Economic Outlook – 9 October 2022


• Lower job openings, higher jobless claims, and slowing job growth all provided some evidence of a softening labor market, but a lower unemployment rate and solid wage growth clouded the aggregate outlook. Equity markets rallied to start the week with hopes of a ‘Fed pivot’ before retreating on Friday as the jobs report drove yields higher and dampened the prospect of a less aggressive Fed. As of the time of writing, the S&P 500 is still up 2.5% for the week, while the ten-year treasury yield sits at 3.9% – 10bps higher than it was to start the day

• Non-farm payrolls capped the week, coming in slightly above market expectations with 263k jobs added in September. The unemployment rate ticked down by 0.2 percentage points, back to its July low of 3.5% as the labor force was virtually unchanged from its August level. Combined with steady growth in average hourly earnings of 0.3% MoM, it is clear that the labor market remains strong – a sentiment that is not lost on financial markets which are now pricing in a fourth 75bps hike by the Fed in November with 80% probability

• The ISM Manufacturing Purchasing Manager’s Index (PMI), which indicates growth by values of 50 or above, has declined steadily from a level of 60 in November 2021 and is now very close to contractionary territory with a September reading of 50.9. The ISM Services PMI also peaked in November 2021 but has plateaued in the 55-60 range for most of 2022, including the most recent September reading

• Job openings for August declined by 10% to reach their lowest level since June 2021. This brought the ratio of job openings to unemployed individuals down to 1.67 – its lowest level since November 2021. This will be welcomed by Jerome Powell who noted that this ratio was exceptionally high in his September press conference. Jobless claims also displayed signs of softening with a 15.3% increase last week, although this only brings the level of claims back to where it was a month ago. On aggregate, the labor market will need to soften further in order for inflation to sustainably return to the Fed’s target range

• Wage growth did not appear to accelerate during September. Average hourly earnings increased 0.3% during the month, in line with market expectations. On a yearly basis, average hourly earnings growth softened a bit, rising by 5.0%, a touch slower than August’s 5.2% increase. The cool down will come as a welcome development, but wage growth remains well above rates that are consistent with the Fed’s 2% inflation target

• One sector which is showing clear signs of slowing is manufacturing, with the ISM Manufacturing PMI quickly approaching contractionary territory. The index dropped by 1.9 percentage points to 50.9 in September, reaching its lowest level since May 2020. Slowing demand was a leading contributor to the lower reading, with both new orders and new export orders contracting. Some of this demand has shifted into the service sectors, with the ISM Services PMI remaining well in expansionary territory, though it too is showing some signs of slowing. While the reading for September was slightly above expectations at 56.7, a slowdown in the backlog of orders as well as new orders could be indicative of the early signs of peak demand for services

• OPEC+ agreed on Wednesday to slash oil production targets by 2 million barrels a day, citing an expected slowdown in global demand as economies weaken. In response, the Biden administration ordered the release of 10 million more barrels from the US Strategic Petroleum Reserve, which has the capacity to store 714 million barrels but currently holds about 416 million barrels after the release of more than 200 million barrels in 2022. In response to the OPEC+ decision, the White House said nothing is off the table, including the possibility of a ban on US oil exports, while Democratic members of Congress have introduced legislation that would mandate the withdrawal of US troops from Saudi Arabia and the United Arab Emirates. Meanwhile, momentum is building in Congress for the passage of the so-called NOPEC (No Oil Producing and Exporting Cartels) bill which would change US antitrust law to strip OPEC+ nations and their national oil companies of sovereign immunity from lawsuit

• FactSet reports that as Q3 earning season prepares to kick off, the bottoms-up estimate for S&P 500 earnings per share have been cut to $55.51 from $59.44 over the course of the quarter, a decline of 6.6%. Estimates are typically pared back as the quarter progresses, but this cut is significantly larger than average. Earnings are now expected to increase 2.9%, down from a rise of 9.8% seen at the beginning of the period

• Stocks ended higher for the first time in four weeks but surrendered most of their gains, as some data suggested that the economy was not slowing enough to satisfy Federal Reserve policymakers. Energy was the standout performer in the S&P 500 Index as oil prices surged following a decision by major exporters to cut global production

• In terms of data release, NFIB Small Business Optimism is out on Tuesday. August marked the best improvement in small business optimism since June 2021, with the NFIB index rising to 91.8. However, that still marks a relatively low reading, and comes only two months after the lowest reading since 2012. Small business owners may not be facing the same issues they did prior to the Great Recession and the ensuing slow recovery, but today they are in the doldrums of still-high inflation, an “unhealthily” tight labor market and negative feelings about future economic conditions

• CPI print is out on Thursday. Inflation continues to be a difficult beast to tame, as evidenced in the 0.6% monthly gain in core CPI for August. However, some price pressures are abating, and the signs could start to show up in the September release on Thursday. Further, base effects from high monthly readings late last year should soon also help bring the YoY rate of inflation lower


• One of the more controversial pillars of the British government’s recent mini-budget, the elimination of the 45% income tax rate on the nation’s highest earners, was dropped this week amid opposition from members of the ruling Conservative Party. The government also announced that it will release its plan to cut the United Kingdom’s debt at the end of October, accelerating its previously scheduled release date in late-November, along with forecasts from the Office for Budget Responsibility, which will assess the plan’s economic impact. The value of the pound has stabilized on foreign exchange markets in recent sessions, though gilt yields remain volatile. Despite the government’s tax-cut reversal, Fitch Ratings warned it may downgrade the UK’s AA- credit rating due to an expected rise in fiscal deficits over the medium term

• Sterling was slightly higher on Friday but still within striking distance of this week’s low against the dollar while concerns about the budget plan kept weighing on UK assets. Analysts expect the pound to be rangebound ahead of a crucial jobs report later in the day as investors looked for clues on how much further U.S. rates would need to rise. The Bank of England kept taking measures to stabilise financial markets and bought 154.5 million pounds of long-dated British government bonds on Thursday at its daily reverse auction in its first purchases since Monday. UK finance minister Kwasi Kwarteng announced 45 billion pounds of tax cuts on Sept. 23, triggering an abrupt sell-off on bond markets that forced the BoE to intervene. Kwarteng is due to announce a medium-term fiscal plan later this month. The pound was up 0.1% at $1.1168, not far off this week’s low at $1.1086. It ended the week barely flat


• The minutes from the ECB’s September monetary policy meeting showed relatively clear-cut support for aggressive action due to rising concerns about high inflation becoming entrenched. Some policymakers initially backed increasing a key interest rate by 0.50%, but, after discussion, a “very large” number favored taking it up 0.75%. Some rate-setters backed a more modest move because the looming risk of recession might mitigate inflationary pressure and be sufficient to return inflation to target. However, others argued that policy would remain expansionary even after a 0.75% hike and that this larger move would be a major step to frontload the transition from the prevailing highly accommodative policy and ensure a timely return of inflation back to target. Chief Economist Philip Lane, who has a track record of being dovish, proposed the larger move and indicated that further rate rises would be needed. Eurozone inflation accelerated to 10% in September

• A higher-than-forecast jump in eurozone producer prices in August highlighted the upside risk to headline inflation. Factory gate prices rose 5.0% sequentially and 43.3% year over year, mainly driven by surging energy costs. Price pressures continued to mount in September, the final version of S&P Global’s survey of manufacturing and services purchasing managers’ indexes (PMIs) showed. Both the composite input and output price indexes accelerated higher, with companies opting to pass on rising costs to customers. In addition, a growing number of German companies were planning to raise prices, according to the Ifo Institute

• Shares in Europe gained ground, following global peers, on hopes that central banks might start scaling back interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.98% higher. Major indexes also climbed. France’s CAC 40 Index put on 1.82%, Germany’s DAX Index added 1.31%, and Italy’s FTSE MIB Index advanced 1.22%


• Investors sold USD 1.4 billion in Chinese bonds and USD 700 million in stocks in September, according to the Institute of International Finance, in response to the country’s weakening outlook made worse by Beijing’s zero-tolerance approach to the coronavirus. China reported the highest number of new infections in about a month, driven by people traveling over the holiday, sparking a fresh round of lockdowns in several cities. China’s finance ministry has said it will issue an additional CNY 5.5 billion (USD 773.18 million) worth of yuan-denominated sovereign bonds in Hong Kong on October 12

• Beijing has stepped up measures to support the country’s debt-laden property sector ahead of China’s Communist Party congress, which is slated to start October 16 and last about one week. Chinese President Xi Jinping is widely assumed to secure an unprecedented third term at the twice-a-decade gathering, which analysts will parse for clues about China’s future leadership and policy direction

• China’s foreign exchange reserves fell to USD 3.029 trillion at the end of September from USD 3.055 trillion at the end of August. September’s decline marked the third month of losses for China’s foreign exchange reserves, the world’s largest, bringing it closer to the psychologically important USD 3 trillion threshold

• China’s stock markets were shut for the National Day holiday from October 1 to October 7, otherwise known as Golden Week. The weeklong break followed a risk-off September for Chinese assets as foreign investors sold off Chinese stocks and bonds and pushed the offshore yuan to a record low against the U.S. dollar at month-end. The onshore yuan exchange rate ended September near levels not seen since the 2008 global financial crisis, according to Bloomberg

Sources: T. Rowe Price, TD Economics, Wells Fargo, Reuters, MFS Investments, M. Cassar Derjavets