| USA The S&P Global Flash Composite PMI signalled yet another solid expansion in private sector activity in October, as it rose from 54.0 to 54.3. New orders (from 52.5 to 54.2) piled up at the fastest pace in 17 months but that did not prevent a modest decline in private sector employment. Inflation continued to ease in the month, with input/output prices rising the least since May 2020 and at a pace below the pre-pandemic average. The manufacturing sector gauge improved (from 47.3 to 47.8) but remained well in contraction territory, as output and new orders fell at reduced rates. Factory employment continued to shrink. The services sub-index (from 55.2 to 55.3) edged up as new orders piled up at the fastest pace since April 2022. Stronger demand and another improvement in business sentiment (to a 16-month high) did not, however, prevent a marginal decline in payrolls. Durable goods orders contracted 0.8% MoM in September, a result roughly in line with consensus expectations. Orders in the transportation category cooled 3.1% on declines for civilian (-22.7%) and defense aircraft (-23.7%). Excluding transportation, orders advanced a consensus-topping 0.4%. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, increased 0.5% m/m after gaining 0.3% in August. On a three-month annualized basis, “core” orders were up 0.5%, showing lackluster momentum for business equipment spending heading into Q4. Shipments of non-defense capital goods excluding aircraft, a good proxy of current equipment spending, looked even weaker. A monthly decline of 0.3% in this segment in September meant that, on a three-month annualised basis, shipments were down 2.8. Existing-home sales fell for a sixth time in the last 7 months in September, edging down 1.0% to a 14-year low of 3,840K (seasonally adjusted and annualised). Contract closings decreased in both the single-family segment (-0.6% to 3,470K) and the condo segment (-5.1% to a post-pandemic low of 370K). On a 12-month basis, the total number of transactions was down 3.5%, but seeing how the level of transactions in September 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 32% below pre-pandemic levels and 42% below the most recent peak reached in January 2021 (6,600K). Lower sales in the month, combined with an increase in the number of listings (from 1,370K to a 4-year high of 1,390K), translated into a one-tick increase of the inventory-to-sales ratio to 4.3. While this figure is roughly back where it stood before the pandemic, it remained well below its historical average and at a level consistent with tight supply (<5 indicates a tight market for the National Association of Realtors). Last month, it was raised the possibility of a recovery in real estate transactions in the context of falling mortgage rates, but it looks like it won’t happen soon. This is because mortgage rates have risen again in recent weeks, leading to a further drop in mortgage applications. New home sales rose 4.1% during the month to a seasonally adjusted and annualized rate of 738K, the highest level in 16 months. This result was also slightly higher than the median economist forecast, which called for a 720K print. Although the rise in transactions during the month was partially offset by a slight increase in the number of homes available on the market (from 468K to a multi-year high of 470K), the inventory-to-sales ratio still fell from 7.9 to 7.6, a level that remains well above the long-term average for this indicator (6.1). The Conference Board’s index of leading economic indicators (LEI) fell 0.5 point in September to a 7-and-a-half year low of 99.7. September also marked the 31st consecutive month without an increase in the LEI, the longest sequence recorded since these data began to be compiled in the late 1950s. Four of the ten underlying economic indicators contributed to the monthly decline, led by ISM new orders (-0.20 percentage point), the interest rate spread (-0.18 pp) and building permits (-0.09 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. Both of these conditions were met in September: The LEI index fell 5.2% annualised over six months and the six-month diffusion index stood at 35%. Fed Beige Book survey participants reported very little change in activity levels in in the run-up to the October 11 survey deadline. Two of the twelve Federal Districts reported modest growth, while all the others signaled stagnation. Manufacturing activity declined in most Districts, while tourism suffered from the passage of two major hurricanes. Reports on consumer spending were mixed, with several Fed contacts noting a shift in the composition of purchase towards less expensive items. Housing market activity was stable as still-high mortgage rates continued to keep many buyers on the sidelines. The Federal Reserve will be entering its pre-interest rate decision blackout period this weekend, with no further updates expected until Chair Powell’s post-meeting press conference on November 7th. The Fed officials stated that the strength of incoming economic data would warrant caution in future policy decisions, but all speakers noted that the trajectory of interest rates would continue to be downward. Market pricing has pulled back their expectations for rate cuts, but they are now realigned with the Federal Reserve’s median projection from the September Summary of Economic Projections. The broad market S&P 500 Index finished lower after posting gains in each of the six previous weeks. Equities seemed to take cues from the US Treasury market, where futures market pricing now reflects a shallower Fed rate-cutting cycle. Large-cap stocks held up better than small-caps, and growth stocks outperformed value as the tech-heavy Nasdaq Composite Index gained slightly. UK UK Flash PMIs have come out at 51.7 composite, 50.3 Manufacturing and 51.8 Services, all three remaining positive, but below consensus forecasts which were (respectively) 52.6, 51.4 and 52.4. These figures mark an 11-month low. Eurozone PMIs, which came out earlier this morning, have risen by 0.1, but the outlook there remains subdued as the composite is now sitting at 49.7, implying a decline in activity is still expected. Businesses overall are delaying investment and postponing hiring decisions, with S&P reporting overall staffing numbers decreasing for the first time since 2024. While all three indices remain positive (e.g. above 50), indicating an expansion is still expected over the coming 12 months, momentum is clearly stalling. The silver lining was a fall in input prices and inflationary pressures in general. S&P Chief Economist has cited gloomy rhetoric from the Chancellor and wider uncertainty ahead of the budget on 30 October. This gloom seems reasonably widespread with consumer confidence having plummeted from -13 to -20 in September (next data comes out on Friday), while yesterday’s PWC’s consumer confidence fell to its lowest level so far this year, with the index dropping particularly sharply for the over 65s, which is now the most downbeat age group in the country for the first time since 2016. EU The October PMI turned out insignificantly higher than last month’s disappointing reading. The composite PMI printed at 49.7, close to the neutral 50-level and in line with consensus expectations, but will hardly reinvigorate expectations for the eurozone economic recovery. A bright spot is that the manufacturing PMI stopped the bleeding, with an above-expectations pickup driven by new orders. Hopefully, this is a sign that the still downbeat manufacturing PMI is not signalling a new downturn, upending the soft-landing path, but concern remains. The market reaction was muted, with just a slight strengthening of the euro. The service sector cooled further, but the headline services PMI is still in expansionary territory. Note, however, that an easing of so far resilient eurozone labour market conditions seems to be approaching, as service sector purchasing managers are no longer signalling employment increases with the subindex dropping to neutral (50.1). A number of European Central Bank (ECB) policymakers—including former hawks—raised the possibility of more policy easing this year, although they seemed to be divided over the pace of rate cuts. Speaking at the annual meetings of the International Monetary Fund (IMF) and World Bank, ECB President Christine Lagarde and Germany’s Joachim Nagel advocated for a cautious approach. However, central bankers from France, Portugal, and Finland warned that the ECB could fall behind the curve, as weakening economic growth raised the risk of undershooting the 2% inflation target. France’s François Villeroy de Galhau suggested that the ECB maintain “agile pragmatism,” while Portugal’s Mário Centeno said a half-point cut in December “can be on the table.” Austria’s Robert Holzmann told Bloomberg a quarter-point interest rate reduction in December was “probable.” He added: “A bigger half-point cut is unlikely though not impossible.” Belgium’s Pierre Wunsch and others indicated it was far too early to start considering such a large reduction. Italy’s Fabio Panetta, however, argued rates may even need to be cut sharply to below the “neutral” level—neutral being where they neither stimulate nor restrict growth—to support the economyIn local currency terms. The pan-European STOXX Europe 600 Index ended 1.18% lower on expectations that the Federal Reserve may ease monetary policy more slowly. Major European stock indexes also fell. Italy’s FTSE MIB lost 1.22%, France’s CAC 40 Index dropped 1.52%, and Germany’s DAX declined 0.99%. CHINA China’s youth unemployment rate eased in September from a record high the prior month. The jobless rate for 16- to 24-year-olds, excluding students, came in at 17.6% in September, down from 18.8% in August, according to official data. August’s figure marked the highest level of youth unemployment since the statistics bureau stopped including students in the gauge in December 2023. Chinese banks lowered their one- and five-year loan prime rates by 25 basis points to 3.1% and 3.6%, respectively, making it cheaper for consumers to take out mortgages and other loans. The rate cuts were in line with a broad stimulus package unveiled by the PBOC in late September aimed at reviving China’s economy. The central bank also signaled additional easing measures in the near term, including another potential cut to the reserve requirement ratio, depending on liquidity conditions. The PBOC last cut the reserve requirement ratio by 50 basis points on September 27. The People’s Bank of China (PBOC) injected RMB 700 billion into the banking system via its medium-term lending facility (MTLF) and left the lending rate unchanged at 2%, as expected. With RMB 789 billion in loans set to expire next month, the operation resulted in a net withdrawal of RMB 89 billion from the banking system for October. The central bank last reduced the rate on the MTLF, a one-year policy loan, by a record 30 basis points on September 25. Chinese equities rose as the central bank implemented more stimulus measures to shore up the economy. The Shanghai Composite Index advanced 1.17%, while the blue-chip CSI 300 added 0.79%. In Hong Kong, the benchmark Hang Seng Index declined 1.03%, according to FactSet. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, TD Economics, M. Cassar Derjavets. |
