| USA Real GDP expanded 2.8% annualised in the third quarter, a result roughly in line with the median economist forecast calling for a +2.9% print. As this was stronger than potential, the output gap widened from +2.4% to +2.6%, the widest it has been since 1978. Year on year, real GDP was up 2.7%. Domestic demand grew at a very healthy clip in the three months to September, supported by household consumption (+3.7% QoQ ann., the best showing in a year and a half), as well as business equipment spending (+11.1%) and government spending (+5.0%). Structure (-4.0%) and residential (-5.1%) investment, on the other hand, showed contractions. Spending on goods jumped the most since 2023Q1 (+6.0% QoQ ann.), buoyed by an 8.1% gain for durables. Outlays on services increased as well (+2.6%) albeit to a lesser extent. Trade had a negative impact on growth (-0.55 percentage point) as imports expanded at faster pace than exports (11.2% vs. 8.9%). Inventories, for their part, subtracted 0.17 percentage point to the headline GDP figure. The Personal Consumption Expenditure Price Index excluding food and energy climbed an annualised 2.2% in the quarter, decelerating from 2.8% in Q2 but still a tad above the +2.1% result expected by consensus. YoY, the index remained unchanged at a three-and-a-half-year low of 2.7%. The savings rate, for its part, dropped from 5.0% to 4.8%, significantly below the pre-pandemic average for this indicator (around 6.2%). The GDP data were broadly in line with consensus expectations and showed solid growth in Q3. Household consumption once again stole the show, with consumers continuing to splurge on both goods and services. This resilience was made a little less difficult to understand by the significant upward revision to real disposable income data, which meant consumers didn’t have to dip into their savings. Nonfarm payrolls rose 12K in October, a lot less than the median economist forecast calling for a +100K print. The negative surprise was compounded by a -112K cumulative revision of the prior months’ results. Employment in the goods sector fell 37K as an 8K gain in construction was more than offset by a 46K decline in manufacturing (the biggest drop recorded since the early days of the pandemic). Employment in the mining/logging segment, meanwhile, edged up 1K. Jobs in service-producing industries advanced just 9K on gains for health/social assistance (+51K), and wholesale trade (+10K). Alternatively, payrolls contracted in the following segments: professional/business services (-47K), retail trade (-6K), leisure/hospitality (-4K), transportation/warehousing (-4K) and utilities (-2K). The temporary help services category, meanwhile, registered its biggest decline in payrolls since 2020M04 (-49K). In total, 28K jobs were lost in the private sector (marking the first decline since 2020M12), while 40K were added in the public sector, the latter tilted heavily towards state/local administrations (+39K). Average hourly earnings rose 4.0% in October, up from 3.9% the prior month and in line with consensus expectations. MoM, earnings progressed 0.4% following a 0.3% print the prior month (initially estimated at +0.4%). The household survey painted a similarly downbeat picture of the situation prevailing in the labour market, with a reported 368K decrease in employment. As this drop was offset by a 1-tick decline in the participation rate (to 62.6%), the unemployment rate remained unchanged at 4.1%. Full-time employment contracted 164K, while the ranks of part-timers shrank 227K Employment data were much weaker than expected in October, but these results should be taken with a major grain of salt. The passage of hurricanes Helene and Milton undoubtedly weighed on the headline payroll figure. Recall that, according to the methodology of the establishment survey, people unable to work because of bad weather are counted as unemployed. No fewer than 512K people fitted that description in October, one of the highest figures recorded in recent years. The ISM Manufacturing PMI registered at 46.5 in October, shrinking from 47.2 the prior month, the lowest reading since July 2023. Manufacturing activity has now been contracting, meaning below the 50-mark separating expansion from contraction, every month except once in the past two years. Production activity also dropped sharply in October, from 49.8 to 46.2, marking the biggest monthly decline since April 2021. Additionally, the backlog of orders (from 44.1 to 42.3) fell faster. On the other hand, new orders (from 46.1 to 47.1) and payroll (from 43.9 to 44.4) continued to decline but at a slower pace as demand cooled. The headline PCE deflator came in at a 43-month low of 2.1%, a result in line with the median economist forecast. The core index, for its part, remained stable at 2.7% on a 12-month basis, a print one tick higher than the consensus. On a monthly basis headline PCE edged up 0.2% and core PCE increased 0.3%, both in line with consensus expectations. The Conference Board Consumer Confidence Index surged to 108.7 in October from 99.2 in September (revised up from 98.7). The median economist estimate called for a 99.5 print. The monthly jump was the largest since March 2021 and erased completely the previous month collapse. As a result, consumer confidence reached its highest level since January but remained way below its pre-pandemic level. The S&P CoreLogic Case-Shiller 20-City Home Price Index for August rose 0.35% m/m, above the consensus forecast calling for a 0.20% increase. This marks the 18th consecutive monthly advance and an acceleration from the previous months’ growth (+0.25%). Seasonally adjusted, prices were up in 18 of the 20 cities tracked, led by Seattle (0.85%), Chicago (0.81%), Washington (0.65%), and Minneapolis (0.45%). Year over year, prices rose 5.20% at the national level Pending home sales climbed 7.4 % in September versus 0.6% in August, representing their biggest gain in more than four years. The increase exceeded the median economist forecast of 1.9%. Despite the increase in contract signings, the 75.8 index level remains historically low for data going back more than two decades. As mortgage rate increased drastically in October, strength in pending home sales could be short-lived. The Job Openings & Labor Turnover Survey (JOLTS) fell to its lowest level since 2021, declining from 7,861K in August (initially estimated at 8,040K) to 7,443K in September. As this decrease was complemented by a slight increase in the number of people looking for a job, the ratio of job openings to unemployed workers fell to 1.09 from a downwardly revised 1.10 in August, which remained below this indicator’s pre-pandemic levels (≈1.20-1.25). The monthly decline in job opening was led by health care/social assistance (-175k), hospitality (-102K), retail (-58K) and transportation (-54K). Alternatively, job postings increased in the finance/insurance (85K), professional/business services (77K), and information (13K) sectors. The technology-oriented Nasdaq Composite and S&P MidCap 400 Index reached record intraday highs. Growth stocks generally lagged value shares, due partly to cautious earnings reports from Facebook parent Meta Platforms and software giant Microsoft. Small-caps also held up much better than large-caps. UK The OBR has set out its economic forecasts for the UK economy over the coming years. In broad terms, the growth outlook is now lower than forecast by the OBR in March, although the Chancellor is saying this is due to incomplete information being used at that time so that the numbers are not cross comparable. As to inflation, the OBR is expecting decisions made in the budget to increase inflation by 0.4pp in 2025/26 and by 0.3pp in 2027 and 2028, with inflation now only expected to meet its target by 2029. Having been critical about the state of affairs she has inherited from her predecessor, she clearly hopes these expansionary policies, chiefly in Education and Health, will lift both confidence and growth in the next few years. The budget is set to raise GBP 40 billion from new tax measures, amongst the largest tax rises in any budget in history. On the spending side, there is an anticipation that departmental spending will increase by GBP 74 billion by 2029, the difference between these figures being GBP 32.5 billion in increased borrowing. Business costs have also been impacted by rises to the minimum wage, set to rise by 6.7%. The chancellor has revised her fiscal rules to give her additional flexibility on capital expenditure, although the initial market reaction seems to be relatively sanguine about the changes. As before, the government would only borrow to invest; and secondly the aim is to have debt to GDP falling in five years. The key to this latter rule was what counted as debt. The chancellor will now be using “Net Financial Debt” as opposed to Net Debt. This former figure includes the returns on government assets and so increases the ability of the government to borrow. The Bank of England‘s money and credit release suggests the UK housing market continues to pick up. Mortgage approvals registered at 65,600 in September, up 700 from the previous month. Mortgage approvals are now at the highest level since August 2022 and have now been at roughly the pre-pandemic average for two consecutive months. House prices have increased over the past year, with the land registry measure showing a rise of 2.75% and metrics using mortgage approval data (Nationwide HPI and Halifax HPI) showing a rise of between 3.4% and 5.1%. This has largely come about as swap rates have seen notable drops over the past twelve months (100bp for 2 years and roughly 75bp for 5 years), helping to increase mortgage availability. This trend in rising house prices is expected to continue for the next two years in the mainstream market. The yield on two-year UK gilts rose more than 0.25% after Chancellor of the Exchequer Rachel Reeves unveiled the Labour Party’s first budget since taking office in July. The plan will increase taxes by £40 billion annually by 2030 and spending by £74 billion. A looser definition of debt will allow the government to borrow an extra £100 billion in coming years, ostensibly to fund infrastructure spending. A hike in the employer’s portion of the National Insurance tax will rise, which economists fear could hamper employment and wage growth. On Friday, Moody’s and S&P both expressed skepticism over the shifting debt definition. EU Eurozone core inflation held steady at 2.7 percent, YoY, in October, just above Bloomberg survey estimates at 2.6 percent. Headline inflation ticked up by 0.3 pp to land on ECB’s target at 2.0 percent, against 0.1 pp Bloomberg survey estimates. At the latest monetary policy press conference Lagarde made a point of service price inflation having edged down from 4.1 percent in August to 3.9 percent in September. In October, service inflation held steady, and the key observation must be that it is sticky, with price increases only marginally below the level observed in November last year. Core goods inflation remains low at 0.5 percent YoY. Energy prices declined by 4.6 percent YoY in October, slightly less than in September (-6.1 percent), while food inflation ticked up by 0.5 pp to 2.4 percent. ECB has signalled increased confidence that inflation is well on track towards the target, and shifted towards more focus on support for economic activity. Third quarter GDP surprised on the upside, but recent business surveys, PMI as well as DG ECFIN, signal continued weakness going forward. The ECB is expected to cut rates by 25 bp to 3.0 percent in December, and lackluster economic activity increases the probability of continued consecutive cuts next year. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.52% lower. Concerns about the potential for escalating conflict in the Middle East, some poor corporate results, and moderating expectations for the European Central Bank’s (ECB’s) interest rate cuts contributed to the weakness. Major stock indexes also fell. France’s CAC 40 Index lost 1.18%, Germany’s DAX dropped 1.07%, and Italy’s FTSE MIB sank 1.42%. CHINA In the property sector, the value of new home sales by the country’s top 100 developers rose 7.1% from a year ago after September’s 37.7% drop, marking the first year-on-year growth in 2024, according to the China Real Estate Information Corp. China’s factory activity expanded for the first time since April amid better demand. The official Manufacturing Purchasing managers’ Index (PMI) rose to an above-consensus 50.1 in October from 49.8 in September, according to the country’s statistics office, topping the 50-mark threshold separating growth from contraction. The non-manufacturing PMI, which measures construction and services activity, increased to a lower-than-expected 50.2 in October from 50 in September. The rise in services activity was partly attributed to increased spending during the country’s Golden Week holiday. Separately, the private Caixin/S&P Global survey of manufacturing activity rose to 50.3 in October from the prior month’s 49.3 amid new order growth. Chinese stocks retreated despite data showing a pickup in economic activity. The Shanghai Composite Index fell 0.84%, while the blue chip CSI 300 gave up 1.68%. In Hong Kong, the benchmark Hang Seng Index lost 0.41%, according to FactSet. The first batch of major economic indicators after the rollout of Beijing’s broad stimulus package indicated early signs of recovery in the Chinese economy. The macroeconomic outlook for China in 2025 has significantly improved, and while the economy may not completely reverse course, at the very least it should stabilise going forward. Once the initial phase of market volatility passes, stock valuations will be driven by fundamentals, and focus will switch to earnings growth rather than economic growth. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, M. Cassar Derjavets. |
