded 0.2% sequentially In local currency terms, the pan-European STOXX Europe 600 Index ended 2.46% higher as hopes grew for another round of interest rate cuts as early as September. Major stock indexes posted strong gains. Germany’s DAX climbed 3.38%, France’s CAC 40 Index advanced 2.48%, and Italy’s FTSE MIB added 4.09%. CHINA New home prices in 70 cities fell 0.7% in July, unchanged from the pace of declines in the prior two months and marking the 13th straight monthly drop, according to China’s statistics bureau. While data suggested that the government’s property rescue package introduced in May has spurred demand in major cities, buying interest remained sluggish in smaller towns, according to Bloomberg New bank loans rose a weaker-than-expected RMB 260 billion in July, down sharply from RMB 2.13 trillion in June, while loan growth in July slowed to 8.7% year on year. July’s weak credit data raised speculation that the central bank may cut interest rates further to fuel demand as China’s prolonged property market slump continues to hit consumer confidence July data highlighted weakness in China’s economy. Industrial production rose a below-consensus 5.1% in July from a year earlier, slowing from June’s 5.3% increase, partly due to lower auto sales. Retail sales expanded a better-than-expected 2.7% in July from a year earlier, up from a 2% increase in June. Fixed asset investment rose 3.6% in the January to July period from a year ago, lagging forecasts, while property investment fell 10.2% YoY. The urban unemployment rate edged up to 5.2% from 5% the prior month Chinese equities rose as investor sentiment was largely unaffected by weaker-than-expected economic activity. The Shanghai Composite Index gained 0.6% while the blue-chip CSI 300 added 0.42%. In Hong Kong, the benchmark Hang Seng Index was up 1.99%, according to FactSet. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, TD Economics, M. Cassar Derjavets. |
