| USA Existing-home sales declined 2.2% in July to 4,070K (seasonally adjusted and annualized). Contract closings fell in both the single-family (-1.9% to 3,650K) and the condo (-4.5% to 420K) segments. Lower sales, combined with an increased number of homes available on the market (+3.7% to 1,110K), meant the inventory-to-sales ratio ticked up to 3.3. Despite increasing over the past four months, the ratio was still indicative of a very tight market. So was the very quick turnover rate: Properties that sold in July 2023 had been on the market for only 20 days on average, compared with 34 days in February. The median price paid for a previously owned home stood at $406,700 in July, up 1.9% on a 12-month basis Sales of new homes jumped 4.4% MoM in July to 714K (seasonally adjusted and annualized), above consensus expectations calling for a 703K print. Despite the increase in the number of homes available on the market (from 428K to 437K), the combined effect with the rebound in sales translated into a two-tick decrease in the inventory-to-sales ratio to 7.3, a level that remained above this indicator’s historical average (6.1) The S&P Global Flash Composite PMI cooled from 52.0 in July to 50.4 in August, signaling the weakest improvement in private sector operating conditions in six months. New orders continued to expand, albeit at the softest pace since February, with survey respondents blaming the slowdown on “sustained pressure from inflation and high interest rates”. This less favorable demand environment encouraged companies to increase their workforce only marginally in August. On the inflation front, the PMI report showed mounting pressure on input prices associated with “greater wage bills, increased raw material prices and higher fuel costs”. On the other hand, output price inflation slowed in August “amid efforts to boost sales”. Stoked by expectations regarding a “stabilization in interest rates, greater client demand and a moderation in price pressures”, business confidence improved in August but remained weaker than its historical average The services sub-index slid from 52.3 to a six-month low of 51.0 as both output and new orders expanded at a slower pace than in the prior month. The manufacturing tracker, for its part, slipped from 49.0 to 47.0. The decline was the second-sharpest since January. Notably, the drop in output and the stronger decrease in new orders drew the manufacturing sub-index deeper in contraction territory This week brought the first glimpse into BLS’s annual benchmark revisions to nonfarm payrolls, which are included in the first employment report of each year. The BLS indicated that private sector payrolls as of March likely numbered 358,000 fewer than currently stated, suggesting that the labor market did not start the year as hot as previously thought. This revision helps to bridge some of the gap between the establishment survey and other survey-based measures of employment. Nonfarm payrolls derived from the establishment survey launched a 14-month streak of better-than-expected outcomes that was not broken until June, all the while other employment indicators included in the ISM and NFIB surveys were starting to flash signs of slowing Durable goods orders decreased 5.2% MoM instead of only 4.0% as expected by consensus. Orders in the transportation category recorded a 14.3% drop as orders for civilian aircraft plummeted 43.6% after soaring 71.1% the month before. Excluding transportation, orders advanced 0.5%, exceeding the consensus estimate of 0.2%. The report showed, also, that orders for nondefense capital goods excluding aircraft, a proxy for future capital spending, decreased 0.2% MoM after edging down 0.1% in June. On a three-month annualized basis, “core” orders were up 1.6%, building relatively good momentum for business equipment spending heading into Q3 The Securities and Exchange Commission approved new rules aimed at overhauling the way private- equity and hedge funds deal with their investors. The rules restrict the ability of the firms to offer some investors special deals known as side letters, which have better terms than other deals. The SEC will also require private funds to provide their investors quarterly financial statements detailing their performance and expenses, and to undergo annual audits Fed Chair Jerome Powell delivered the much-anticipated opening remarks at the Jackson Hole Economic Policy Symposium. His speech titled, “Inflation: Progress and the Path Ahead” was a bit of a let down, as the central banker largely reiterated earlier Fed talking points, retained maximum policy optionality and stressed the uncertainty about the path ahead. Overall, the key takeaway is that the Fed is fully committed to its 2% inflation target (pouring cold water on those suggesting a 3% target should be adopted) and, in the pursuit of 2% inflation, they are prepared to tighten policy further if needed It’s clear the Fed is either at or very close to the end of the line for rate increases, so unlike last year’s Jackson Hole symposium when the focus was on the terminal policy rate, the focus was on the neutral policy interest rate. Unfortunately, no many answers came from as Chair Powell’s speech was more about reiterating recent talking points/stressing data dependence than ushering in a more structural change to Fed policy. The speech was littered with ‘on one hand, on the other hand’ type statements, as policymakers clearly aren’t sure of exactly where policy needs to be to achieve 2% inflation and where it needs to be to sustain inflation there. It’s fair to say they haven’t fully abandoned the long-held idea that neutral is around 2.5% and unchanged from pre-COVID but they’re also not comfortable ‘pounding the table’ on the New York Fed’s model that says r-star hasn’t changed. Overall, it’s clear the Fed is still trying to understand how the economy is going to adapt to these elevated interest rates. Of course, with inflation still well above target, they’re not going to step to the sidelines or prematurely declare victory. Therefore, it’s not unlikely the Fed hikes once more (as the dot plot suggests) but think that the more important changes to the rate outlook going forward are going to come from the timing or rate cuts Benchmark returns varied for the week as investors seemed to react to mixed signals on the economy and the course of monetary policy. Growth stocks handily outperformed value shares, helped by another substantial earnings and revenue beat by artificial intelligence chipmaker NVIDIA. Financials pulled back early in the week after S&P Global downgraded its credit ratings of five regional banks, citing, in part, stresses in the commercial real estate lending market. Several retailers reported second-quarter results, which arguably offered a generally cautious picture on the health of the U.S. consumer. Shares of department store operator Macy’s fell sharply after the company reported falling earnings and warned of growing consumer caution, along with rising credit card delinquencies. Macy’s competitor Nordstrom, while beating earnings and revenue estimates, also cited rising late payments on its credit cards in issuing a cautious outlook. Nordstrom, discount chain Dollar Tree, and specialty retailer Dick’s Sporting Goods noted that earnings suffered from exceptionally high levels of theft from their stores In terms of data release, personal income and spending is out on Thursday. Recession keeps getting pushed back and the staying power of the consumer is a key reason why. Even as credit becomes harder to access for consumers and pandemic era savings get closer to running out, consumers continue to spend. June marked the largest monthly gain in real consumption since January, which suggests that PCE is set to start the third quarter on solid ground. A better sense of third quarter spending will come with the release of July personal income and spending data Employment data is out on Friday. A revision to already published data released this week suggests that there were fewer nonfarm jobs added than initially reported. That suggests employers added jobs at a slightly slower rate in 2022 and early 2023 than already-released data initially suggested. The revisions do not change what was already understood: that job growth, while more resilient than most expected, has slowed since the frenetic pace of hiring in the wake of the pandemic ISM manufacturing is out on Friday. At a time when the soft-landing camp is welcoming waves of newcomers, the ISM and other measures of manufacturing activity have offered safe harbor for those convinced the U.S. economy is headed for recession. The ISM notched a ninth straight month in contraction in July as the employment component fell to a three-year low. Despite this, new orders rose to a nine-month high as production also improved. The signal from the ISM is bleak, but the 1990s midcycle slowdown was just as bad. Recession is likely but not inevitable. UK British consumers’ mood perked up this month as lower inflation made individuals less downbeat about the outlook for their personal finances, although sentiment remained poor overall due to concern about the wider economy. The GfK consumer sentiment indicator rose to -25 in August from a three-month low of -30 in July, its biggest rise since April although still below the average of -10 for the survey, which has been running since 1974. Households’ expectations for their personal financial situation over the coming year rose to -3 from -7, well above the reading of -31 a year ago when energy prices were soaring and the government had yet to announce its subsidy programme Consumer price inflation dropped to 6.8% in July, down from a 41-year high of 11.1% reached in October 2022, although still higher than in all other major economies. Wage growth is now close to matching inflation for the first time in nearly two years – though rapid rises in salaries worry the Bank of England, which raised interest rates to a 15-year high of 5.25% this month. The improvement in the GfK survey contrasts with other recent downbeat data on consumer spending British retail sales fell in August at the fastest rate since March 2021 and most stores are expecting another tough month ahead, an industry survey showed on Thursday. The Confederation of British Industry’s monthly balance of retail sales, which compares volumes with a year ago, fell to -44 in August from -25 in July. Expectations for the month ahead improved to -21 from -32, but were still deeply negative. “Against a backdrop of rising interest rates and weak demand, retailers foresee cuts to investment over the next year, while employment is expected to fall again next month,” CBI economist Martin Sartorius said. The quarterly business situation balance – a gauge of sentiment among retailers – fell to -14 from +6 in May, the lowest reading this year. EU Initial results from a survey of purchasing managers compiled by S&P Global indicated that business activity in the eurozone likely shrank for a third consecutive month. The Purchasing Managers’ Index (PMI) for manufacturing came in at 43.7—a slight improvement from July but still well below 50, the level that indicates a contraction in activity. Meanwhile, the PMI reading for the services sector dipped below 50. The HCOB Flash Eurozone Composite PMI Output Index, which combines data from both sectors, fell to a 33-month low of 47.0 from 48.6 in July The Bundesbank said in its monthly report that it expects German economic output to remain “largely unchanged” in the three months ending September 30. If this scenario were to transpire, the economy would have posted zero growth for two consecutive quarters. A recovery in private consumption should continue, according to the central bank, but it also asserted that weak foreign demand could translate into anemic industrial production. German companies appeared to become more pessimistic in August. The Ifo Institute’s business confidence index fell for a fourth consecutive month to 85.7, its lowest level since October 2022 In local currency terms, the pan-European STOXX Europe 600 Index ended 0.66% higher as European natural gas prices dropped and expectations grew that interest rates may soon peak. Major stock indexes advanced. Italy’s FTSE MIB tacked on 1.61%, France’s CAC 40 Index gained 0.91%, and Germany’s DAX added 0.37%. CHINA Disappointing data, signs of deflation, record youth unemployment, and continued liquidity problems in the debt-laden property sector have contributed to an erosion of confidence in China’s economy. Signs of deteriorating growth—and a sense that China’s government has relatively few good options to arrest the downturn—have raised the prospect of accelerated capital outflows. Overseas funds sold the equivalent of USD 10.7 billion from the mainland market over the 13 trading days through Wednesday, according to Bloomberg, the longest stretch since it began tracking the data in 2016 State media reported that China has proposed that local governments can scrap a rule that disqualifies people who have ever had a mortgage—even those who have fully repaid them—from being considered a first-time homebuyer in major cities. The proposal was Beijing’s latest effort to shore up the property sector, which is under pressure from falling home prices and a rising number of developers defaulting on their debt The risks of a systemic crisis emanating from China’s property sector appear low. Moreover, the riskier “shadow” banking system, which includes trusts, is smaller now than it has been in recent years thanks to increased regulation. As a result, the key risks are at the periphery of its financial system and potentially resolvable through regulatory intervention. Nevertheless, they are carefully monitoring property sector developments and possible spillovers to other sectors Chinese stocks fell as investors grew more pessimistic about the country’s economic outlook. The blue-chip CSI 300 Index and Shanghai Composite Index both recorded weekly declines and added to their year-to-date losses. The CSI 300 Index is trading at its lowest level since November 2022, while the Shanghai Composite Index is at its lowest level since last December. In Hong Kong, the Hang Seng Index, which entered a bear market the previous Friday, rose slightly for the week, though it too is at its lowest level since November. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, Reuters, M. Cassar Derjavets. |
