| USA The Consumer Price Index held steady in October instead of rising 0.1% as per consensus. This followed a 0.4% gain the prior month. Prices in the energy segment fell 2.5% in October as a 1.2% gain for utility gas services was more than offset by declines for gasoline (-5.0%) and fuel oil (-0.8%). The cost of food, meanwhile, advanced 0.3%. The core CPI, which excludes food and energy, rose 0.2%, a tick less than the +0.3% print forecast by economists. The cost of core goods fell for the fifth month in a row, edging down 0.1%. Used vehicles saw another drop (-0.8%). This was only partially offset by a 1.9% increase in the tobacco/smoking products segment. Other goods categories showed mixed results with the price of medical care commodities rising 0.4% and that of new vehicles slipping 0.1%. Prices for ex-energy services progressed 0.3%, marking the second-smallest increase in the past two years for this indicator. Strong gains in the motor vehicle insurance category (+1.9%) were compensated for in part by a 0.9% drop in airline fares. Shelter costs continued to move up (+0.3%) albeit at a more subdued pace. Prices in the medical care services segment, for their part, increased 0.3% for the second month in a row. YoY, headline inflation came in at 3.2%, down from 3.7% the prior month and one tick below the median economist forecast. The 12-month core measure, meanwhile, moved from 4.1% to a 25-month low of 4.0%. This, too, was one tick below consensus expectations The Producer Price Index for final demand decreased 0.5% in October instead of increasing 0.1% as expected by consensus. Goods prices were down 1.4% as energy dropped 6.5% and food decreased 0.2%. Prices in the services category, meanwhile, remained stable. The core PPI, which excludes food and energy, held steady in the month instead of climbing three ticks as expected by consensus. YoY, the headline PPI went from +2.2% to +1.3% (consensus: 1.9%), a first decrease in four months and a return to pre-pandemic levels. Excluding food and energy, the PPI decreased from +2.7% to +2.4%. Retail sales fell 0.1% instead of 0.3% as per the consensus forecast. The prior month’s result, meanwhile, was revised up from +0.7% to +0.9%. Sales of motor vehicles/parts contributed negatively to the headline print as they retraced 1.0% in the first month of Q4. Without autos, retail outlays rose a consensus-topping 0.1% as gains for health/personal care items (+1.1%), electronics (+0.6%), and food/beverages (+0.6%) were only partially offset by declines for furniture (-2.0%), miscellaneous items (-1.7%), sporting goods (-0.8%), and gasoline stations (-0.3%). Outlays in restaurants and bars rose 0.3%, the smallest gain in seven months. In all, sales were up in just 6 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, progressed 0.2% Industrial production decreased 0.6% in October instead of declining 0.4% as per consensus. To make matters worse, the prior month’s result was revised down from +0.3% to +0.1%. After expanding 0.2% in September, manufacturing output shrank 0.7% in October as both durable goods (-1.3%) and non-durable goods (-0.1%) retreated. More specifically, however, computers/electronics (+1.9%) and electrical equipment (+1.5%) progressed the most, while plastic/rubber products (-2.2%), primary metals (-1.7%), furniture (-1.4%), and wood products (-0.4%) saw declines. Production in the motor vehicles/ parts segment dropped 10.0% owing to the UWA strike The Empire State Manufacturing Index of general business conditions improved from -4.6 in October to 9.1 in November. The result surprised on the upside of consensus expectations (-3.0) and was now showing an improvement in factory activity in New York State and surrounding areas. The shipments sub-index climbed higher up into expansion territory (from 1.4 to 10.0), while the new orders gauge sank deeper into contraction (from -4.2 to -4.9). Work backlogs (from -19.1 to -23.2) shrank for the seventeenth time in 18 months as payrolls (from 3.1 to -4.5) returned into contraction territory. Supply chain pressures continued to ease, as measured by the delivery times subindex, which stayed below the 0 mark (from -6.4 to -6.1) separating expansion from contraction. Input prices (from 25.5 to 22.2) and output prices (from 11.7 to 11.1) continued to advance, but at a more subdued pace. Finally, business expectations for the next six months (from 23.1 to -0.9) dropped into contraction to a level far below their long-term average (36.2) The Philly Fed Manufacturing Business Outlook Index continued to paint a downbeat picture of the situation prevailing in the manufacturing sector. That said, the index rose in November (from -9.0 to – 5.9) more than expected by consensus (-8.0) but continued to signal a deterioration of operating conditions. This was the 16th negative print in the past 18 months. The sub-indices tracking shipments (from 10.8 to -17.9), new orders (from 4.4 to 1.4), and number of employees (from 4.0 to 1.3) showed a deterioration in the month, though the latter two remained in expansion territory. The sub-index tracking weekly hours worked sank further below 0 (from -4.3 to -11.4). As shipments contracted and new orders stayed positive, work backlogs continued to decrease, but at a slower pace. Supplier delivery times (from -21.4 to -8.7) continued to shorten but at a slower pace as well, while input price inflation (from 23.1 to 14.8) eased a bit. The index tracking future business activity (from 9.2 to -2.1), for its part, slid further below its long-term average (34.0) and dropped back into negative territory for the first time since May 2023 The Import Price Index (IPI) decreased 0.8% Mom in October, a bigger contraction than expected by economists (-0.3%). The headline print was affected by a 6.5% drop in the price of petroleum imports. Excluding this category, import prices were down 0.2% in the month. On a 12-month basis, the headline IPI decreased 2.0%; in September, the decline had been 1.5%. The less volatile ex-petroleum gauge was down 1.1% on an annual basis The NFIB Small Business Optimism Index edged down 0.1 point to 90.7, a very low level on a historical basis. The net percentage of firms that expected business conditions to improve over the next six months remained steady at -43%. Meanwhile, the percentage of firms that expected real sales to rise improved slightly (from a net -13% in September to a net -10% in October), while the net percentage of firms planning to increase capital spending remained stable (24%). Also, a net -32% reported a drop in earnings over the past three month, a sharp deterioration relative to September (-24%). On the employment front, the proportion of firms planning to hire decreased a tick to 17%, while the percentage of firms not able to fill positions remained unchanged at 43% in October. On the salary front, 36% of small firms indicated that they had sweetened employee compensation in the past 3 to 6 months, the same percentage as in the previous two months but down from 38% in July. However, the proportion of businesses that planned to do so in the coming months increased from 23% to 24% Housing starts increased for a second month in a row in October to 1,372K (seasonally adjusted and annualized), which was above consensus expectations (1,350K). The improvement was due in large part to a 6.3% gain in the multi-family segment (to 402K). Groundbreaking in the single-family segment (+0.2% to 970K) rose as well, but to a lesser extent. Building permits, for their part, edged up 1.1% to 1,487K, following a 4.5% drop the previous month. As for housing starts, the improvement was due in large part to a 2.2% gain in the multi-family segment (to 519K). Groundbreaking in the single-family segment (+0.5% to 968K) rose as well, but to a lesser extent The US Congress passed a continuing resolution on Wednesday funding parts of the government through mid-January and other departments through early February. The bill contained no spending cuts nor did it include supplemental aid for Israel and Ukraine. Republican members of the House of Representatives allowed the bill to pass despite sizable opposition from within the GOP caucus rather than derailing newly-elected Speaker Mike Johnson’s first major piece of legislation. Without the legislation, funding would have lapsed at midnight on Friday Three Fed governors, including Vice Chair Philip Johnson, responded to a question from Senator Rick Scott (R, FL) saying that the size of the Fed’s balance sheet could decline considerably, but the ultimate size of the balance sheet will be determined by market demand for reserves and currency In terms of data release, existing home sales is out on Tuesday. High mortgage rates continue to strain homebuyer demand, triggering a prolonged slide in existing home sales. Resales sank to a new cycle low in September following four back-to-back monthly declines. On top of higher financing costs, the resale market also suffers from low supply, which has firmed price growth and pushed affordability even further out of reach Durable goods orders print is out on Wednesday. The Fed’s commitment to bringing down inflation with higher-for-longer interest rates has created a tough environment for new capital expenditures. A volatile jump in aircraft orders drove durable goods orders 4.6% higher in September (month-over-month). Stripping out transportation, however, capital goods orders rose a more temperate 0.5%. Nondefense capital goods shipments slipped 0.3%, contributing to the sharp drop in equipment spending in Q3. The broader trend suggests that shipments are leveling off, underpinning the expectation for weaker equipment spending to drag on GDP over the next few quarters. UK Retail Sales for October have come out at -0.3% MoM, -2.7% YoY, and Retail Sales ex fuel came out at -0.1% MoM, -2.4% YoY. Over the past quarter, sales volumes fell by 1.1% YoY, the biggest driver of the fall was fuel sales where volumes fell by 2.0% in October 2023, reflecting higher fuel prices. While these are not as bad as the figures last December, when sales were down -7.3%, they are clearly indicating that the economic stumble continues. As to where retail sales are taking place, this month’s data showed a rise of 0.8% in online sales (it was the only broad indicator to see a rise). Online sales have risen from 20% pre-pandemic to peak in the mid 30% during lockdowns, and they have now reached a more stable level at around 25%. The footfall data (released earlier this month) showed a modest revival for Shopping Malls, largely at the expense of Retail Parks, the latter being a more likely venue for discount retailers. But before this is taken as sign of slowly growing consumer confidence, delayable expenses continue to languish as consumers put off purchases of larger more expensive items. Overall, the picture for the UK economy remains one of stumbling along at near zero growth The UK’s headline rate of inflation has tumbled to well below 5% in October. YoY CPI inflation fell from 6.7% in September to 4.6% in October. The YoY core rate of inflation, which excludes food and energy, eased from 6.9% to 6.6%. Annualised goods inflation saw a major fall (6.2% to 2.2%) but, perhaps more significantly for the Bank of England, services inflation cooled from 6.9% to 6.6%. Services inflation is one of the key metrics that MPC members are currently tracking when deciding on interest rates. The major drop in headline inflation now brings UK inflation roughly in line with France’s, although Germany’s rate remains considerably lower. The 2.1pp drop in headline rate between September and October has mostly been driven by the base effect in energy markets. For example, while gas costs rose by 1.7% in the twelve months to September, they fell by 31% in the year to October. The electricity and gas component of YoY CPI alone has fallen by around 1.5pp between September and October. Other contributors to the fall include an easing in annualised food and non-alcohol prices which are now at the lowest annual rate since June 2022 The UK labor market remains tight. Wages, including bonuses, rose 7.7% in the three months through September compared with 7.9% in the previous period. And the Office for National Statistics estimated that unemployment was unchanged at 4.2% in the three months through October. EU European Central Bank (ECB) President Christine Lagarde said at a Financial Times event that policymakers expected inflation to pick up at the start of next year as base effects drop out of the annual comparison. Lagarde hinted, however, that even if inflation accelerates again, another interest rate increase may not be required: “We are at a level where we believe that, if kept long enough—and this long enough is not trivial—will take us to the 2% medium-term target.” She added that there will probably be no change over the “next couple of quarters.” Elsewhere, Vice President Luis de Guindos also pushed back against market expectations for rate cuts. He reiterated that monetary policy would be at a sufficiently restrictive level for as long as necessary to bring inflation back to target. Meanwhile, the latest data confirmed that the annual inflation rate in the eurozone fell to 2.9% in October, the lowest level since July 2021 Germany’s Constitutional Court ruled against the government’s transfer of COVID emergency funds to its Climate Fund. This effectively reduces Germany’s borrowing capacity by €60 billion, a short-term fiscal drag at a time when the economy is at stall speed In local currency terms, the pan-European STOXX Europe 600 Index ended 2.82% higher as financial markets increased bets on central banks cutting interest rates soon. Major stock indexes also rose sharply. Germany’s DAX climbed 4.49%, Italy’s FTSE MIB gained 3.49%, and France’s CAC 40 Index added 2.68%. CHINA Official data for October offered a mixed picture of China’s economy. Industrial production and retail sales grew more than forecast last month from a year earlier, while fixed asset investment growth missed estimates due to a dip in infrastructure growth and real estate investment. Unemployment remained steady from September. Separately, new bank loans rose an above-consensus RMB 738.4 billion in October but plunged from September’s RMB 2.31 trillion, largely driven by a seasonal downturn in corporate lending. In monetary policy news, the People’s Bank of China (PBOC) injected RMB 1.45 trillion into the banking system via its medium-term lending facility compared with RMB 850 billion in maturing loans, its largest net injection since December 2016. The medium-term lending facility rate was left unchanged as expected. Liquidity injections are seen as a part of the central bank’s ongoing efforts to counter economic headwinds as weak consumer confidence and property market woes remain a drag on the country’s post-pandemic recovery. Many economists predict that the PBOC will step up policy easing for the rest of 2023, including a possible cut to its reserve ratio requirement, as the government ramps up measures to boost China’s economy Official readings showed that the housing market’s slump deepened in October. Investment in property development fell by an above-consensus 9.3% in the first 10 months of the year compared with a 9.1% decline in the January to September period, according to the National Bureau of Statistics. Property sales slumped by 7.8% between January and October versus the same period in 2022. New home prices in 70 of China’s largest cities declined 0.38% last month from September and marked the largest month-on-month drop since February 2015 Chinese President Xi Jinping and US President Joe Biden met on the sidelines of the APEC summit in San Francisco on Wednesday, their first face-to-face meeting in a year. The leaders agreed to resume military contacts, restart cooperation on choking off key ingredients for making fentanyl and open a dialogue on the risks posed by artificial intelligence. Xi told a group of American executives that he wants friendly relations with the US and has no interest in fighting either a cold or hot war. Attendees said they were surprised that Xi steered clear of discussing trade and investment Chinese equities were mixed after official indicators highlighted the fragility of the country’s economy. The Shanghai Composite Index rose 0.51% while the blue-chip CSI 300 Index lost 0.51%. In Hong Kong, the benchmark Hang Seng Index gained 1.46%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets |
