In the last week of August, economic data has mostly surprised to the downside, resulting in a fall in interest rates thanks to lower inflation expectations, and a rise in developed market stocks. The most recent purchasing managers’ indices (PMIs) showed growth momentum weakening across the eurozone, the UK and the US.
US bond yields fall
On 30 August, US Treasury bond yields fell during trading to their lowest level in more than a fortnight. The yield on 2-year US Treasuries is now at around 4.89%, down from its highs close to 5.10% earlier this month, while that on the benchmark 10-year T-note is below 4.12 %, down from 4.32%. These moves follow a run of disappointing economic data. A revised reading for US gross domestic product showed that the economy expanded at an annualised rate of 2.1% in the second quarter of this year, down from the initial estimate of 2.4%.
Recent labour market data point to a slowdown in the US job market. The number of new job openings in the US fell to 8.8 million in July, landing below consensus forecasts at the lowest level in over two years. The job quits rate declined to its lowest level in 30 months (see Exhibit 1), an indication that workers are seeing fewer attractive job opportunities in the US market. Finally, ADP data showed that private payrolls rose by 177 000 jobs in July, the smallest gain in five months and below the 195 000 forecast by economists polled by Refinitiv.
Despite this week’s weaker data, conditions in the US labour market remain tight, with 1.51 job openings for every unemployed person in July, compared to 1.54 in June. That remains the lowest ratio since September 2021 and well above the 1.0-1.2 range considered consistent with a jobs market that is not generating too much inflation. Layoffs are also very low by historical standards.
The Fed will be looking for further evidence of weakness in US labour markets. We anticipate that the non-farm payrolls (see Exhibit 2) report to be published on 1 September will offer further signs of a slowdown in job creation.
If rebalancing (i.e., weakening) of the US labour market continues then core inflation could fall to below 3.5 % by December, alleviating the need for further rate hikes from the Fed.
A survey from the Conference Board on 26 August showed US consumer confidence fell by more than expected in August. Among the possible explanations for the drop are diminishing pandemic-era savings, more expensive credit costs, and the looming resumption of student loan payments this autumn.
Alongside disinflationary winds from China and the eurozone, these forces are weighing on bond yields. Our fixed income teams await confirmation that the previous rise in US bond yields was more of a summer squall than the first inkling of a regime change in the level of yields.
US financial markets will resume full service following the US Labor Day holiday on 4 September.
No policy surprises at Jackson Hole
Addressing the Fed’s economic conference in Jackson Hole, Wyoming, on 25 August, Chair Powell reiterated that US inflation ‘remains too high’ and necessitates the central bank either holding rates at their current level or raising them to bring inflation down to its 2% target.
Markets expect the Fed at its September meeting to hold the federal funds rate steady at its current level of 5.25%-5.50%, but following Powell’s speech, futures markets pushed their expectations for a cut in the federal funds rate to June 2024, a month later than they had previously anticipated.
Today (31 August) saw publication of the latest reading of the Fed’s preferred inflation gauge — the personal consumption expenditure (PCE) price index. Core PCE, which strips out volatile food and energy prices, came in 4.2% higher year-on-year for July, up slightly from 4.1% in June.
More weak data in China
Fresh economic support measures have been announced in China to bolster demand. However, they remain well short of the decisive moves markets see as necessary. China’s finance ministry cut its levy on share trading to 0.05%, the first such reduction since the 2008 financial crisis.
Separately, the China Securities Regulatory Commission, a stock market regulator, promised to slow the pace of initial public offerings as new listings tend to depress valuations and lower liquidity in broader markets.
China’s official manufacturing PMI surprised to the upside for August, with the headline index rising to a five-month high of 49.7 from 49.3 in July. The breakdown was encouraging, showing both the output and new orders sub-indices now back above 50 for the first time since March (and this despite a continued contraction in export orders). The output price index also rose above 50 for the first time since February, suggesting that the producer price index likely rose in August for the first time since last November.
However, tempering the positive news on the manufacturing side were signs of a further moderation in the rest of the economy. The official non-manufacturing PMI fell further to 51.0 from 51.5, a new low for this year. The decline was entirely due to a further drop in the services index to 50.5 from 51.5. While the sub-sector indices for transport-related sectors, accommodation and food services all remained above 55 this month, benefiting from the summer travel boom, the indices for property and financial services stayed below 50.
Confidence has likely been dented further by the news that Country Garden, China’s biggest private developer, missed bond payments this month and disclosed losses of USD 7 billion in the first half of 2023. Missed payments at Zhongrong, a major Chinese investment company, have sparked fears that the crisis in real estate might spill over into the country’s savings products.
Taking a step back, the big picture is that while the manufacturing sector survey was encouraging, activity in China remains weak overall and more policy easing will likely still be needed to revive confidence and push growth back on track towards this year’s 5% target.
Christine Lagarde – The star of Jackson Hole
There was no significant news in the aggregate eurozone inflation print for August. Headline inflation remained flat at 5.3% due to a sharp surge in energy inflation over the month, but everywhere else, inflation is falling. Core inflation declined by 20bp from 5.5% to 5.3%, falling slightly below the consensus expectation, mostly due to services.
At Jackson Hole, all the attention focused on Fed Chair Powell’s speech. In our view, it was ECB President Christine Lagarde who delivered the most interesting speech. She gave no hints of what is to come at the European Central Bank’s next meetings but talked about “policymaking in an age of shifts and breaks,” noting that if we are in a new age, past regularities may no longer be a good guide as to how the economy works.
Markets are pricing in a roughly 50% probability of the ECB raising interest rates at its next policy meeting in September. Our macroeconomic team expect no further hikes and a first cut from the ECB in mid-2024.