| USA Retail sales advanced 0.7% in July, overshooting the +0.4% print expected by consensus. The prior month’s growth was revised up from +0.2% to +0.3%. Sales of motor vehicles and parts contributed negatively to the headline print as they eased 0.3% in the first month of Q3. Excluding autos, retail outlays rose a consensus-topping 1.0% as gains for non-store retailers (+1.9%), sporting goods (+1.5%), restaurants and bars (+1.4%), and clothing (+1.0%) were only partially offset by declines for furniture (-1.8%), electronics (-1.3%), and miscellaneous items (-0.3%). In all, sales were up in 9 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 1.0%. Once again in July, retail sales data came in stronger than expected. True, a big chunk of the monthly gain was due to non-store retailers, which benefited from Amazon Prime Day. However, even excluding this category, outlays still advanced a healthy 0.5%. The increase in spending in bars and restaurants was another piece of good news as it suggests spending on services (which accounts for a bigger portion of GDP than does spending on goods) remained solid in July. The sizable decline in furniture sales was one of the few negatives in the report and reflected a still depressed real estate market. Let’s recall that home resales remained 20% to 25% below their pre-pandemic level The Empire State Manufacturing Index of general business conditions tumbled from 1.1 in July to -19.0 in August, which was far worse than the -1.0 reading expected. The figure is consistent with a contraction in factory activity in New York State and surrounding areas following two months of expansion. The shipments sub-index dove from 13.4 to -12.3, which is consistent with shrinking new orders (this sub-index fell 3.3 to -19.9). This may explain why the work backlog sub-index went from -8.8 to -6.8, which indicated a fourteenth contraction in 15 months, and why the payrolls sub-index slid from 4.7 to -1.4, which indicated a slight contraction after the previous month’s expansion. But while the number of employees did not shrink significantly in the month, the average employee workweek did (the corresponding gauge slid from 0.3 to -10.7), which is perhaps an early sign of efforts by firms to lower wage costs. Meanwhile, the delivery times subindex jumped from -6.9 to 1.9, its first foray in expansion territory since January 2023. Input and output prices (the corresponding sub-indices sprang from 16.7 to 25.3 and from 3.9 to 12.6, respectively) accelerated in the month, but inflation remained at levels much lower than those reached during the post-pandemic surge. The sub-index measuring business expectations for the next six months improved from 14.3 to 19.9 but remained well below its long-term average of 36.2 The Philly Fed Manufacturing Business Outlook Index painted a more upbeat picture of the situation prevailing in the manufacturing sector. The index improved from -13.5 in July to 12.0 in August, which far exceeded consensus expectations calling for a -10.4 print. This was the indicator’s first time above zero since August 2022. Both new orders and shipments expanded in the month, as evidenced by their corresponding sub-indices, which went from -15.9 to 16.0 and from -12.5 to 5.7, respectively. This may explain why the average workweek lengthened (the corresponding gauge sprang from -3.0 to 6.3), though the number of employees declined for the sixth consecutive month (this sub-index slid from -1.0 to -6.0). Supplier delivery times shortened again albeit at the slowest pace in seven months, as indicated by the corresponding sub-index, which climbed from -12.9 to -7.0. Finally, input price inflation picked up (the corresponding sub-index went from 9.5 to 20.8), while output price inflation cooled (this sub-index sagged from 23.0 to 14.1). Finally, firms were not as optimistic about the future: the sub-index tracking future business activity sank from 29.1 to 3.9 Housing starts increased 3.9% to 1,452K in July, in line with consensus expectations (1,450K). However, the previous month’s result was revised down from 1,434K to 1,398K. July’s improvement was attributable to the single-family segment (+6.7% to 983K), as starts in the multi-unit category were down (-1.7% to 469K). Meanwhile, the number of homes currently under construction rose from 1,675K to 1681K. More specifically, the number of multiunit dwellings under construction swelled to a new all-time high of 1,003K Building permits remained essentially unchanged in July (+0.1% to 1,442K), as a 1.0% drop (to 512K) in the multi-family segment was offset by a 0.6% increase (to 930K) in the single-family segment. The number of authorized residential projects for which construction had not yet begun dipped in July from 278K to 277K, which remained down from the all-time high of 302K reached in October 2022. This suggests that capacity pressures continued to ease in the real estate sector, thus allowing builders to tackle their bloated work backlogs In August, sentiment as measured by the National Association of Home Builders Market Index declined six points to 50 instead of holding steady as per consensus. This was its first decrease in 2023. NAHB data also signaled a six-point drop in prospective buyer traffic (the corresponding gauge fell from 40 to 34). While there is no denying that the lack of supply on the resale market will help stimulate residential construction in the coming months, builders still face many challenges. Chief among them is affordability, which slid to a new all-time low in August. This should put a lid on demand and bring about a modest rebound, at best, in residential construction Industrial production expanded 1.0% in July, exceeding the 0.3% gain expected by consensus. Mitigating the upside surprise, the prior month’s result underwent a downward revision from -0.5% to -0.8%. Manufacturing output (+0.5%) increased following two consecutive months of decline. The growth was supported primarily by durable goods manufacturing, with most of the improvement stemming from motor vehicles and parts (+5.2%). Non-durable manufacturing, for its part, expanded a meagre 0.1% as increases in textile and product mills (+3.1%) and petroleum and coal products (+1.1%) more than offset declines in paper (-0.7%) and plastics and rubber products (-0.4%). A 5.4% increase in utilities production also contributed to the headline growth in industrial output, as did a 0.5% increase in the mining sector The Import Price Index (IPI) swelled 0.4% MoM in July, a bigger increase than expected by economists (+0.2%). The headline print was affected by a 3.5% gain in the price of petroleum imports. Excluding this category, import prices were flat in the month. On a 12-month basis, the headline IPI was down 4.4%, up from the 6.1% pullback registered in June. The less volatile ex-petroleum gauge was down 1.3% on an annual basis, up from June’s 1.9% decline The Conference Board’s index of leading economic indicators (LEI) fell for the sixteenth straight month in July, sliding 0.4 point to a three-year low of 105.8. Seven of the ten underlying economic indicators were either neutral or acted as a drag on the headline index, with the biggest negative contributions coming from ISM new orders (-0.18 pp), the interest rate spread (-0.15 pp), and average consumer expectations (-0.12 pp). Over the past six months, the S&P 500 has been particularly optimistic compared with the sum of the other sub-indices Whether the economy was slowing and by how much may arguably have become less clear since the Fed’s meeting, however. The Atlanta Fed’s GDPNow forecast for growth in the current quarter, which is continually revised based on incoming data, jumped to 5.8% as of Wednesday, well above the official second-quarter growth rate of 2.4%. While most expect the actual growth rate in the third quarter to come in substantially lower, the Atlanta Fed’s “Blue Chip” survey of economists indicated that most are also steadily revising higher their growth forecasts. Nevertheless, rate hike expectations as measured by the CME FedWatch tool remained roughly stable over the week, with futures markets pricing in the likelihood of rates staying at their current level through the end of the year Minutes of the July meeting of the Federal Open Market Committee show that most Fed policymakers continue to see significant upside risks to inflation and that those risks could necessitate further tightening. But despite the economy’s resilience, some FOMC members observe downside risks to growth. Officials saw high uncertainty around the lags inherent in monetary policy. On the dovish side, some worried that tight financial conditions could cause a sharper slowdown than anticipated. The next rate decision will depend on the totality of economic and inflation data, the minutes show. Markets will look to the annual gathering of central bankers in Jackson Hole, Wyoming late next week for further policy guidance Stocks were broadly lower as sentiment appeared to take a blow from a sharp increase in longer-term bond yields and fears of a sharp slowdown in China (see below). The S&P 500 Index ended the week down 5.15% from its July 26 intraday peak. Growth shares should theoretically suffer the most as rising rates place a greater discount on future earnings, but the Russell 1000 Growth Index held up modestly better than its value counterpart. Small-cap stocks performed the worst. Program trading, technical factors, and thin summer trading volumes may have accentuated the market’s swings. UK Retail sales figures for July have come out, they were down -1.2% MoM, -3.2% YoY, while Retail Sales ex-Fuel were down -1.4% MoM, -3.4% YoY. While these numbers are worse than expected, it is worth remembering that July was exceptionally wet (after, from a weather point of view, a good June) and this has undoubtedly had an impact. Food and clothing retailers both reported that wet weather was reducing sales and footfall in general was down across all retailers. Fuel sales were up by 0.1% Looking into these figures to try and discern broader implications for the economy. A degree of consumer caution persists, with retail sales of larger ticket items/non essentials in particular, continuing to lag. The fact that consumer confidence remains so low, the GfK measure was back down to -30 at the last reading, albeit above its all-time lows of -49 last autumn, has to be seen to be feeding into this. While consumer confidence might eventually be expected to be boosted by real wages turning positive for the first time since November 2021, the wage growth numbers are still low and the prospect of reductions in the tax burden, now at a 70-year high, remains distant UK inflation (CPI) for July has come out at -0.4% MoM, 6.8% YoY, after last month’s larger-than-expected fall brought down the forecast peak of interest rates from 6%+ to 5.75%. Core inflation (stripping out volatile energy and food prices) came through at 0.3% MoM, 6.9% YoY. The Retail Price Index, which has a larger house price component, was down by -0.6% MoM, but still up 9% YoY. RPI is less used, but it is the index which determines the interest rates on UK Index linked Gilts and with UK debt servicing costs already at heightened levels, it will be of acute interest to the Treasury Unpicking the figures to discern future movements, it is notable that Producer Price Inputs continue to fall -0.4% MoM, -3.3% YoY and even output figures are largely falling at 0.1% MoM, -0.8% YoY. Falling energy prices, notably gas and electricity prices on the back of the lower OFGEM price cap, were the driving force, although less so than in June’s figures. Food prices were up 0.1% MoM, but this is well below the pace of recent increases, which touched 19.2% in March 2023, transport prices were up 1.3% MoM, but fell by 2.1% YoY, average petrol prices per litre were 143.2p compared to 189.5p at this time last year. All of which supports the view that CPI inflation is due to continue to fall over the course of 2023, but that once the driving component became services (when CPI is approximately 4%), which are largely composed of salaries, further falls in 2024 are going to be less rapid UK employment and earnings data for June is out. Unemployment has risen to 4.2%, with the claimant count up by 29,000. The more timely claimant count (numbers here are for July) supports the view of unemployment rising slowly over the coming year and peaking at 5.0% in early 2024. In addition, the employment numbers continue to slow, in line with broader expectations for the economy. What is also apparent is that the employment market has steadily become less straightforward, with a growing number of long-term sick not counted in the labour force or unemployment figures. While some of this rise in long-term sick has been attributed to backlogs in the NHS, even if this is fixed, a good portion of these people are unlikely to move back into the workforce anytime soon, if ever. More positively, unemployment is, as always, a lagging indicator; employers only looking to reducing staffing levels after all other immediate cost reductions have been considered. This reluctance to let people go has become steadily more pronounced over the past few decades, with unemployment peaking in the past four recessions at approximately 12% (1982), 10% (1990), 8% (2009). Alongside this employer reluctance to let people go is a more broadly based acceptance by employees of the need for some flexibility in compensation, with reductions in working hours becoming steadily more common; they are down by 0.5% or 5.6 million hours this quarter. EU Nothing relevant occurred in EU In local currency terms, the pan-European STOXX Europe 600 Index fell 2.34% on intensifying concerns about the outlook for China’s economy and the prospect of a prolonged period of higher European interest rates. Major stock indexes also weakened. France’s CAC 40 Index slid 2.40%, Germany’s DAX lost 1.62%, and Italy’s FTSE MIB gave up 1.81%. CHINA Official data for July revealed that China’s economic activity continued to weaken. Industrial output and retail sales grew at a slower-than-expected pace in July from a year earlier. Fixed asset investment growth in the first seven months of 2023 also missed forecasts. Urban unemployment edged up to 5.3% from June’s 5.2%, according to China’s statistics bureau. The bureau did not release the youth unemployment rate, which rose every month in 2023 and hit a record 21.3% in June. The decision to suspend the closely watched indicator raised concerns that Beijing was suppressing information that it deemed politically sensitive More evidence of a property market downturn weighed on the outlook for a key sector of China’s economy. New home prices in 70 of China’s largest cities fell 0.23% in July from June, when they declined for the first time this year. China’s property sector showed signs of stabilizing earlier this year, but recent developments have renewed concerns about the strength of the recovery. Country Garden, one of China’s largest property developers, suspended trading on several onshore bonds after the company missed interest payments on two dollar-denominated bonds the prior week. Meanwhile, China Evergrande, another leading developer that defaulted in 2021, filed for bankruptcy protection in New York, a move that protects the company from U.S. creditors as it works on debt restructuring deals in Hong Kong and the Cayman Islands, Bloomberg reported The People’s Bank of China unexpectedly cut its medium-term lending facility rate by 15 basis points to 2.5%, its largest reduction since 2020, as the country grapples with weak demand. The central bank also lowered the seven-day reverse repurchase rate, a short-term policy rate, by 10 basis points Chinese stocks lost ground amid pessimism about the country’s flagging economic recovery. The Shanghai Stock Exchange Index gave up 1.80%, while the blue-chip CSI 300 fell 2.58%. In Hong Kong, the benchmark Hang Seng Index plummeted 5.89%, its biggest weekly drop in five months, according to Reuters. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets |
