| USA Nonfarm Payrolls (NFP) rose 142K in August, less than the median economist forecast calling for a +165K print. This negative surprise was compounded by an 86K cumulative negative revision to the prior months’ results. The consensus was that disappointing NFP in July had been partly due to temporary factors, notably Hurricane Beryl, which had kept many workers at home during the survey’s reference week. This scenario thus saw the slowdown in job creation as a bump in the road that would most likely be reversed once these temporary factors had dissipated. This headline number casts some doubt on this hypothesis and suggests instead that the recent slowdown in job creation could be due to structural/cyclical factors rather than temporary ones. Headcount growth did accelerate in the month, but nonetheless came in below consensus expectations. The prior months’ results were also revised significantly downward. Gains in the private sector were decent, though still not very widespread. As a result, the 6-month diffusion index fell to a level close to those observed before the 2001 and 2007-09 recessions What does all this mean for the Fed? In his speech at Jackson Hole, the central bank Chairman Jerome Powell said the Fed would “do everything [it could] to support a strong labour market” and that it would not “welcome further cooling in labour market conditions.” The question, then, is whether this data are consistent with a further deterioration in the job market in the Fed’s eyes. On the one hand, payrolls rose at a pace that remained above that which the Fed considers necessary to absorb new entrants to the labour force (100K) in August but revisions to the prior months’ data made recent momentum look much less vigorous. The fact that the unemployment rate ticked down was indeed encouraging, but its trend remained firmly upward. While these developments might not be sufficient to encourage the Fed to start its easing cycle with a 50-basis point bang, they certainly leave the door open for such an oversized cut later this year. Whatever the Fed decides to do, monetary policy easing will come too late to prevent a significant slowdown in economic growth. The Fed had been much more proactive in its response to a deteriorating labour market in previous cycles, lowering rates significantly even before the Sahm rule was triggered. Its response in the current cycle has been delayed by its desire (justifiable to a point) to bring inflation back to target in a sustainable manner. But this delay will leave its mark on the economy. The Household Survey painted a slightly more upbeat picture of the situation prevailing in the labour market, with a reported 168K increase in employment. This gain, combined with an unchanged participation rate (62.7%) and a 120K increase in the size of the labour force, resulted in one-tick decrease in the unemployment rate to 4.2%. Full-time employment plunged 438K, while the ranks of part-timers swelled 527K. The Trade Deficit widened by 7.9% to $78.8 billion in July from $73.0 billion (revised from $73.1 billion) the prior month. This was due to an increase in the goods trade deficit of $5.6 billion to $103.1 billion from $97.5 billion (the largest goods deficit in a little over two years). The variation was not helped by a negative change in the services surplus (to $24.5 billion to $24.3 billion). Goods imports expanded $6.4 billion to $278.2 billion on positive changes in capital goods (3.3 bn) and industrial supplies and materials (2.8 bn). Goods exports were fuelled mainly by an increase in capital goods (1.8 bn) while autos/parts (-1.7 bn) and consumer goods (-0.8 bn) posted declines. Service imports rose $0.8 billion but set another record high, while exports increased $0.6 billion. Travel exports (spending by visitors in the United States) were essentially unchanged at $17.7 billion, and imports (spending by Americans abroad) fell slightly to $14.4 billion. The ISM Manufacturing PMI rose from a year-to-date low of 46.8 to 47.2 in August, but not enough to surpass expectations (median forecast: 47.5). The index remained below the 50-point mark (i.e., the mark that separates expansion from contraction) for the 21st time in 22 months. New orders fell to 44.6 from 47.4 in July. Weak demand conditions improved but continued to be reflected in a low work backlog reading (43.6, up from 41.7), which could explain why firms continued to shrink payrolls (up to 46.0 from 43.4). Supply conditions remained positive in August albeit moderated as signaled by the supplier deliveries sub-index falling (from 52.6 to 50.5). The prices paid indicator rose further in expansion territory, printing at 54.0 from 52.9 in the previous month. Just five of the 16 manufacturing industries surveyed reported growth in August. The ISM Non-Manufacturing PMI edged up to 51.5 in August from 51.4 in July. The reading was one tick better than the median economist forecast which was expecting a flat print. The new order sub-index (to 53.0 from 52.4), business activity sub-index (to 53.3 from 54.5), and employment tracker (to 50.2 from 51.1) all remained in expansion territory. Prices paid moved up to 57.3 from 57.0, marking an 87th straight month in expansion. Of the 18 industries covered, ten reported growth in August. The latest Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined to 7,673K in July, down from the revised 7,910K in June. This marks a continued decrease in the number of available positions, falling short of the survey forecast of 8,100K. The job openings rate decreased to 4.6% in July. Hires edged up to 3.5% from 3.3%, accompanied by an increase in separations, which rose to 3.4% from 3.2%. The quit rate also ticked up to 2.1% from 2.0%, while layoffs increased slightly to 1.1% from 1.0%. According to the latest edition of the Fed’s Beige Book, overall economic activity rose slightly for three districts in the period from late July to late August, while nine districts reported negative or zero growth (up from five in the previous report). Consumer spending edged down in most districts, with sales for autos being positive in some and negative in others. Elevated interest rates and high prices were touted as limiting factors for the latter. Manufacturing activity, consistent with other reports, declined in most districts with some noting continued contractions. The residential real estate sector was mixed but it should be noted that most districts reported softer sales figures. The commercial side was nary better. Future expectations varied from muted to optimistic albeit three districts anticipated moderation. Employment was reported as “flat to slightly up” in the most recent period. Five districts reported higher headcounts while others relayed that firms were slowing activity and letting job levels decline through attrition rather than layoffs. Employers have gotten pickier and competition for labour is becoming less of a factor. Inflation via wages will surely ease as “firms felt less pressure to increase wages and salaries”. Consequently, wages rose at a decent pace but have slowed. The S&P 500 Index suffered its worst weekly drop in 18 months, as worries over an economic slowdown appeared to weigh on sentiment. Information technology shares led the declines, driven in part by a drop in NVIDIA following rumors that it may be the subject of a Justice Department antitrust investigation, which led to a roughly USD 300 billion drop in the chip giant’s market capitalization. Energy shares were also especially weak on the back of a decline in oil prices. Conversely, the typically defensive utilities, consumer staples, and real estate sectors held up better. Some speculated that a factor in the declines may have been investor nervousness over seasonal trading patterns. Historically, September has been one of the worst months for stocks, averaging a 0.7% loss since 1950, while the S&P 500 has declined 4.9%, 9.3%, 4.8%, and 3.9% over the last four years. Trading volumes also picked up as investors returned to the office following the summer vacation season. Markets were closed Monday in observation of the Labor Day holiday. UK Britain needs an additional one trillion pounds ($1.3 trillion) in investment in the next decade to grow the economy. Prime Minister Starmer said he wanted the economy to achieve annual growth of 2.5% when campaigning in the run-up to July 4’s election (a rate that Britain has not regularly reached since before the 2008 financial crisis). An annual growth rate of 3% would require extra investment of 100 billion pounds a year in the next 10 years, particularly in energy, housing and venture capital, according to Capital Markets Industry Taskforce. The investment could come out of the six trillion pounds in long-term capital in Britain’s pensions and insurance sector, the report’s lead author Nigel Wilson, former boss of Legal & General, opens new tab, told Reuters. “We’ve underinvested in the UK for such a long time, there’s a massive gap between the other G7 countries and ourselves,” he said. “We have the long-term capital in the UK, it needs to be reallocated.” The British economy needs an extra 50 billion pounds annually in energy investment, as it seeks to meet net zero targets, 30 billion pounds in housing and 20-30 billion in venture capital, the report said. The government should look at incentives to investment, such as reductions in taxes on shares for retail investors, the report added. UK pensions have a “significantly lower” allocation to domestic and unlisted equities than most developed market pension systems globally, according to a separate report published on Friday by think tank New Financial. UK pensions could as much as double their allocations and still be in line with the pensions industry in other advanced markets, the report said. The UK government has called for a review of the pension system, as it seeks to increase UK pensions investment in domestic startups. “UK pension schemes could play a greater role in UK capital markets than they currently do,” UK pensions minister Emma Reynolds told a CMIT conference. British high-end homebuilder Berkeley reiterated its annual profit forecast, saying trading has been stable over the first four months of its current fiscal year. The housing market is expected to benefit from the UK’s first rate cut in more than four years last month, as well as from the government’s reform plans to boost land supply. Britain’s ruling Labour Party is aiming to build 1.5 million homes before the next election and develop underused areas like car parks and green spaces with low environmental value, marking a significant shift from previous policies. Berkeley, which unlike its bigger rivals focuses on redeveloping land that was previously used for industrial purposes, said it was on target to achieve its pre-tax earnings forecast for the year to April 30 of 525 million pounds ($691.6 million). Analysts on average are expecting annual profit of 526.7 million pounds, according to LSEG data. “Like the rest of the industry, the group is clearly evaluating the implications of the new government’s targets and policy initiatives,” Investec analyst Aynsley Lammin said in a note. The company, which operates across London, Birmingham and the south of England, said pre-tax profits for the year are expected to be weighted towards the first half, and operating margin will be slightly ahead of its long-term range of 17.5% to 19.5% for the six-month period to October end. In June Berkeley lifted its earnings outlook for 2025, the first FTSE 100 homebuilder to do so in more than two years. British house prices rose last month at the fastest annual pace since late 2022, data from mortgage lender Halifax showed, adding to signs of renewed momentum in the property market. Berkeley’s FTSE 100 rival Barratt, opens new tab said this week the recovery in the UK housing market is in its “early days” and that it doesn’t see profit growth until fiscal 2026. Vistry, opens new tab, the country’s top builder by output, posted a 7% rise in half-year earnings, helped by resilient demand for its affordable homes. EU European Central Bank (ECB) Governing Council member Gediminas Simkus told Econostream Media that he saw a “clear case” for an interest rate cut in September but regarded the potential for another one in October was “quite unlikely.” In his view, it was appropriate to ease policy, given a clearly disinflationary trend and structurally “sluggish” growth, but “by how much and in exactly which month, time will tell.” His colleague, Martins Kazaks, told Latvian TV that policymakers could take the next step to decrease rates in September while adding that policy should only ease gradually. Executive Board member Piero Cipollone told France’s Le Monde newspaper that recent economic data so far had confirmed that inflation was slowing, giving scope for the ECB to lower borrowing costs. “There is a real risk that our stance could become too restrictive and harm the economy,” he said. However, Bundesbank’s Joachim Nagel continued to warn about premature easing, given elevated wage growth and services inflation, in an interview with the Faz newspaper. German manufacturing orders in July unexpectedly increased 2.9% sequentially after seasonal and calendar adjustments, following an upward revision of June’s result to 4.6%. However, when large orders for transportation equipment were stripped out, factory orders dropped 0.4%. However, industrial production in Germany fell much more than expected, by 2.4% sequentially, having risen 1.7% in the prior month. Weakness in the automotive industry was a big part of this drop. The ifo Institute and the IfW Kiel Institute each lowered growth forecasts for the economy. Kiel said a contraction of 0.1% is likely this year, while ifo predicted the economy will stagnate. In local currency terms, the pan-European STOXX Europe 600 Index ended 3.52% lower on renewed fears about a deterioration in the outlook for global economic growth. Major stock indexes fell as well. France’s CAC 40 Index dropped 3.65%, Germany’s DAX declined 3.20%, and Italy’s FTSE MIB lost 3.15%. CHINA The value of new home sales by the country’s top 100 developers fell 26.8% in August year on year, accelerating from a 19.7% drop in July, according to the China Real Estate Information Corp. The continued slide in new home prices signalled the waning impact of the government’s real estate rescue package in May and raised speculation of further support measures from Beijing to put a floor beneath the property downturn. China’s official manufacturing purchasing managers’ index (PMI) slipped to a lower-than-expected 49.1 in August from 49.4 in July as production and new order declines deepened, the National Bureau of Statistics reported. The gauge has hovered below the 50-mark threshold, separating growth from contraction for all but three months since April 2023, according to Bloomberg. The nonmanufacturing PMI, which measures construction and services activity, edged up to an above-consensus 50.3 in August from July’s 50.2. The private Caixin/S&P Global survey of manufacturing activity, which polls smaller, export-oriented firms, expanded to a better-than-expected 50.4 from July’s 49.8 as new orders returned to growth. The Caixin services PMI fell to 51.6 from July’s 52.1 reading, missing economists’ forecasts, as softer new work inflows and higher input costs contributed to lower staffing levels. The mixed PMI readings highlighted the uneven performance of China’s economy as a housing market slump (now in its fourth year) and rising trade tensions have weighed on the growth outlook. Chinese equities retreated as investors digested weak corporate earnings and economic data. The Shanghai Composite Index declined 2.69%, while the blue-chip CSI 300 lost 2.71%. In Hong Kong, the benchmark Hang Seng Index gave up 3.03%. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Reuters, M. Cassar Derjavets. |
