USA
• The S&P Global flash composite PMI sank from 47.7 in July to 45.0 in August, marking a second consecutive contraction in private-sector activity and the sharpest since May 2020. Outside of the pandemic period, this was also the lowest reading recorded in data going back to 2009. New orders fell the most in 27 months owing to tepid foreign demand. “Material shortages, delivery delays, hikes in interest rates and strong inflationary pressures all served to dampen customer demand,” mentioned the S&P report. As a result, work backlogs shrank for a third month running and employment advanced at the slowest pace this year. “[A] growing number of firms stated that uncertainty and rising costs led them to delay the immediate replacement of staff,” indicated the report. Input price inflation, meanwhile, was the softest in a year and a half but remained acute by historical standards, with firms linking increases in cost burdens not only to rising interest rates and higher prices for a range of raw materials and transportation, but also to wage increases, which were putting additional pressure on expenses. The rise in output charges also softened, something panelists linked to “efforts to pass through any concessions to customers to encourage the placement of orders”. Rather surprisingly under the circumstances, business confidence for future output rose to a three-month high
• Nonfarm payrolls rose 315K in August, slightly more than the +298K print expected by consensus. That said, the upward surprise was more than offset by a sizeable downward revision to the previous months’ results (-107K). Employment in the goods sector sprang 45K, with gains in manufacturing (+22K), construction (+16K) and, to a lesser extent, mining/logging (+7K). Services-producing industries, meanwhile, expanded payrolls by 263K, with notable increases for education/health (+68K), professional/business services (+68K), retail trade (+44K) and leisure/hospitality (+31K). Employment in the public sector edged up 7K as gains at the state/local level (+9K) were only partially offset by a decline in federal jobs (-2K). Average hourly earnings rose 5.2% YoY in August, unchanged from July and one tick weaker than the median economist forecast (+5.3%). Month on month, earnings progressed 0.3%, decelerating from 0.5% the prior month
• Considering the revisions made to the data of the past months, the establishment survey came in weaker than consensus expectations in August but continued to report healthy job gains. As a result, non-farm payrolls exceeded their pre-crisis level for the first time. The details of the report were also reassuring with private employment registering a sizeable increase (+308K) and temporary help services continuing to trend upward (+12K). After having accelerated in July, average hourly earnings lost a bit of momentum, but this should be seen as a positive in an environment where inflation is well above the central bank’s target. One of the only negative points in the establishment report was the drop in the diffusion index. The latter slid to a 19-month low in August (62.1%), as employment gains were concentrated in high-contact industries that had suffered the most during the pandemic (e.g. education/health, retail, leisure/hospitality)
• The household survey, meanwhile, showed job gains accelerating after a few disappointing months. More importantly, it signaled a 3-tick increase in the participation rate. Without wanting to read too much into one month’s data, this trend reversal was still encouraging knowing that a higher participation rate could help alleviate labour shortages and, in turn, keep wages under control. On a less positive note, full-time employment declined for the fourth time in the last five months. The participation rate of prime aged workers stood at a post-pandemic high of 82.8%, while that of workers aged 55 and over continued to linger far below its precrisis levels (38.6%)
• The Conference Board Consumer Confidence Index grew from 95.7 in July to 103.2 in August, above the median economist forecast calling for a 98.0 print. The improvement reflected more optimistic longer-term consumer expectations. The sub-index tracking sentiment towards the next six months rebounded from the eight-year low of 65.3 to 75.1, which remains low per historical standards. A higher proportion of respondents had a positive outlook on business conditions (from 16.3% to 19.2%) and employment (from 15.1% to 17.4%). Inflation expectations declined to 7.0%, their lowest since January 2022. The assessment of the present situation improved as well. Indeed, the corresponding tracker grew from 139.7 to 145.7 as the share of respondents who considered current business conditions to be “good” were up from 16.3% to 19.2%. However, the percentage of polled individuals who deemed jobs plentiful fell from 49.2% to 48%
• The ISM Manufacturing PMI was unchanged at 52.8 in August, on growth in all five subindexes. This result still signaled the weakest expansion at U.S. factories since June 2020. Output growth decelerated but remained in expansion (from 53.5 to a 26-month low of 50.4), while new orders renewed with expansionary levels after two consecutive months of decline (from a post-pandemic low of 48.0 to 51.3). After a three-month stay in contraction territory, the employment tracker also slid back in expansion, from 49.9 to 54.2. Elsewhere, signs of improvement on the supply chain side were clearly visible in the report. The input price tracker continued to fall (from 60.0 to 52.5), reflecting a decline in commodity prices. Although still in expansion, this index stood at its lowest level since June 2020
• According to the S&P CoreLogic Case-Shiller 20-City Index, home prices rose a seasonally adjusted 0.44% in June, marking a 122nd consecutive gain for this indicator, albeit the slowest in 24 months. For the first time in two years, not all 20 markets recorded an increase, with cooldowns observed in Seattle (-1.55%), San Francisco (-0.82%) and San Diego (-0.57%), among others. This broke the longest streak of all markets registering increases in the data. Nonetheless, price hikes remained particularly impressive in Miami (+2.47%), Tampa (+2.24%) and Charlotte (+1.55%). Year on year, the index was up 18.6%, down from the all-time high of 21.2% recorded in April. Despite this progress still being one of the sharpest in data going back to 1987, there is a downward trend is taking shape. Looking ahead, the recent increase in borrowing costs are expected to translate into a marked moderation of activity on the resale market and of home price growth
• The Job Openings and Labor Turnover Survey (JOLTS) showed that positions waiting to be filled were essentially unchanged from 11,040 in June (initially estimated at 10.698K) to 11,239K in July. The level of vacancies thus remained extremely high on a historical basis, signaling still elevated demand for workers despite an economic slowdown. The ratio of job offers to unemployed person (1.98) was just a hair under the peak of 1.99 reached in March
• Construction spending contracted 0.4% in July after a 0.5% pullback in June (initially estimated at -1.1%). The decline was attributable to a 0.8% drawdown in private spending while public expenditures expanded 1.5%. Lower private outlays reflected a decline in the residential segment (-1.5%) while non-residential (+0.4%) posted an increase. Residential construction has remained far ahead of non-residential construction since the start of the pandemic. Relative to their pre-crisis levels, private outlays were up 50.6% in the former but down 4.2% in the latter. Looking ahead, housing demand is expected to moderate as interest rates rise and demand in the resale market flags. This should lead to a tapering of residential construction
• The Fed’s quantitative tightening program will hits its stride in September, draining $95 billion from the economy each month, $60 billion in Treasuries and $35 trillion in mortgage-backed securities will be allowed to roll off the central bank’s balance sheet and back into private hands, putting upward pressure on interest rates and reducing liquidity in the US financial system. That’s up from the combined $47.5 billion that has been rolling off since June
• Stocks finished lower for the week as investors continued to digest the implications of hawkish messages from Federal Reserve officials. The S&P 500 Index extended the daily losing streak that began with Fed Chair Jerome Powell’s August 26 speech at the central bank’s Jackson Hole conference, widely perceived as hawkish, through Wednesday before rising marginally on Thursday. Value stocks continued to outperform high-valuation growth stocks, and large-caps held up significantly better than small-cap shares. Energy shares suffered as oil prices declined below USD 90 per barrel for West Texas Intermediate crude, the U.S. benchmark
• In terms of data release, trade balance is out on Wednesday. For the better part of the past two years, the trade balance has stretched wider and has weighed on GDP growth. Strong domestic spending ratcheted up demand for imported goods, and the U.S. economy generally outpaced many other parts of the world where slower growth weighed on exports. That dynamic started moving in the other direction in the second quarter. Slower domestic demand has begun to weigh on import growth just as export growth is ramping up. In fact, exports advanced for the fifth consecutive month in June. The United States is supplying more commodities to Europe as the Russia-Ukraine war continues
• Jobless claims is out on Thursday. The best argument that the U.S. economy is not presently in recession is the strength of the labor market. While it is true that jobless claims are historically low, they are often at a low immediately prior to a recession. Jobless claims have moved up since the spring, with the four-week average of initial filings increasing by 71K since its early April low. The climb has been sharper than the lead-up to prior recessions, at which point payrolls traditionally begin to decline outright. However, the upward trend in claims since the spring comes against what’s been a particularly hard stretch for seasonal factors to accurately capture regular shifts in activity
UK
• House price growth, according to the Nationwide HPI measure, came in above expectations in August, growing by 10% YoY and by 0.8% MoM. Annual house price growth has been in double digits for the tenth month in a row and high price growth over the past two years has lifted average house prices by around GBP 50,000. Average UK house prices now stand at GBP 273,751. There are signs that the market is beginning to lose some momentum. For example, surveyors are reporting fewer new buyer enquiries in recent months and the number of mortgage approvals for house purchases has fallen below pre-pandemic levels. However, the relatively modest changes in these two measures – alongside the perennial problem in the UK of a lack of stock on the housing market – has meant price growth has remained strong
• The Bank of England has released its latest Money and Credit data for July. Consumer Credit was up GBP 1.425bn (consensus GBP 1.5bn), half of which was new credit card lending, while Mortgage Lending was GBP 5.05bn (consensus GBP 5.05bn), in line with longer term trends. Mortgage approvals were 63.77K (Consensus 61.725K), this is well below the January figure of 73.3K, but the figures are in line with the long-term trend again. Smaller businesses repaid GBP 300m in loans, the 16th straight month of loan repayments. Large corporations repaid GBP 1.8bn in loans and redeemed GBP 3.2bn from capital markets. Data showed that Households deposited an additional GBP 4.3bn with banks and building societies in July, compared to GBP 2.6bn in June. This is an early indicator of where the saving rate is likely to be headed. The saving rate has been critical: if people are willing to taking their savings down to a figure typically seen at the bottom of a cycle (from around 6 percent to around 3.5 percent) the lower degree of savings would help to meet the rising cost of living, alternatively, if people are being very cautious, deposits are likely to rise and the saving rate be maintained, implying that cost of living increases are being met through reduced consumption
EU
• Eurozone inflation in August rose slightly more than expected to 9.1 percent y-o-y, compared to 8.9 percent the month before. Energy is expected to have the highest annual rate in August (38.3 percent, compared with 39.6 percent in July), followed by food, alcohol & tobacco (10.6 percent, compared with 9.8 percent), non-energy industrial goods (5.0 percent, compared with 4.5 percent) and services (3.8 percent, compared with 3.7 percent). Meanwhile, core inflation also rose more than expected to 4.3 percent, compared to 4 percent the previous month. The HICP releases in May (April) for major eurozone countries were as follows: France 6.5 percent (6.8), Germany 8.8 percent (8.5), Italy 9 percent (8.4) and Spain 10.3 percent (10.7). Inflationary pressures point to upside risk to both inflation as well as policy forecast going forward. In addition, the pivot in the ECB’s communication away from forward guidance to a meeting-by-meeting (MBM) basis implies a greater focus on realised over forecasted inflation, and this further opens up for additional tightening. Energy price momentum has flattened but momentum in the core categories of both non-energy goods as well as services remains strong
• Eurozone money markets were pricing in a roughly 80% chance of an exceptionally large 0.75 percentage point rate hike by the European Central Bank (ECB) at its next meeting, after a chorus of hawkish comments by policymakers and data showing record inflation. Executive Board member Isabel Schnabel said at the Jackson Hole conference that central banks should act “forcefully” to reduce high inflation, even at the risk of lower growth and higher unemployment to minimize the risk of bad economic outcomes. Banque de France Governor François Villeroy de Galhau said policy would need to remain tight for an extended period and that he favored “another significant step in September.” Policymakers quoted by Reuters, including German Bundesbank President Joachim Nagel, said the bank should again act decisively to subdue inflation, indicating that they favored another large increase as well. However, ECB Chief Economist Philip Lane argued at a conference in Barcelona that borrowing costs should increase at a “steady pace” to allow for any downward adjustment in inflation forecasts
• Shares in Europe fell sharply on fears that central banks could tighten monetary policy aggressively for an extended period. Worries that Russia might stop natural gas supplies to Europe also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.37% lower. Major indexes were mixed. France’s CAC 40 Index dropped 1.70%, and the Germany’s DAX Index gained 0.61%. Italy’s FTSE MIB Index was little changed
• Inflation in the euro area accelerated more than expected to a record 9.1% in August, up from 8.9% in July. Surging energy and food prices were the primary drivers. The number of jobless people in the 19-country bloc dropped by 77,000 in July, leaving the unemployment rate at a record-low 6.6%, Eurostat said
CHINA
• The Caixin/Markit manufacturing PMI for China fell back into contraction territory in August, moving from 50.4 to 49.5. This decline was due to both new concerns, namely a heat wave, and lingering ones, namely COVID-19 restrictions persisting in some parts of the country. With these factors weighing on demand, the new business sub-index indicated lower sales, a first occurrence in three months. Employment also decreased, the fifth consecutive deterioration for this indicator. However, this month’s deterioration was more moderate than in previous months, as companies were unable to clear their orders due to production limitations. Meanwhile, input costs registered a fist decrease since May 2020 as price pressures on some raw materials eased. Finally, business expectations regarding future output remained unchanged from July’s relatively strong print, though it was still below the historical average for this indicator
• China has room to adjust monetary policy as stimulus measures to support the economy have been restrained and consumer inflation is under control, a People’s Bank of China spokeswoman said. Last month, China cut two key interest rates as Beijing stepped up efforts to revive an economy that has been slowing under a nationwide property crisis and continued lockdowns
• China’s stock markets fell as coronavirus outbreaks in major cities triggered renewed lockdowns and dampened the economic outlook. The broad, capitalization-weighted Shanghai Composite Index retreated 1.54% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, slipped 2.01%, Reuters reported.
Sources: T. Rowe Price, MFS Investment Management, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets
