| USA Nominal personal income rose 0.2% in August, two ticks less than the median economist forecast calling for a +0.4% print. The wage/salary component of income moved up 0.5%, while income derived from government transfers edged up 0.1%. Personal current taxes, meanwhile, jumped 0.5%. All this translated into a 0.2% increase in disposable income. Nominal personal spending, for its part, advanced 0.2% as a healthy 0.4% gain on the services side was partially offset by a 0.1% retreat in the goods segment. The savings rate fell one tick to an 8-month low of 4.8%. This remains significantly below the levels observed before the pandemic (between 6.5% and 8.5%). Adjusted for inflation, both disposable income and personal spending edged up 0.1%. In the latter case, the increase reflected a 0.2% gain in the services segment, the latter driven by recreation services (mainly gambling). The headline PCE deflator came in at a 42-month low of 2.2%, a result slightly weaker than the median economist forecast (2.3%). The core index, for its part, advanced 2.7% on a 12-month basis, up from 2.6% the prior month and in line with consensus expectations. Both indices rose 0.1% month on month. The core services PCE deflator excluding housing, a good measure of underlying price pressures, advanced 0.2%. On a 3-month annualised basis, it rose from 2.2% in July to 2.5% in August. New-home sales data for August was better than expectations, despite falling 4.7% over the month and printing at 716K versus a median economist forecast calling for a lower 700K. The decline was somewhat counterbalanced by an upward revision in last month’s reading from 739K to 751K. Overall, new-home sales are essentially in-line with pre-pandemic levels. The S&P Global Flash Composite PMI remained well in expansion territory in September despite inching down two ticks to 54.4. The index was pulled down by manufacturing output for a second consecutive month, albeit the drop was less significant, and the rate was slower than the previous reading. Employment perspectives for the latter were not good, where manufacturing payrolls were cut at the strongest pace since June 2020. Excluding pandemic data, one would have to go back to the January 2010 to find a similar reading. Firms have reduced headcount based on weaker sales. Another negative mark was the increase in prices for both goods and services, a first in four months. Moreover, sentiment about future perspectives substantially worsened with “the survey’s future output index falling to its lowest since October 2022 and the second lowest seen this side of the pandemic”. The Conference Board Consumer Confidence Index dropped to 98.7 in September from 105.6 in August (revised up from 103.3). The median estimate called for a 104.0 print. The monthly decline was the largest since August 2021. The rest of the report was nary better. It will take renewed and continued progress for the series to return to pre-pandemic levels. (Consumer confidence has been trending down since mid-2021.) Consumer assessment of the present situation collapsed to 124.3 from 134.6. The share of respondents that considered current business conditions bad rose to 20.2% from 17.3%, while those who felt conditions were good fell to 18.8% from 21.1%. The proportion that deemed jobs hard to find expanded to 18.3% from 16.8%. Durable goods orders were essentially flat in August. This came on the back of a substantial surge of 9.9% in the prior month. This result was better than the median economist forecast of -2.6% for the month. Transportation orders were tepid at -0.8% but followed an incredible expansion of 34.6% in July. Excluding this category, orders rose by 0.5% instead of edging up one tick as per consensus estimates. The report showed, also, that orders for non-defence capital goods excluding aircraft, a proxy for future capital spending, expanded 0.2% MoM, (instead of growing 0.1% as per the median estimate) after declining 0.2% the month before. On a three-month annualised basis, “core” orders expanded 2.3%. The S&P CoreLogic Case-Shiller 20-City Home Price Index for July rose 0.27% MoM, below the consensus forecast calling for a 0.40% increase. This marks the 17th consecutive monthly advance but a slowdown from the previous months’ growth (+0.47%). Seasonally adjusted, prices were up in 18 of the 20 cities tracked, led by Seattle (1.08%), New York (0.50%), Las Vegas (0.47%), and Detroit (0.43%). YoY, prices rose 4.96% at the national level. Federal Reserve officials who spoke this week broadly echoed the statements of Chair Powell last week, noting that the balance of risks has shifted towards the labor market and that ensuring a soft landing would merit looser financial conditions moving forward. Although the majority of officials who spoke this week were focused on downside risks to the economy, Governor Bowman, the lone dissenting vote from last week’s decision, noted that inflation risks remained elevated and that this would necessitate caution moving forward. Market pricing is roughly 50/50 between a quarter-and a half-point cut at the next meeting in November. With the end of the US government fiscal year approaching on 30 September, Congress passed a stopgap measure to fund government operations through 20 December, avoiding a shutdown amid general election campaigning. The Dow Jones Industrial Average and the S&P 500 Index moved to record highs, as investors appeared to celebrate new stimulus measures in China. Chemicals and materials stocks were particularly strong on hopes for a rebound in Chinese demand. Copper prices also increased, raising hopes that “Doctor Copper” was again reflecting a healthier global industrial economy. UK PMIs indicate that private sector activity continued to expand in September but at a slower pace compared to August. Composite PMI registered at 52.9, down from 53.8, while services PMI fell 0.9pp to 52.8 and the manufacturing PMI dropped 1pp to 51.5. The readings for September were worse than market expectations, although they remain consistent with the UK economy growing at a reasonable 0.3% in Q3 and achieving a so-called “soft landing”. It is also notable that the UK’s PMI readings are stronger than the Euro Area’s currently. Furthermore, broader business optimism has risen and there are also encouraging signs on the inflation front, with survey data suggesting that services inflation has cooled to its lowest level since February 2021. While the release is showing a broadly positive picture for the UK’s economic prospects, concerns about the upcoming Budget feature prominently in the survey. Consumer confidence has taken a knock due to worries about upcoming tax measures and businesses appear to be concerned on this front, too. In both the manufacturing and service sectors there were some reports of clients adopting a “wait and see” approach to decision making ahead of the Autumn Budget. Moreover, the most cited concern among UK private sector firms was fiscal policy uncertainty ahead of the October Budget. EU Eurozone PMI disappoints across the board with the composite output index falling from 51.0 to 48.9, significantly below Bloomberg survey expectations at 50.5. The outlook is weak for manufacturing as well as services, with the former dropping to 44.8 (expectations at 45.7) and the latter to 50.5 (expectations at 52.3). Anyone opening the hood in search for positive sub-components will be disappointed and forced to conclude that there are none. Instead, the concerns for the manufacturing sector is reinforced by the fall in the future output indicator. Business morale worsened in Germany in September, while consumer confidence stabilised at a low level, adding to signs that the economy could have tipped into recession. The ifo Institute said its business climate index dropped to 85.4 in September from 86.6 in August. Sentiment fell in all sectors of the economy, except construction. The consumer sentiment index published by GfK and the Nuremberg Institute for Marketing Decisions ticked up to -21.2 going into October versus -21.9 the month before. Sweden’s Riksbank cut its policy rate by a quarter of a percentage point to 3.25% and indicated that, if the outlooks for inflation and economic activity remain unchanged, further reductions could be in store for the two remaining Executive Board meetings this year. The Swiss National Bank also lowered borrowing costs by a quarter-point to 1.00%, as expected. Governor Thomas Jordan signalled that the bank was ready to cut interest rates again as inflation pressures had decreased markedly. While the Fed has shifted focus towards more support for a soft landing, the ECB has remained more concerned with inflation and cost pressures. The release should be a signal for the ECB to shift focus towards economic activity. Even if the ECB’s expectations on the recovery are low, its forecast implies a gradual pickup in growth, which is challenged by the current reading. The relatively mild drop in the indicators for employment should be poor comfort, and the drop in the price indicators signals easing cost pressures. In local currency terms, the pan-European STOXX Europe 600 Index rebounded, ending 2.69% higher as evidence of slowing business activity spurred hopes for interest rate cuts. China also unveiled a package of measures to stimulate its economy, helping to lift sentiment. Major stock indexes also rose. Germany’s DAX surged 4.03%, France’s CAC 40 Index climbed 3.89, and Italy’s FTSE MIB added 2.86%. CHINA The People’s Bank of China (PBOC) cut its reserve requirement ratio by 50 basis points for most banks, its second cut in banks’ required reserves this year, and reduced its seven-day reverse repo rate by 20 basis points to 1.5%. It cut the medium-term lending facility rate by 30 basis points to 2%, marking the largest-ever cut to the monetary policy tool since the central bank began using it to guide market rates in 2016, according to Bloomberg. The moves were part of a sweeping stimulus package announced by PBOC Governor Pan Gongsheng that aims to jumpstart China’s ailing economy. Other measures unveiled by the PBOC included a rate cut for existing home mortgages and slashing the nationwide down payment ratio for second home purchases to 15% from 25%. China’s top leaders vowed to take action to stabilise the country’s property market and make real estate prices “stop declining,” according to state media. The readout from the 24-man Politburo included a statement that China would deploy the necessary fiscal spending to meet its 2024 growth target of around 5%. The Politburo statement contained no specifics on fiscal spending. However, China plans to issue special sovereign bonds worth about RMB 2 trillion (USD 284.4 billion) this year as part of the fiscal stimulus plan, Reuters reported, citing unnamed sources. The package will include RMB 1 trillion of special sovereign debt focused on boosting domestic consumption, which has flagged since pandemic lockdowns ended. Taken together, the stimulus package is a positive development for China’s economy and will bolster near-term activity and pull market sentiment from very weak levels. Longer term, however, the stimulus isn’t large enough to sustainably free China from its weaker growth trajectory. Chinese stocks surged after Beijing unveiled a slew of measures to shore up the economy. The Shanghai Composite Index climbed 12.8%, while the blue-chip CSI 300 soared 15.7%. In Hong Kong, the Hang Seng Index gained 13%. The rally marked the biggest weekly gain for the benchmark CSI 300 since 2008, when Beijing unveiled a massive stimulus package during the global financial crisis. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Reuters, TD Economics, M. Cassar Derjavets. |
