| USA Real GDP grew 4.9% annualized in the third quarter, more than the median economist forecast calling for a +4.5% print. YOY, real GDP expanded 2.9%. Domestic demand grew at a very healthy clip in the three months to September, supported by household consumption (+4.0% QoQ annualized) and structure (+1.6%), intellectual property (+2.6%), and residential (+3.9%) investment. For residential investment, this was the first gain recorded in two and a half years. Business equipment spending, on the other hand, fell for the third time in four quarters (-3.8%). Government spending rose 4.6%. Running counter to the recent trend, household spending grew at a faster pace in the goods segment (+4.8%) than in the services segment (+3.6%). In both cases, however, growth was solid. Trade had a small negative impact on growth (-0.07 percentage point) as a 6.2% gain for exports was more than offset by a 5.7% gain for imports. Inventories, for their part, added a whopping 1.32 percentage points to the headline GDP figure GDP came in stronger than expected in Q3, expanding at the fastest pace in two years. Although part of this gain was due to inventory build-up and a significant increase in government spending, domestic demand remained the star of the show as evidenced by an annualized 3.3% jump in final sales to private domestic purchasers. Household spending on services rose the most since 2021Q3, while goods consumption accelerated sharply. On the investment side, this is the fourth consecutive progression in the structures segment. The increase came in a supportive policy environment: The Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the CHIPS Act each provided direct funding and tax incentives for public and private manufacturing construction. The result has been an explosion in spending in this sector, which could extend into coming quarters. Residential investment, meanwhile, expanded for the first time in 10 quarters in Q3. However positive as this may be, the gain is unlikely to mark the beginning of a lasting turnaround in this sector Nominal personal income increased 0.3% in September, one tick less than the median economist forecast (+0.4%). Amid a labour market that remains healthy, the wage/salary component of income progressed 0.4%, whereas income derived from government transfers edged down 0.1%. Personal current taxes, meanwhile, grew 0.8%. All this translated into a 0.3% increase in disposable income Nominal personal spending, for its part, rose 0.7% in the month, two ticks more than consensus expectations. Outlays on services expanded 0.7%, while goods consumption rose 0.5%. As disposable income grew at a slower pace than spending, the savings rate slipped from 4.0% to a 9-month low of 3.4%, far below the levels observed before the pandemic (between 6.5% and 8.5%) The headline PCE deflator came in at 3.4%, unchanged from the prior month and in line with consensus expectations. The core measure, for its part, cooled from 3.8% to a 28-month low of 3.7%, a result that was also in line with the median economist forecast. On a monthly basis, the headline index advanced 0.4%, while the gauge excluding food and energy rose 0.3%. Core PCE excluding housing, a measure closely followed by the Fed, rose 0.4% MoM and was tracking a 4.0% gain on a 3-month annualized basis The S&P Global Flash Composite PMI improved from 50.2 in September to a three-month high of 51.0 in October, signaling a stronger improvement in private sector operating conditions. The figures for the new orders sub-index were mixed, however. There is an increase for the manufacturing sector but a third monthly contraction for the service sector. Survey respondents blamed the situation on “high interest rates and challenging economic conditions”. New export orders remained subdued in October because of “dollar strength leading to reduced competitiveness”. The employment sub-index remained in expansion territory, but the workforce increased only marginally. On the inflation front, the PMI report showed that both input and output prices increased at a slower pace. Expectations among firms regarding the 12-month outlook also improved in October and reached their joint-highest level since May 2022 The services sub-index increased from 50.1 in September to a three-month high of 50.9 in October. The manufacturing tracker, for its part, moved from 49.8, which indicated a marginal contraction in September, to 50.0 in October, which indicated a stabilization of activity in the sector Durable goods orders jumped 4.7% MoM instead of 1.9% as expected by consensus. Orders in the transportation category surged 12.7% as orders for civilian aircraft practically doubled in the month (+92.5%). Excluding transportation, orders advanced 0.5%, which is still higher than the consensus forecast of 0.2%. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, increased 0.6% MoMw after gaining 1.1% in August. On a three month annualized basis, “core” orders were up 1.4% Sales of new homes rebounded 12.3% MoM in September to 759K (seasonally adjusted and annualized), which was far above the 680K print expected by consensus. However, this increase in transactions should not be seen as a sign of strength in the real estate market. The rise in new-home sales is explained, instead, by the resale housing market being completely paralyzed by the current interest rate environment. This increase, combined with a marginal increase in the number of homes available on the market (from 432K to 435K), pulled the inventory-to-sales ratio down eight ticks to 6.9, closer to but still above this indicator’s historical average of 6.1 From the Fed’s perspective, nothing out this week will influence next week’s interest rate decision. At this point, markets are fully priced for the FOMC to hold rates steady, and only attach a 20% probability to another rate hike in December. However, that could quickly change over the next week should the FOMC statement and/or Powell’s press conference strike a more hawkish tone. Next week’s Employment Cost Index release for the third quarter is also important given it contains a measure of wage inflation that the Fed watches closely. As well, October’s employment figures out Friday will be closely scrutinized as usual. Unless these reports show a definitive sign that the labor market is cooling, which looks unlikely given the recent strength in higher frequency indictors including jobless claims and Indeed job posting data, another rate hike come December seems inevitable It took four attempts, but on Wednesday Republican members of the US House of Representatives voted unanimously to elect little-known Louisiana Representative Mike Johnson speaker of the House. His election eases the threat of a government shutdown when the current funding bill expires in mid-November as Johnson has endorsed passing a continuing resolution to fund the government through either January 15 or April 15. Additional large-scale aid for Ukraine may not gain support in the GOP-led House, though support for Israel is expected to receive broad backing While US initial jobless claims remain low, at 210,000, continuing claims have risen 118,000 over the past month to 1,790,000, the highest level since May. This suggests that the unemployed are finding it increasingly difficult to land new jobs and that the labor market is cooling US Secretary of the Treasury Janet Yellen said the US is experiencing what looks like a soft landing as the labor force participation rate has risen, consumer spending remains strong and inflation is decelerating The major U.S. stock benchmarks finished lower for a second straight week, as market sentiment was dented by mixed corporate earnings reports and concerns about higher interest rates. It was a busy week for quarterly earnings reports, with nearly a third of the S&P 500 Index due to report. Investors seemed particularly focused on results from Amazon.com, Google parent Alphabet, Facebook owner Meta Platforms, and Microsoft, all of which are members of the mega-cap technology-focused group of stocks known as the Magnificent Seven that helped drive positive market results earlier in the year. Although most metrics reported by the companies showed solid growth and exceeded consensus expectations, markets seemed to pounce on indications of rising expenses, which weighed on shares. Amazon’s report, released after the market closed on Thursday, appeared to receive the most positive reaction, and shares of the company rallied on Friday In terms of data release, ISM indices are out respectively on Wednesday and Friday. The ISM manufacturing and services indices continue to tell two different stories on the economy. For manufacturing, the main index has now been below the 50-threshold designating expansion from contraction for 11 straight months. But recent data have shown some reprieve in activity as the index ticked up to 49.0 in September. While 50 marks the traditional threshold, any reading above 48.7 is typically associated with expansion. The production index was back above 50 in September and the new orders index moved higher, though it remained in contraction The Employment report is out on Friday. The labor market remains remarkably tight. Employers added a whopping 336K workers in September, and there were upward revisions to the prior months’ data as well. But even with the surprising strength in recent job gains, the labor market has shown some signs of moderating. Job openings and hiring plans have moved lower, demand for temporary help has fallen and the average work week is back to pre-pandemic levels. UK Britain’s jobs market is showing more signs of cooling with online vacancies and pay offers falling, according to data from job search website Adzuna which will be noted by the Bank of England before this week’s interest rate decision. Online job adverts fell by 1.6% in September from August, bucking the usual end-of-summer bounce in job postings, and advertised salaries fell by the same amount, Adzuna said. People walk alongside a Job Centre Plus in London, Britain, October 25, 2023. REUTERS/ Susannah Ireland/File photo Acquire Licensing Rights. “September traditionally sees a surge in job market activity but the figures we’re seeing this year could signal a cooling off of the job market, which had shown signs of resilience earlier in the year,” Adzuna co-founder Andrew Hunter said. The BoE, which is widely expected to leave interest rates at their 15-year high of 5.25% on Thursday, is trying to gauge how much inflationary heat remains in the jobs market. Its task has been complicated by problems at Britain’s official statistics office in conducting its surveys of the workforce The UK’s unemployment rate rose to 4.2% in the three months through August from 4.0% in March-to-May period, according to a new data series from the Office for National Statistics that uses an updated methodology. Separately, a purchasing managers’ survey showed that business activity in the private sector remained in contractionary territory for a third month running in October. The UK’s FTSE 100 declined on Thursday as Standard Chartered led a slide in bank stocks and Unilever led a drop in consumer shares after the two blue-chip companies posted disappointing earnings. The FTSE 100 (.FTSE) closed 0.8% lower, while the mid-cap FTSE 250 (.FTMC) slid 0.5%. Shares of Standard Chartered (STAN.L) dropped 12.4% to the bottom of FTSE 100 after the UK lender reported a 33% tumble in third-quarter pre-tax profit due to a nearly $1 billion hit from exposure to China’s banking and troubled real estate sectors. The broader banks index (.FTNMX301010) slid 1.8%. Unilever’s (ULVR.L) new boss Hein Schumacher laid out long-awaited plans to simplify the business after admitting it had underperformed in recent years, but its shares fell 2.8% as some investors were unimpressed. “Between higher interest rates and inflation that continues to remain high, companies are being hit heavily,” said Daniela Hathorn, senior market analyst, at Capital.com. EU The decline in eurozone business activity accelerated at the start of the fourth quarter, according to purchasing managers’ surveys compiled by S&P Global. An early estimate of the HCOB Eurozone Composite Purchasing Managers’ Index (PMI), which includes both the manufacturing and services sectors, fell more than expected to 46.5 from 47.2 in September. This latest reading, a 35-month low, marked the fifth consecutive month that the PMI was less than 50, the level that corresponds with shrinking business output. The PMI for the manufacturing sector was the deepest into contractionary territory, and the slowdown in services quickened. The latest leading indicators pointed to a challenging economic environment in Germany, with the composite PMI compiled by S&P Global remaining in contractionary territory and falling to a two-month low The European Central Bank held rates steady at 4% on Thursday, as expected. Past rate hikes continue to be transmitted forcefully, and underlying inflation measures continue to ease, the ECB said. ECB President Christine Lagarde said the eurozone economy remains weak and will likely remain so for the rest of the year. With the labor market is strong but weakening, futures markets expect the ECB to maintain rates at their current level until mid-2024, when a cut is expected In local currency terms, the pan-European STOXX Europe 600 Index ended 0.96% lower amid uncertainty about interest rates, the economy, and conflicts in the Middle East. Major stock indexes slipped. Germany’s DAX fell 0.75%, France’s CAC 40 Index eased 0.31%, and Italy’s FTSE MIB dipped 0.25%. CHINA Profits at industrial firms in China increased by 11.9% in September from the prior-year period, marking the second consecutive monthly increase, but slowed from the 17.2% rise in August. For the first nine months of 2023, profits fell by 9% from a year ago, following an 11.7% contraction recorded in the first eight months of the year. Demand improved during the month, boosting hopes that parts of China’s economy may have bottomed. China’s government authorized the issuance of RMB 1 trillion in additional sovereign debt for disaster relief and construction. It also approved a plan to raise the fiscal deficit ratio for 2023 to about 3.8% of gross domestic product, up from the 3% limit it set in March. The budget changes from the Standing Committee of the National People’s Congress were Beijing’s latest attempt to shore up support for the country’s financial markets and economy, which are struggling amid a persistent housing market crisis. Country Garden Holdings, previously China’s largest property developer, defaulted on its offshore debt payments for the first time after it was unable to meet interest payments at the end of a 30-day grace period. The crisis at Country Garden, which recently appointed financial advisers to help it carry out an offshore debt restructuring, underscores the company’s fall into distress amid China’s housing market slump. The company is the latest high-profile casualty of China’s housing market downturn after China Evergrande defaulted on its offshore bonds in 2021, an event that sparked the current crisis Equities in China rose as an improvement in industrial profits suggested that the economy may be stabilizing. The Shanghai Composite Index advanced 1.16% while the blue-chip CSI 300 gained 1.48%. In Hong Kong, the benchmark Hang Seng Index added 1.32% in the holiday-shortened week. Stock markets in Hong Kong were closed Monday for the Chung Yeung Festival. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada,, TD Economics, Reuters, M. Cassar Derjavets. |
