| USA Nonfarm payrolls rose 150K in October, below the median economist forecast calling for a +180K print. This negative surprise was compounded by a -101K cumulative revision to the previous months’ data. Employment in the goods sector fell 11K as a 23K gain in the construction segment was more than offset by a 35K drop for manufacturing, the largest observed in two-and-a-half years. Payrolls in the mining/logging segment rose only marginally (+1K). Jobs in services-producing industries, for their part, expanded 110K, with notable increases for health/social assistance (+77K), leisure/hospitality (+19K) and professional/business services (+15K). Alternatively, cuts were observed in the transportation/warehousing (-12K), information (-9K) and financial activities (-2K) categories. The temporary help services category, meanwhile, saw payrolls increase for the first time in 10 months. In all, just 99K jobs were created in the private sector (the least in four months), compared with 51K in the public sector, the latter split unevenly between local/state (+48K) and federal (+3K) administrations. Average hourly earnings rose 4.1% in October, down from 4.3% in September but still one tick above consensus expectations. MoM, earnings progressed 0.2% The household survey painted an even less upbeat picture of the situation prevailing in the labour market, with a reported 348K drop in employment, the biggest recorded since the early days of the pandemic. This sizeable decline, combined with a slight decrease in the participation rate (from 62.8% to 62.7%), translated into a one-tick increase in the unemployment rate to a 21-month high of 3.9%. Full-time employment rose 326K, while the ranks of part-timers cratered 670K. Once again, employment gains were concentrated in just a few client-facing industries; health/social assistance performed especially well. But elsewhere, gains were much more modest, as demonstrated by a decline in the diffusion index from 61.4% to 52.0%, the lowest print recorded since the early days of the pandemic. The less volatile 6-month diffusion index (from 62.8% to 62.6%) also slid to a post-pandemic low The ISM Manufacturing PMI sank deeper into contraction territory in October. This came after three consecutive months of increases and marked an entire year below the 50-point level. At 46.7, the headline index came in below consensus expectations calling for a 49.0 print. Production stabilized (from 52.5 to 50.4) while new orders continued to shrink, doing so at a faster pace than in the prior month (from 49.2 to 45.5). Foreign demand remained somewhat weak, but the contraction was less pronounced than in September (from 47.4 to 49.4). Still, the employment sub-index did not bode well for demand: U.S. factories returned to trend and subtracted workers in the month (from 51.2 to 46.8). Signs of supply chain improvements were not as visible in the report as both input prices (from 43.8 to 45.1) and supplier delivery times (from 46.4 to 47.7) drew closer to the 50-point mark separating expansion from contraction. This, combined with slightly worse demand conditions, allowed unfilled orders to improve slightly, as evidenced by a decrease in work backlogs (from 42.4 to 42.2) The services side of the economy fared a bit better, with the ISM services index expanding again in October, though at a slower pace. Twelve out of eighteen industries reported growth; however, the softer-than-expected reading suggests that the Fed’s hiking campaign is influencing the services sector as well The Conference Board Consumer Confidence Index slid from 104.3 in September to 102.6 in October. Longer-term expectations deteriorated for a third straight month. The sub-index tracking sentiment towards the next six months fell 0.8 point to 75.6 as a larger share of respondents had a negative opinion of future business conditions (from 18.7% to 20.2%) and employment (from 18.9% to 19.0%). These dimmer prospects also translated into a drop in the share of respondents who expected their income to increase (from 17.9% to 15.6%). Proportionally fewer respondents planned to buy a home (from 5.5% to 5.3%), a car (from 11.7% to 10.6%) or major appliances (from 47.0% to 45.9%) in October. Consumer inflation was expected to stand at 5.9% for the next 12 months, up two ticks from the prior month, which had registered as the lowest level since November 2020. Consumer assessment of the current situation deteriorated (146.2 to 143.1). The share of respondents who deemed jobs plentiful at present sagged from 39.7% to 39.4% The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the sixth consecutive month in August, climbing 1.0% MoM to an all-time high. Price increases were observed in thirteen of the markets covered, led by Miami (+1.2%), Las Vegas (+1.1%), Detroit (+0.8%), Atlanta (+0.8%), Charlotte (+0.80%), and Phoenix (+0.7). YoY, prices were up 2.6% at the national level, a second increase after five months of decline. Although demand remains weak on the real estate market, very tight supply, combined with a strong labour market, is likely to keep pushing prices up in the coming months Construction spending advanced 0.4% in September after progressing an upwardly revised 1.0% the prior month (initially estimated at +0.5%). The monthly gain reflected increases in both the private sector (+0.4%) and the public sector (+0.4%). In the former, spending on residential projects increased 0.6%, while outlays on non-residential structures were up 0.1%. Following a decent handoff from the previous quarter, Q3 construction growth was running at a solid pace The Job Openings and Labor Turnover Survey (JOLTS) showed that the number of positions waiting to be filled rose from 9,497K in August (initially estimated at 9,610K) to a multi-month high of 9,553K in September. As this was not offset by an increase in the number of people looking for a job, the ratio of job offers to unemployed persons stayed at 1.5, its lowest point since September 2021 but still well above this indicator’s pre-pandemic level (≈1.20-1.25). The monthly increase in job offers was led by leisure and hospitality (+181K), financial activities (+94K), trade, transportation and utilities (+88K), and construction (+56K). Alternatively, job postings decreased in other services (-124K), professional and business services (-105K), and government (-81K), among others For 2024, the US Internal Revenue Service increased the maximum employee contribution to 401(k) plans to $23,00, up from $22,500 this year. Catch up contribution limits for those aged 50+ will remain unchanged at $7,000. The limit for individual retirement accounts was raised $500 to $7,000 The Federal Reserve kept its policy rate unchanged at the 5.25-5.5 percent range, as anticipated by virtually all economists and fully priced in by the markets. For the third consecutive meeting, the Fed’s press release shows that the FOMC has been surprised by the strength of the economy, tweaking the description of growth and employment. But despite that, and the slight upturn in inflation, the FOMC refrained from firming up its wording on inflation. Market interest rates declined on impact. At the press conference, Fed Chair Jerome Powell answered a question whether there is a hiking bias on the FOMC right now by saying “It’s fair to say that that’s the question we’re asking — should we hike more?” Despite such hawkish-tinted phrases, interest rates kept declining during the Q&Q session. Powell and the FOMC are confident about the anchoring of inflation expectations, “pretty comfortable” with the wage pressure and viewing the risks as coming into better balance However, the FOMC “remains highly attentive to inflation risks”, and Powell acknowledged that “a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal”. All told, surprisingly high incoming inflation prints could still cause the FOMC to hike again. At its September meeting, a majority of FOMC participants expected that one more hike would be appropriate. Since then, market interest rates have risen even further, adding to the surge that started in July. Several drivers can help explain the interest rate rise. Powell said that tighter financial conditions can supplant for another policy rate hike, but under two conditions: it has to be persistent, and it cannot just be a reflection of changed expectations for future policy rate moves (which the Fed then would need to follow through on). Powell said the Fed is not yet convinced about the persistence part, but said that the driver does not so far appear to be expectations of higher policy rate. In its press release, the FOMC also changed the language slightly – to show that it takes note a significant tightening of financial conditions – by adding the word financial here: “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” The S&P 500 Index recorded its strongest weekly gain in nearly a year, as signs of a slowing economy and a policy statement from the Federal Reserve that was generally perceived as dovish led to a sharp decrease in long-term bond yields. Growth stocks and the technology-heavy Nasdaq Composite Index outperformed somewhat, but the gains were broad-based and led by the small-cap Russell 2000 Index, which scored its best weekly gain since October 2022. It was the second-busiest week of earnings season and markets also appeared to be moved in part by trades made by institutional investors to recognize tax losses before their fiscal year ended on October 31. Index rebalancing and “window dressing” before month-end holdings disclosure may also have been at work In terms of data release, the trade balance print is out on Tuesday. Over the past year, the international trade deficit has narrowed back toward its pre-pandemic norm. The latest monthly data for August showed exports rose 1.6%, while imports fell 0.7%. With both sides of the trade relationship moving in a direction supportive of a narrowing in the trade gap, the overall trade deficit came in at $58.3B, the smallest gap in nearly three years. While the momentum in exports had looked solid this summer, last week’s Q3 GDP report revealed that real net exports subtracted a tenth of a percentage point from headline growth amid stronger-than-expected imports. The outturn suggests the U.S. trade balance widened in September. Advance data on merchandise trade point to a modestly wider goods deficit at the end of the quarter as well The University of Michigan Sentiment is out on Friday. Consumer sentiment has fallen for three months straight. The headline index clocked 63.8 in October, or the lowest since May. Turmoil in Congress, labor strikes and the Israel-Hamas war have recently instilled a generally higher degree of economic uncertainty. Amid the Fed’s increased focus on inflation expectations, the related line items have become the most consequential series of the University of Michigan’s survey. The median year-ahead inflation expectation rose a full percentage point to 4.2% in October, or the highest in five months. The longer-term (5-10 years ahead) expectation ticked up to 3.0%, which remains well within the range seen over the past few years. While the year-ahead expectation did jump, short-term expectations tend to be volatile. UK The BoE has decided to hold rates steady for a second consecutive meeting, leaving the base rate at 5.25%. This, of course, follows the US Federal Reserve’s decision yesterday to keep US rates on hold. The Monetary Policy Committee (MPC) was, however, split on its decision, with six members backing a freeze in rates and three opting for an increase of 0.25pp. The three dissenting members backed an increase in rates on the basis that the labour market remains relatively tight and measures of wage growth and services inflation continue to be elevated. A majority of members disagreed with this analysis, arguing that the labour market had loosened sufficiently and that the acceleration in the ONS’s average weekly earnings is not reflected in a broader range of wage growth measures. The MPC’s job has been made harder by conflicting messages from data sources and problems around the collection of data. For example, the ONS’s measure of annual private sector regular average weekly earnings was 8% in August, but other measures suggest the figure is lower. And while metrics such as unemployment, vacancies and inactivity suggest the labour market is loosening, there are concerns around the accuracy of the data The BoE has stated that there is an upside risk to inflation from the situation in the Middle East. However, this should be put into context. For now, the conflict seems to be contained, with the impact on energy markets remaining very small compared to volatility seen in late 2021 and 2022. Even if oil prices saw a substantial increase, it would seem unlikely that this alone could lead to a double spike in inflation. For example, a new USD 110 a barrel price would only add 0.5pp at the peak to UK CPI inflation, according to Bloomberg’s SHOK model. Despite the hold in rates, monetary policy tightening will of course continue through the Quantitative Tightening (QT) programme. At the latest MPC meeting, GBP 100bn of QT was signed off to take place over the course of October 2023 to September 2024, although the BoE expects this to have little impact on financial conditions. The BoE forecasts that GBP 80bn of QT in the previous 12 months only led a 10bp increase in 10-year gilt yields. EU The October flash HICP data shows headline inflation cooling slightly faster than previously anticipated, an outturn that many gleaned yesterday already, when not least German flash CPI data turned out on the low side of expectations. Core inflation stays high, only easing to 4.2% YoY, fully in line with expectations. Services price increases have only cooled marginally, and remain close to a 5-percent clip, and this is the main driver of eurozone inflation. The reason headline inflation plunged once again is negative base effects from the jaw-dropping energy price surges last autumn. Not least Italy and Germany exhibit large base effect currently. Beyond November, the base effects will moderate, as e.g., the ECB has shown, which means the sticky service price inflation will dictate outturns in headline inflation more and more. Note that yesterday’s EU Commission sentiment data showed eurozone pricing plans roughly unchanged, at an admittedly only modestly elevated level, but with a very wide confidence ban, which shows how retail and services sectors are far from done raising prices In local currency terms, the pan-European STOXX Europe 600 Index rebounded from the previous week’s loss and ended 3.41% higher. Major stock indexes also rallied, lifted by expectations that interest rates may have peaked. Italy’s FTSE MIB surged 5.08%, France’s CAC 40 Index jumped 3.71%, and Germany’s DAX climbed 3.42%. CHINA China’s factory activity returned to contraction in October. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.5 in October, down from 50.2 in September, as production growth slowed. The nonmanufacturing PMI slowed to a lower-than-expected 50.6 from 51.7 in September. Separately, the private Caixin/S&P Global survey of manufacturing activity fell to a below-forecast 49.5 in October from September’s 50.6. The private survey of services activity edged slightly higher but also lagged the consensus estimate China’s Central Financial Work Conference said it will set up a mechanism to resolve local debt risk by potentially transferring local government debt to the central government. The push follows a move made last week to increase the government’s borrowing capacity by 0.8% of GDP. Further measures are being considered to mitigate other financial risks, including those from real estate developers and small and medium-sized banks New home sales by the country’s top 100 developers fell 27.5% in October from a year earlier, easing from the 29.2% drop in September, according to the China Real Estate Information Corp. In a further sign of the sector’s downturn, real estate loans declined to RMB 53.19 trillion in September from the prior-year period, according to the central bank. The level of loans was RMB 100 billion less than a year earlier and marked the first year-on-year decline since the data became available in 2005 China’s ongoing housing market decline remains a serious drag on its growth outlook for many investors despite recent indicators suggesting a demand recovery after Beijing rolled out a flurry of stimulus measures. Although China is widely expected to attain its goal of 5% gross domestic product (GDP) growth in 2023, many observers appear to believe that the economy remains vulnerable given insufficient governmental support for the housing sector. According to S&P Global Ratings, under a bear case scenario, China’s GDP growth could slow to as low as 2.9% next year as property sales fall as much as 25% from 2022 Stocks in China gained as speculation that U.S. interest rates may have peaked offset broader concerns about the country’s slowing growth. The Shanghai Composite Index rose 0.43%, while the blue-chip CSI 300 advanced 0.61%. In Hong Kong, the benchmark Hang Seng Index added 1.53%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, TD Economics, Handelsbanken Capital Markets, M. Cassar Derjavets. |
