Weekly report on world economy

The US labor market is far more robust than anticipated.

The overall consensus among US economic observers has been that the labor market is contracting, which will cause the US economy to grow more slowly. Nonetheless, investors should probably reevaluate their expectations in light of the government's most recent jobs report. The data showed a startling rate of job expansion and a drop in the unemployment rate. In reaction, bond yields went up, stock prices somewhat climbed, and the US currency appreciated compared to other major currencies. The US economy may be set for a soft landing, but not as softly as initially anticipated, according to the jobs report. Let's examine the specifics.

First, two studies on the labor market are released by the US government. A survey of establishments forms the basis of one, while a survey of homes forms the basis of the other. According to the establishment survey, there were 254,000 new employment in September 2024. This month's total was the highest since March and well above investor expectations. Construction accounted for 25,000 of the rise, followed by retail (15,600), professional services (17,000), health care and social assistance (71,700), leisure and hospitality (78,000), and state and local government (29,000).  Other sectors saw either slight increases in employment or, in the case of manufacturing, a decrease. In the meantime, average hourly pay increased by 4% from the previous year—the largest gain since May. Despite decreasing inflation, it appears that the tight labor market is contributing to a little increase in wage rises. If productivity doesn't increase proportionately, the Federal Reserve may become concerned about it.

According to the household survey, which looks at self-employment as well, employment increased at a rate that was over three times higher than the labor force's size. As a result, in September, the unemployment rate dropped from 4.2% in August to 4.1%. The unemployment rate fell for the second month in a row in this one.

How does this affect Fed policy, and why? The day before the jobs report was announced, futures markets were pricing in a 68% chance of a 25 basis point reduction at the Fed's next policy meeting in November. But on the day of the announcement, that likelihood increased to 94%. Stated differently, a lot of investors saw the robust employment expansion as considerably lowering the probability of a 50 basis point reduction. With the jobs report suggesting some acceleration in wage growth, many investors now anticipate more cautious action from the Fed. Furthermore, this viewpoint is in line with previous remarks made by Fed Chair Powell, who hinted at a likely gradual fall in interest rates.

In the meantime, there has been a slight uptick over the last few weeks in the 10-year breakeven rate, which is a measure of bond investors' expectations for average inflation over the following ten years. As of September 10, 2024, the breakeven rate was 2.02%. On October 3, 2024, it stood at 2.21%. Since late July, it has reached its highest point. Given the strength of the US economy, investors have clearly revised upward their forecasts for inflation. They still anticipate comparatively little inflation, though.

US consumer spending and household income are growing slowly.

Real (inflation-adjusted) disposable income and consumer expenditure in the US both grew somewhat and at roughly the same rate in August. After a time of upheaval, it seems that the consumer side of the US economy is returning to normal with modest growth. Real disposable income, or income after taxes and inflation, increased by 0.1% in August compared to July. There was a little decline in the personal savings rate from 4.9% in July to 4.8% in August. It appears that households have stopped cutting back on their savings, which had been a major contributor to the robust expansion in spending.

The rise in service purchases was the only factor contributing to the increase in spending. Spending on durable and nondurable products remained unchanged.

The government also released data on the PCE-deflator, or personal consumption expenditure deflator, which is the Fed's preferred inflation indicator. In August, this measure increased 2.2% over the previous year. This falls comfortably inside the Fed's target range. Furthermore, core prices increased 2.7% from a year earlier when volatile food and energy costs are taken out of the picture; this is still within the Fed's goal range. Prices for non-durables increased by 0.2%, services increased by 3.7%, and durable items decreased by 2.2%.

In spite of the likelihood of interest rate reductions, Fed Chair Powell recently stated that the committee does not feel “like it is in a hurry to cut rates quickly.” In light of this, he proposed that the committee forgo the drastic 50-point decrease that occurred in September and instead return to 25-basis-point cuts in the upcoming months. It is expected that the most recent statistics on consumer expenditure and the PCE-deflator will support this viewpoint.

In conclusion, Chair Powell stated that the rate decrease in September "reflects our growing confidence that strength in the labor market can be maintained in an environment of moderate economic expansion and inflation moving stably down to our target, with an appropriate recalibration of our policy stance.”

Inflation in the Eurozone is still declining.

Within the eurozone, inflation has dropped below the 2% target set by the European Central Bank (ECB). September 2024 saw the lowest increase in three years in consumer prices, rising just 1.8% from the previous year. The European Central Bank has started reducing interest rates, albeit gradually, out of concern that inflation may not be stopped. The most recent report makes a different claim.

With volatile food and energy excluded, core prices increased 2.7% in August 2024 compared to the same month the previous year. The lowest level since February 2022 was reached. Furthermore, the cost of food increased by 2.7%, the cost of energy decreased by 6%, and the cost of non-energy industrial items increased by just 0.4%. Yet, the cost of services increased by 4%, continuing to rise sharply. For a few months, not much has changed in this regard. In fact, in November 2023, service inflation was 4%. The cost of services has played a role in keeping the ECB from cutting interest rates too quickly. However, there is ample justification to keep lowering rates given the fragility of the European economy.

When the ECB meets again later this month, it is generally anticipated that it will lower its benchmark rates by another 25 basis points. Furthermore, this anticipation has grown. Bond yields in the main eurozone economies dropped precipitously after the inflation report, which was expected to signal a decline in short-term interest rates. To top it off, the euro's value plummeted. However, stock prices dropped, probably as a result of negative sentiment regarding the health of the eurozone economy.  

BIS presents a dismal outlook for central bank policies going forward.

A more volatile world economy may result in periodic price spikes occurring more frequently. Nonetheless, trade will act as less of a shock absorber for price swings in a more restrictive trade climate. As a result, interest rate hikes by central banks may become necessary more frequently than they have in the past. The central bank for central bankers, the Bank for International Settlements (BIS), has a deputy general manager who holds this opinion.

Trade conflicts, climate change, and geopolitical war are factors that Andrea Maechler identified as increasing the frequency of abrupt price movements. These shocks are getting "larger and more frequent," according to her. "This may require adjustments to the conduct of monetary policy," the speaker continued. Strong monetary tightening may occasionally be required to maintain the stability of inflation expectations.

She claimed that the issue is that recurring labor shortages are a result of onerous demography. This suggests that unexpected shocks might have a bigger effect than they otherwise would in conjunction with trade restrictions. According to Maechler, "all this suggests that inflation may become more volatile, increasing the likelihood that economies will shift more quickly from self-reinforcing high-inflation regimes to self-stabilizing low-inflation regimes." Monetary tightening may therefore need to occur more frequently than in the past. This study implies that we may be facing a new age of chronically greater inflation if central banks do not respond to periodic shocks.  

Encouraged to reduce monetary easing, the Bank of Japan

Although the recent spike in inflation in Japan has significantly subsided, the country's economy is still not strong. After a protracted period of easing, the Bank of Japan (BOJ) has started to tighten monetary policy, but it has been careful so as not to impede economic recovery. Furthermore, even though it has welcomed the yen's advance in value, it probably wants to avoid a significant increase that would harm export competitiveness.

Governor Asahi Noguchi of BOJ enters this setting. He stated that although an increase in interest rates is necessary, the process should go slowly to prevent negative effects on the economy. "We will adjust the degree of monetary support, albeit at a slow pace, if economic and price developments move in line with our forecasts," the speaker stated.

Shigeru Ishiba, Japan's incoming prime minister, stated that the country's economy is not prepared for additional interest rate rises. "I do not believe that we are in an environment that would require us to raise interest rates further," he stated specifically. Following a discussion with the BOJ governor, he made this statement. 

The yen's value fell to a one-month low as a result of his remarks, while the price of Japanese stocks rose. His remarks were also a little unexpected considering his track record as a monetary policy hawk. Higher interest rates, however, would hardly be conducive to political success considering that he would shortly face voters in a snap election.

The manufacturing sector worldwide is still declining.

According to S&P Global's most recent purchasing managers' indices (PMIs) for manufacturing, the state of the global manufacturing sector appears to be becoming worse. PMIs are predictive metrics used to indicate the industry's future course. Subindices include output, new orders, export orders, price, employment, stocks, and sentiment form their basis. A reading above 50 denotes increasing activity; the greater the number, the quicker the rate of increase.

The composite of the 32 countries' PMIs, known as the global PMI, dropped from 49.6 in August to 48.8 in September, indicating an accelerating downturn in activity. From August to September, every subindex declined, with the majority falling below 50. Just 10 of the 32 countries under study had PMIs above 50; the other 22 had PMIs below 50. Brazil, Spain, the Philippines, India, and Brazil had the highest PMIs. Turkey, France, Austria, Germany, and Austria had the lowest PMIs. 

The UK, India, ASEAN (Southeast Asia), and Taiwan were the main nations/regions where manufacturing activity was increasing. The United States, the eurozone, Japan, China, and South Korea were the main nations or regions experiencing a decline in activity. Only Greece and Spain had increasing activity within the eurozone.

September's US manufacturing PMI decreased marginally to 47.3, indicating a moderate fall. It was the fastest output decline in fifteen months. Employment in the industry decreased as a result of the continued reduction in new orders. In many situations, "spending, investment, and inventory-building have been paused amid the uncertainty caused by the presidential election," according to S&P. Nonetheless, confidence has increased due to the possibility of lower interest rates.

The manufacturing PMI in Europe dropped to 45.0, the lowest level in nine months, for the 20-member eurozone. Germany was the worst affected, with the PMI dropping to 40.6, a 12-month low. Even if Spain's manufacturing industry showed signs of growth, it was far from enough to reverse Germany's manufacturing sector's decline. S&P revealed that new orders are "plummeting fast," which is not good news for output in the near future. Moreover, employment is declining quickly. Additionally, S&P notes that businesses are having supply chain issues, which are causing delays and shortages, in spite of the drop in demand. The manufacturing situation in the eurozone may force the ECB to quicken its monetary easing.

In the meantime, British manufacturing has greatly improved. In September, the PMI decreased but stayed at 51.5, indicating a moderate increase in activity. This was fueled by a comparatively robust domestic market. However, as businesses fear that a tight fiscal strategy will reduce demand, confidence is eroding.

Moving on to Asia, China's manufacturing PMI declined, from 50.4 in August to 49.3 in September, suggesting a slight slowdown in activity. Despite a little rise in output, fewer new orders and export orders were placed. In fact, new orders declined at the quickest rate in the previous 24 months. As a result, there was an additional issue with surplus supplies. Confidence declined and employment declined. The need for additional fiscal stimulus has been fueled by the problem of insufficient demand.

Japan's manufacturing PMI decreased little to 49.7 in September, pointing to a small slowdown in activity. Both new orders and output fell. Although confidence declined to its lowest point in two years, employment increased extremely slowly. Furthermore, factory activity in South Korea, a neighbor, decreased as well after increasing the month before.

India's manufacturing sector was the best performing in the world; its PMI fell marginally to 56.5, suggesting fast growth. While still strong, all subindices showed a slowdown from the prior month. Furthermore, Taiwan's PMI for manufacturing fell to 50.8, indicating a moderate rate of development. In the end, the ASEAN PMI dropped to 50.5, with Singapore experiencing the biggest growth and Myanmar experiencing the biggest loss.