| USA After being negatively impacted by Hurricane Beryl in July (-0.9%), industrial production rebounded in August, increasing by 0.8%. Manufacturing output expanded 0.9% thanks in large part to a 9.8% jump in the motor vehicles/parts segment. Excluding autos, factory output rose a more subdued 0.3%. Among the main subcategories, primary metals (+3.2%) and electrical equipment (+2.0%) registered healthy gains, while petroleum/coal products were the biggest loser (-2.3%). Utility output was flat, while production in the mining sector grew 0.8%. Capacity utilisation in the industrial sector rose from 77.4% to 78.0%. In the manufacturing sector, it climbed from 76.6% to 77.2%. Retail sales edged up 0.1% in August instead of contracting 0.2% as per consensus. The prior month’s result, meanwhile, was revised slightly upwards, from +1.0% to +1.1%. Sales of motor vehicles and parts contributed negatively to the headline print, as they declined 0.1%. Without autos, outlays inched up 0.1%, as gains for miscellaneous items (+1.7%), non-store retailers (+1.4%) and health/personal care items (+0.7%) were only partially offset by declines for gasoline stations (-1.2%), electronics (-1.1%), food/beverages (-0.7%), clothing (-0.7%) and furniture (-0.7%). In all, sales were up in just 5 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 consensus-matching 0.3%. The Empire State Manufacturing Index of general business conditions jumped from -4.7 in August to a 29-month high of 11.5 in September, thereby signalling the first improvement in factory activity in New York State and surrounding areas since November last year. The shipments sub-index rose to a 15-month high of 17.9 (from 0.3 prior), while the new orders tracker moved back firmly into expansion territory (from -7.9 to 9.4). A more favourable demand backdrop did not prevent payrolls (from -6.7 to -5.7) from shrinking for the eleventh month running. Supply chain pressures continued to ease, as measured by the delivery times sub-index (from -3.2 to -1.1), which remained below the 0-mark. Business expectations for the next six months improved significantly, with the corresponding gauge moving from 22.9 to a 30- month high of 30.6. The index tracking investment spending intentions, on the other hand, slipped from 8.5 to -2.5, a level the likes of which have only been observed during the pandemic and the Great Recession. The Philly Fed Manufacturing Business Outlook Index also improved, moving up from -7.0 in August to 1.7 in September, a level consistent with just a modest expansion of factory activity. The details of the report were not particularly encouraging, with both the new orders (from 14.6 to -1.5) and shipments indices (from 8.5 to -14.3) falling back into contraction. In the latter case, the deterioration was even the worst recorded in 18 months. Still in the negative column, the index tracking input prices (from 24.0 to 34.0) increased to its highest level since December 2022. When it comes to employment, the Philly Fed report sent contradictory signals, with the number of employees sub-index (from -5.7 to 10.7) showing an expansion and that tracking hours worked (from -2.3) flagging the most severe contraction in 5 months. Finally, the future business activity gauge edged up from 15.4 to 15.8 but remained significantly below its long-term average (33.8). After sinking to a post-pandemic low of 1,237K in July (seasonally adjusted and annualised), housing starts sprang to 1,356K in August, a result significantly above consensus expectations (1,318K). The improvement reflected an increase in the single-family segment (+15.8% to 992K), where construction picked up after having been impacted by hurricane Beryl the prior month. Groundbreaking in the multi-family segment, meanwhile, slipped 4.2% to 364K. Building permits rose as well, moving from 1,406K in July to 1,475K in August on gains in both the single-family segment (+2.8% to 967K) and the multi-family segment (+9.2% to 508K). Existing-home sales fell for a fifth time in the last 6 months in August, cooling 2.5% to a 10-month low of 3,860K (seasonally adjusted and annualised). Contract closings decreased in the single-family segment (-2.5% to 3,480K), while they remained unchanged in the condo segment (at a post-pandemic low of 380K). On a 12-month basis, the total number of transactions was down 4.2%, but seeing how the level of transactions in August 2023 was already depressed, this figure does not accurately reflect the sharp slowdown in the resale market since mortgage rates began to rise. For a better idea of the situation, suffice to say that sales currently stand about 30% below pre-pandemic levels and 41% below the most recent peak reached in January 2021 (6,600K). The Conference Board’s index of leading economic indicators (LEI) fell 0.2 point in August to a near 8-year low of 100.2. Four of the ten underlying economic indicators contributed to the decline, led by ISM new orders (-0.23 percentage points), the interest rate spread (-0.18 percentage point) and average consumer expectations (0.08 percentage points). Historical analysis shows that an annualised 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. Both of these conditions were met in May: The LEI index fell 4.6% annualised over six months and the six-month diffusion index stood at 40%. Accompanying the policy statement, the FOMC also released revised economic forecasts, known as the Summary of Economic Projections (SEP). The SEP is an aggregation of each Committee members’ individual forecasts but are not “official” Fed projections. Overall, the median forecast showed that the growth outlook remained little changed relative to the June forecast, with GDP still expected to expand by 2.0% per-year between 2024 and 2027. However, the unemployment rate was revised higher for both 2024 and 2025, and core PCE inflation was marked down in both years. Consistent with the FOMC’s expectations for a slightly softer labor market, and cooler inflation, there were notable downward revisions to the median interest rate outlook (i.e., the “dot plot”) for 2024 through 2026. The revised forecast now shows a total of 100 bps of easing by the end of this year (previously 25 bps) with another 100 bps of cuts projected for 2025, corresponding to a target range of 3.25% to 3.5%. This is 75 bps lower than the June SEP. In the press conference, Chair Powell characterised the larger cut as a “strong start”, but also reiterated that future reductions in the policy rate were by no means on a preset course. Moreover, the Chair pushed back on the notion that this week’s outsized move was driven by a fear that the FOMC had fallen behind the curve. However, he did state that had the FOMC known back at the July 30-31 meeting that the labor market would have cooled as much as it did in the months that followed that rate decision, they probably would have started the easing cycle sooner. The large-cap indexes moved to record highs as investors celebrated the kickoff to what many expect to be a prolonged Federal Reserve rate-cutting cycle. The rally was also relatively broad, with the smaller-cap indexes outperforming, although they remained below previous peaks (the small-cap) Russell 2000 Index, in particular, ended the week roughly 9% below the all-time high it established in November 2021. The event dominating sentiment during the week appeared to be the Fed’s rate announcement following its policy meeting concluding Wednesday. Over much of the previous week, according to futures markets tracked by the CME FedWatch Tool, opinion had been roughly split as to whether policymakers would cut rates by a quarter point (25 basis points, or 0.25 percentage points) or a half point (50 basis points, or 0.50 percentage points). UK The Bank of England‘s Monetary Policy Committee voted to keep UK interest rates steady at 5 percent, in line with analysts expectations. The vote was split 8-1 in favour of hold (the vote to reduce rates in August had been 5-4, with the Governor casting the deciding vote in favour of a reduction). A 25bp reduction in November and again in February 2025 is possible. An MPC inflation report was not issued with this rate decision, the next MPC report will accompany the meeting on 7 November. The inflation data was undoubtedly key to the MPC’s decision, while the August inflation rate overall held steady at 2.3%, services inflation rose from 5.7% to 5.9%, largely driven by earnings. Longer term the outlook is that the overall 2% inflation target can be sustainably maintained so long as goods inflation is around -1%, while services inflation sits at around 3%. For the moment goods inflation is negative at -0.9%, although longer term as and when supply chains are rebalanced away from China, maintaining that negative price trend may prove a challenge. As to services inflation and earnings, there is an ongoing concern that above inflation (and well above productivity growth) pay rises being agreed by the new Government for a range of public sector workers could spill over into pay expectations in the private sector. Such an outcome would undoubtedly prompt the MPC to slow, or stop, its path of interest rate reductions. UK consumer confidence has taken an unwelcome dip in September, with GfK’s headline measure falling from -13 in August to -20. Markets had expected confidence to remain stable. Consumer expectations for their personal finances over the next 12 months dropped by 9 points and the year-ahead outlook for the economy declined by 12 points. While consumers will be cheering a more stable inflationary environment along with the prospect of further interest rate cuts, the sudden drop in confidence appears to be linked with fears over potential measures that could be contained in next month’s Budget on 30 October. EU Recent comments from hawkish European Central Bank (ECB) policymakers indicated that further easing of monetary policy should be gradual, given persistent underlying inflation pressures. Slovakia’s Peter Kazimir said that the ECB should wait until December before contemplating another rate cut. Latvia’s Martins Kazaks said that policy normalization should still be cautious due to lingering inflation risks. Germany’s Joachim Nagel said that although he sees inflation returning to the 2% target by late 2025, it was still too high, so the timing of easing decisions could vary. Belgium’s Pierre Wunsch said that further reductions in borrowing costs were possible but warned that they could be delayed if high services inflation persisted. Chief Economist Philip Lane said that gradual easing is appropriate if economic data are in line with the baseline forecasts. On the economic front, hourly wages and salaries in the eurozone grew at an annual rate of 4.5% in the three months through June, down from a revised 5.2% in the first. Germany’s ZEW sentiment reading had investor confidence in the economy at its lowest level in almost a year as the expectations gauge declined to 3.6 in September from 19.2 in August. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.33% lower, as the rally triggered by the US Federal Reserve’s interest rate cut faded and investors grew cautious about the outlook for monetary policy. Major stock indexes advanced, with Italy’s FTSE MIB increasing 0.58%, France’s CAC 40 Index adding 0.47%, and Germany’s DAX eking out a 0.11% gain. CHINA China’s urban unemployment rate unexpectedly edged up to 5.3%, a six-month high, from 5.2% in July. The property sector, now in its fourth year of a downturn, showed no sign of a letup. New home prices in 70 cities fell 0.7% in August, according to the National Bureau of Statistics, unchanged from the pace of declines in the prior three months and marking the 14th consecutive monthly drop August data underscored the slowing momentum in China’s economy. Industrial production rose 4.5% from a year earlier, lagging forecasts and down from July’s 5.1% increase amid weaker commodity prices and auto sales. Retail sales expanded a below-consensus 2.1% from a year ago, easing from July’s 2.7% rise. Fixed asset investment rose a lower-than-expected 3.4% in the January to August period, down from the 3.6% expansion recorded in the first seven months this year, while property investment fell 10.2% year on year. Chinese equities rose in a holiday-shortened week as the Fed’s decision to cut interest rates offset a batch of disappointing economic data. The Shanghai Composite Index gained 1.21%, while the blue-chip CSI 300 added 1.32%. In Hong Kong, the benchmark Hang Seng Index gained 5.12%, according to FactSet. Markets in mainland China were closed Monday and Tuesday for the Mid-Autumn Festival. Hong Kong markets were closed Wednesday but reopened Thursday. The indicators suggest growing risks for Beijing in meeting its economic growth target of about 5% this year. As a result, many economists expect that China’s government will implement further easing measures to stimulate the economy. The start of the long-awaited US interest rate cuts is also expected to give policymakers more room to cut rates in the coming months. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Reuters, TD Economics, M. Cassar Derjavets. |
