| USA Retail sales advanced 0.7% in September, overshooting the +0.3% print expected by consensus. Adding to the good news, the prior month’s result was revised upward, from +0.6% to +0.8%. Sales of motor vehicles/parts contributed positively to the headline print as they advanced 1.0% in the final month of Q3. Without autos, retail outlays rose a consensus topping 0.6%, as gains for miscellaneous items (+3.0%), non-store retailers (+1.1%), gasoline stations (+0.9%), and health/personal care items (+0.8%) were only partially offset by declines for clothing (-0.8%), electronics (-0.8%), and building materials (-0.2%). Outlays in restaurants and bars progressed 0.9% on a monthly basis. In all, sales were up in 8 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, rose 0.6%. Once again in September, retail sales data came in stronger than expected. However, unlike in August, this increase was not due only to higher prices. (Last week’s CPI report showed goods prices rose only 0.1% in September.) Part of the monthly gain reflected rising sales at automobile dealerships, but the strength was certainly not limited to this category alone. Outlays on miscellaneous goods bounced back after dropping in July and August, while sales at non-store retailers continued their seemingly unstoppable progression. The continued increase in spending in bars and restaurants was another piece of good news in the report as it suggests that spending on services (which accounts for a bigger portion of GDP than spending on goods does) remained healthy in September. A third consecutive decline in furniture sales, however, reflected a still-depressed real estate market. (Home resales remained roughly 25% below their pre-pandemic level) Industrial production expanded 0.3% in September instead of holding steady as per consensus, but this positive surprise was largely offset by a downward revision to the prior month’s result, from +0.4% to +0.0%. After shrinking 0.1% in August, manufacturing output swelled 0.4% in September on gains for both durable (+0.4%) and non-durable (+0.3%) goods. Where the subcategories are concerned, wood products (+2.5%), plastic/rubber products (+1.7%), and primary metals (+1.5%) were the biggest winners, while computers/electronics (-0.3%) and furniture (-0.4%) saw declines. Production in the motor vehicles/parts segment edged up 0.3%. Utilities output, meanwhile, retreated 0.3%, erasing only a small portion of the prior months’ gains. Finally, production in the mining sector advanced 0.4% The Empire State Manufacturing Index of general business conditions cooled from 1.9 in September to -4.6 in October. Though this was slightly better than expected (-6.0), it was nonetheless consistent with a deterioration in factory activity in New York State and surrounding areas. The shipments sub-index retreated but remained in expansion territory (from 12.4 to 1.4), while the new orders gauge (from 5.1 to -4.2) fell back into contraction (<0). Work backlogs (from -5.2 to -19.1) shrank for the sixteenth time in 17 months and at the fastest pace in more than three years, but this did not prevent payrolls (from -2.7 to 3.1) from expanding for the first time in three months. Supply chain pressures continued to ease, as measured by the delivery times sub-index, which slid back below the 0 mark (from 2.1 to -6.4) separating expansion from contraction. Input prices (from 25.8 to 25.5) and output prices (from 19.6 to 11.7) continued to advance, but at a relatively subdued pace. Finally, business expectations for the next six months (from 26.3 to 23.1) sank further below their long-term average (36.2) The Philly Fed Manufacturing Business Outlook Index painted a similarly downbeat picture of the situation prevailing in the manufacturing sector. Despite rising slightly in October (from -13.5 to -9.0), the index came in below consensus expectations (-7.0) and continued to signal a deterioration of operating conditions. The sub-indices tracking shipments (from -3.2 to 10.8), new orders (from -10.2 to 4.4), and number of employees (from -5.7 to 4.0) swung back into expansion territory during the month, while the one tracking weekly hours worked slipped back below 0 (from 4.7 to -4.3). As shipments advanced at a faster rate than new orders did, work backlogs decreased the most since the pandemic. Supplier delivery times (from -16.1 to -12.9) shortened at the fastest pace in six months and input price inflation (from 25.7 to 23.1) eased a bit. The index tracking future business activity (from 11.1 to 9.2), for its part, slid further below its long-term average (34.0) Housing starts rebounded to 1,358K in September, which was still below consensus expectations (1,383K). The improvement was due in large part to a 17.6% gain in the multi-family segment (to 395K). Groundbreaking in the single-family segment (+3.2% to 963K) rose as well, but to a lesser extent. Building permits, for their part, sank 4.4% to 1,473K, pulled down by a 14.3% drop to a near three-year low of 508K in the multifamily segment. Applications to build in the single-family category, meanwhile, increased 1.8% to 965KH Existing-home sales declined for the tenth time in 12 months in September, slipping 2.0% MoM to a 13-year low of 3,960K (seasonally adjusted and annualized). YoY, the number of transactions was down 18.9%. Contract closings fell in both the single-family (-1.9% to 3,530K) and the condo (-2.3% to 430K) segments. Lower sales, combined with a slight increase in the number of homes available on the market (1,130K), translated into a one-tick increase in the inventory-to-sales ratio to 3.4. Despite having risen over the past six months, this ratio was still indicative of a tight market. The median price paid for a previously owned home was $394,300 in September, up 2.8% on a 12-month basis The Conference Board’s index of leading economic indicators (LEI) slipped 0.7 point in September to a 39-month low of 104.6. This was the eighteenth consecutive decline for this indicator, marking the longest negative streak since the Great Recession. Six of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from average consumer expectations (-0.19 pp), building permits (-0.14 pp) and ISM new orders (-0.14 pp). Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. Only one of these conditions was met in September: The LEI index fell 6.7% annualized over six months but the six-month diffusion index stood at 60% According to the latest edition of the Fed’s Beige Book, overall economic activity remained more or less unchanged in September and early October, a downgrade from the modest increase reported in the prior iteration of the survey. Consumer spending and manufacturing activity were described as “mixed”, although contacts across multiple Districts noted an improved outlook with respect to the latter. Conditions in the real estate sector, meanwhile, were little changed, with activity continuing to be hampered by low inventories. Employment growth was described as “slight to moderate” in a context where candidate pools were expanding. Worker retention improved but the availability of skilled workers remained constrained. A few Districts highlighted a greater participation rate among older workers, some of which were postponing retirement or returning to the job market part time. Wage growth remained modest countrywide, with several respondents reporting less pushback from candidates on wage offers. “There were multiple reports of firms modifying their compensation packages to mitigate higher labor costs,” indicated the report, “including allowing remote work in lieu of higher wages, reducing sign-on bonuses or other wage enhancements, shifting compensation to more performance-based models, and passing on a greater share of healthcare and other benefits costs to employees.” On the inflation front, price gains were described as modest but were nonetheless supported by increases in fuel costs and wages. Input costs were said to have stabilized in the manufacturing sector but remained a concern in the services sector. Prices received failed to increase at the same pace as prices paid in the survey period, as businesses struggled to pass along cost pressures to increasingly price-sensitive consumers. As a result, profit margins were squeezed US Federal Reserve Chair Jerome Powell delivered a speech at the Economic Club of New York on Thursday and participated in a discussion with Bloomberg’s David Westin. Powell said that given the uncertainties and risks the economy faces and how much tightening has been done already, the Fed will “proceed carefully,” suggesting policymakers are in no hurry to tighten policy further. Like many of his colleagues, Powell acknowledged that the recent surge in bond yields could require the Fed to do less. Geopolitical tensions are highly elevated, he said, and pose important risks to global economic activity. However, additional evidence of strong economic growth could merit additional rate hikes, the chair said, keeping all options on the table. Powell noted that monetary policy isn’t “too tight” right now. The odds of an additional rate hike in the coming three meetings declined after Powell’s comments, falling from about 54% at Wednesday’s close to about 33% on Friday morning Representative Jim Jordan (R-OH) will make a third attempt to secure the speaker’s gavel in the US House of Representatives after his first two attempts fell far short of the mark. Efforts to temporarily broaden the powers of acting Speaker Patrick McHenry (R-SC) have not borne fruit. The lack of a speaker is becoming a pressing problem as government funding runs out in a matter of weeks and important matters such as funding for Ukraine and Israel remain stalled Geopolitical concerns, tough talk from Federal Reserve officials, and a rise in long-term bond yields to new 16-year highs appeared to weigh on sentiment and drive the S&P 500 Index to its biggest weekly decline in a month. The Nasdaq Composite Index fared worst among the major benchmarks and nearly moved back into bear market territory, ending the week 19.91% below its early-2022 intraday highs. Relatedly, growth stocks lagged their value counterparts. Stocks started the week on a strong note, marking the 15th straight Monday of gains for the S&P 500, seemingly helped by limited negative news flow regarding the Middle East over the weekend. Deepening tensions later in the week appeared to drain the gains, however In terms of data release, new home sales is out on Wednesday. Sales of new homes have trended higher since late 2022. Limited inventory in the existing home market has bolstered demand for new construction, and builders have capitalized on the opportunity by offering incentives. Building permits for new single-family homes have also increased for the past eight months, suggesting that builders still have confidence in underlying homebuyer demand The real GDP growth is out on Thursday. The U.S. economy’s resilience will likely be on full display in the third quarter’s advance GDP print. Consumer spending kicked off the quarter with plenty of momentum, as real personal consumption expenditures (PCE) rose 0.6% in July. Even with August’s scant 0.1% gain, the latest retail sales data point to a sturdiness in consumer spending at the end of quarter as well. UK GfK’s consumer confidence measure for October was published in the early hours and it shows confidence taking a tumble. The overall index has dropped to a three-month low of -30. This is down 6 points from September’s print and a whopping 10 points below market expectations of -20. All five components that make up the index showed declines with, for example, expectations for the UK economy over the next 12 months dropping by 8 points. Higher prices and surging mortgage and rental rates were cited as reasons for declining confidence, but the uncertainties posed by geopolitical conflict in the Middle East are now also likely being factored in by the UK consumer There has been no change in the UK’s YoY CPI metric in September. September’s print registered at 6.7%, slightly above market expectations of 6.6%. The UK’s YoY core inflation rate dropped marginally from 6.2% to 6.1%, with goods inflation seeing a small decrease but services inflation seeing a small increase. Overall CPI advanced by 0.5% m-o-m: food and non-alcoholic beverages were the main downward contributors to this figure after these prices fell MoM for the first time since September 2021. The yearly CPI rate was driven up largely due to higher motor fuel costs. EU Several European Central Bank (ECB) policymakers, including ECB President Christine Lagarde, Robert Holzmann of Austria, and Yannis Stournaras of Greece, highlighted the inflation risk posed by the rise in oil prices ignited by fighting in the Middle East. Meanwhile, ECB Chief Economist Philip Lane told a Dutch newspaper that the central bank may need to wait until the spring before it can be confident that inflation is returning to the 2% target. Bundesbank President Joachim Nagel echoed Lane’s comments, adding that price pressures remain “too high” in the eurozone, and “upside risks are still pretty present German investor morale improved more than expected in October, driven by expectations of further declines in inflation and stable short-term interest rates in the eurozone, according to the ZEW economic institute. In France, however, business confidence fell across most sectors of the economy in October, according to the official statistics agency In local currency terms, the pan-European STOXX Europe 600 Index ended 3.44% lower amid uncertainty about the outlook for interest rates and fears that conflict in the Middle East could escalate. A spate of disappointing earnings reports worsened the risk-off mood. All the major Continental stock indexes also closed in the red. Italy’s FTSE MIB fell 3.12%, Germany’s DAX lost 2.56%, and France’s CAC 40 Index dropped 2.67%. CHINA Country Garden, formerly China’s largest property developer, announced that it was unable to meet all its offshore debt payments after it received a 30-day grace period in August. The company’s missed dollar bond interest payment makes it all but certain that it will default on a dollar bond for the first time and highlighted the troubles China’s real estate market faces. Meanwhile, home price data showed no letup in the ongoing property market slump. New home prices in 70 of China’s largest cities fell 0.3% in September from August, extending declines for the third consecutive month Concerns about China’s property market outweighed a surprisingly strong gross domestic product release, which showed that China’s economy expanded an above-forecast 4.9% in the third quarter over a year earlier, slowing from the 6.3% rise recorded in the second quarter. On a quarterly basis, the economy grew 1.3%, up from the second quarter’s 0.5% expansion. Quarterly readings provide a better reflection of underlying growth in China than comparisons over a year ago, when major cities were under pandemic lockdown Retail sales rose a better-than-expected 5.5% in September from a year earlier, up from 4.6% in August. Industrial production growth was unchanged from August, while urban unemployment fell slightly Stocks in China fell sharply as deepening property sector woes offset optimism about a better-than-expected gross domestic product report. The Shanghai Composite Index declined 3.4% while the blue-chip CSI 300 gave up 4.17%, erasing all gains from the reopening rally earlier in the year. In Hong Kong, the benchmark Hang Seng Index fell 3.6%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Market, M. Cassar Derjavets |
