Swiss CPI rose 0.2% mom in August, matched expectations. Core CPI (excluding fresh and seasonal products, energy and fuel) rose 0.1% mom. Domestic products prices was flat 0.0% mom. Import products prices rose 0.8% mom.
Compared with the same month a year ago, CPI was unchanged at 1.6% yoy, above expectation of 1.5% yoy. Core CPI slowed from 1.7% yoy to 1.5% yoy. Domestic products prices slowed from 2.3% yoy to 2.2% yoy. Imported products prices rose from -0.6% yoy to -0.3% yoy.
Today, the financial markets are keenly focused on US Non-Farm Payrolls data, which is expected to show growth of 170k jobs in August. While unemployment rate is anticipated to remain steady at 3.50%, average hourly earnings are projected to grow by 0.3% mom. However, related data paint a murkier picture, suggesting that risks could be skewed to the downside for the NFP report. Yet, it’s unsure if the impact on the markets would last long.
Earlier this week, ADP private job growth came in at 177k, slightly missing expectations and dampening the overall employment outlook. Moreover, JOLTS data showed that job openings have plummeted to their lowest level since March 2021, and consumer confidence took a significant hit, dropping from 114.0 to 106.1. The employment components of ISM Manufacturing and Non-Manufacturing reports are not yet available, leaving a gap in the data to fully assess labor market conditions.
Traders have been notably indecisive recently. While it is almost certain that Fed will pause its tightening this month, the likelihood of a rate hike by year’s end seems to be teetering around 50% mark. Market participants are unlikely to get more clarity until the Fed releases its new economic projections and dot plot on September 20, alongside the rate decision.
As for Dollar Index, it’s clearly losing upside momentum as seen in D MACD. While another rise cannot be ruled out as long as 102.84 support holds, strong resistance is likely at 38.2% retracement of 144.77 to 99.57 at 105.37 to limit upside. Break of 102.84 will argue that the corrective rally from 99.57 has completed earlier then expected.
Chinese Yuan saw a sharp uptick after PBoC announced a substantial 200 bps cut in foreign exchange reserve requirement ratio to 4% from 6%, effective September 15. According to PBoC, the move aims to “improve financial institutions’ ability to use foreign exchange funds.”
This RRR cut is set to release approximately USD 16.4B in foreign exchange, based on China’s FX deposits standing at USD 821.8B as of end-July. Market analysts also note that the FX RRR reduction could have the added effect of lowering dollar funding costs in the interbank market, thereby alleviating some of downward pressure on Yuan.
On the technical front, USD/CNH saw a drop to as low as 7.2387 following the announcement, but it has since recovered most ground. Despite the knee-jerk reaction, the broader uptrend from 6.6971 appears to remain intact. Should it break 7.3103 minor resistance, this would signal completion of the correction from 7.3491 and likely pave the way through 7.3491 for testing 7.3745 high.
However, considering bearish divergence condition in D MACD, strong resistance is likely at 61.8% projection of 6.8100 to 7.2853 from 7.1154 at 7.4091 to limit upside, to complete the five wave sequence from 6.6971.
While technical landscape seems to suggest further upside for USD/CNH, it is crucial to note that these views could be rendered academic at a moment’s notice. The Chinese authorities may implement various intervention measures any time, adding an extra layer of unpredictability to the equation.
China’s Caixin PMI for manufacturing defied expectations in August, rising from 49.2 to 51.0 and beating market forecasts of 49.4. This indicates a return to expansionary territory. The report noted several key improvements, including increases in output, new business, and a rebound in employment levels. Significantly, input costs rose for the first time since February, suggesting an easing in deflationary pressures.
Wang Zhe, Senior Economist at Caixin Insight Group, elaborated on the data, stating, “In August, the manufacturing sector showed overall improvement. Apart from sluggish exports, the gauges for supply, total demand, and employment were all in expansionary territory.” Wang also noted that the “slight rise in prices buffered the pressure of deflation” and that logistics remained smooth.
However, caution still underlines the market’s medium-term outlook. According to Wang, “Looking ahead, seasonal impacts will gradually subside, but the problem of insufficient internal demand and weak expectations may form a vicious cycle for a longer period of time.” Wang also warned that “combined with the uncertainty in external demand, the downward pressure on the economy may continue to increase.”
Japan’s PMI Manufacturing remained stagnant at 49.6 in August, indicating a third consecutive month of sectoral contraction. According to Usamah Bhatti at S&P Global Market Intelligence, the rate of deterioration was “unchanged from July and only fractional,” primarily due to a “slower reduction in new orders.”
The report highlighted concerning trends in cost pressures. “Input prices rose at a quicker pace for the first time since September 2022, pushing the rate of input cost inflation to a three-month high,” Bhatti stated. The escalation in input costs was specifically attributed to high raw material prices, labor costs, and a weakened yen.
Despite these pressures, the report found that manufacturers increased their selling prices at the “weakest rate in two years,” indicating that companies may be absorbing the additional costs instead of transferring them to consumers.
The employment situation also emerged as a point of concern. Bhatti noted, “The rate of job creation broadly stalled, with the latest increase the slowest recorded in the 29-month sequence.”
In a cautious tone, ECB Vice President Luis de Guindos said yesterday that “For September, the decision is open,” dropping no hint on whether the central bank would deliver another rate hike, or pause.
Nevertheless, de Guindos was clear about the new economic projections to be published at the September meeting. He noted, “forecasts for economic growth are worse than we had projected in June, while inflation projections are similar to what we had in June.”
De Guindos added that the ECB is “entering the final stretch” of its tightening cycle. He put emphasis on second-round effects and inflation expectations as the factors for any future monetary policy decisions.
US initial jobless claims dropped -4k to 228k in the week ending August 26, slightly above expectation of 227k. Four-week moving average of initial claims rose 250 to 237.5k.
Continuing claims rose 28k to 1725k in the week ending August 19. Four-week moving average of continuing claims rose 8k to 1704k.
US personal income edged up by 0.2% mom, or USD 45.0 billion, missing the anticipated 0.3% increase. The modest gain in income primarily reflected an uptick in compensation, which was partially offset by a decline in personal current transfer receipts.
Conversely, personal spending outperformed expectations, registering a 0.8% mom rise, or an increase of USD 144.6 billion, compared to the projected 0.7%. This growth was predominantly driven by a USD 102.7 billion expansion in spending on services and a USD 41.9 billion increase in goods expenditure.
PCE price index and Core PCE price index (excluding food and energy), both rose 0.2% mom, matching market expectations. The components within the inflation basket displayed a mixed pattern, with prices for goods falling by -0.3% and prices for services rising by 0.4%. Additionally, food prices saw a modest increment of 0.2%, while energy prices edged up by 0.1%.
On a year-over-year basis, PCE price index climbed from 3.0% yoy to 3.3% yoy, while Core PCE price index ascended from 4.1% to 4.2%, both in alignment with market predictions. A disaggregated look at the year-over-year data reveals that prices for goods dropped by -0.5%, and prices for services surged by 5.2%. Meanwhile, food prices increased by 3.5%,and energy prices dipped by a notable -14.6%.
According to the minutes, all members supported the 25 basis point rate increase. Nevertheless, some members expressed a preference initially for not raising key ECB interest rates further, citing risks of stronger-than-anticipated transmission of rate hikes into the economy.
Interestingly, the account captured diverging views on the necessity for another rate hike in September. On one side, it was argued that if inflation did not decline as swiftly as expected, interest rates would need to be adjusted further to ensure a timely return to the 2% target.
On the other side, some members posited that the September ECB staff projections could potentially show a downward revision in the inflation path, making another rate hike in September unnecessary.
ECB Governing Council member Robert Holzmann said he has yet to make a decision about the upcoming September meeting but pointedly did not rule out the possibility of an interest rate hike.
“We are not yet at the highest level; it could be that we do another hike or two,” Holzmann commented, offering a glimpse into his thoughts on the current stance of ECB monetary policy.
However, Holzmann also put forth a scenario that could lead to an earlier-than-expected easing of rates. “If we were to move this year to above 4% … and inflation comes down, then we could be able, perhaps, to change it already to lower rates in 2024. If that’s not the case, we’ll have to wait for 2025,” he said.
In August, Eurozone’s CPI defied market expectations by remaining unchanged at a 5.3% yoy, contrary to anticipated slowdown to 5.1% yoy. Core inflation, which excludes energy, food, alcohol, and tobacco, did slow down, but only to match expectations, declining from 5.5% yoy to 5.3% yoy.
A breakdown of the main components contributing to Eurozone’s inflation rate reveals a mixed bag. Food, alcohol, and tobacco are expected to register the highest annual rate in August at 9.8%, albeit lower than the 10.8% seen in July. Services come next, slipping slightly from 5.6% to 5.5%, followed by non-energy industrial goods which also dipped from 5.0% to 4.8%. Notably, energy costs seem to have eased their downward trend, registering at -3.3% compared to -6.1% in the previous month.
In a speech in South Africa today, BoE Chief Economist Huw Pill underscored the importance of seeing “the job through” to ensure a “lasting and sustainable return of inflation to the 2% target,” highlighting the critical balance the bank must strike as it’s now in the territory of restrictive policy.
Pill acknowledged the perils of “doing too much,” and “inflicting unnecessary damage on employment and growth”.
Nevertheless, the present emphasis, he noted, is on maintaining “sufficiently restrictive” policy for “sufficiently long” to assure a sustainable return to the inflation target, echoing the language used in the MPC’s last statement.
ECB Executive Board member Isabel Schnabel said in a speech that despite decline in headline inflation, largely due to unwinding of previous supply-side shocks, “underlying price pressures remain stubbornly high,” with domestic factors now becoming the main drivers of inflation.
Given this backdrop, Schnabel emphasized the necessity of maintaining “sufficiently restrictive monetary policy” to steer inflation back to target. She advocated for a data-dependent approach, stating that the bank will continually assess whether current policy is effective in ensuring “a sustained and timely return of inflation to our 2% target.”
To guide this assessment, Schnabel pointed to the need for a comprehensive risk analysis that looks beyond baseline inflation forecasts. This approach accounts for an “exceptionally large degree of uncertainty” in medium-term inflation projections, with risks on both the upside and downside.
Upside risks include stronger-than-expected growth in unit labor costs, firmer corporate pricing power, and the potential for new adverse supply-side shocks. Conversely, downside risks include possibility that impact of current monetary policy may become more pronounced over the medium term.
Notably, Schnabel also raised the issue of real risk-free rates, which have declined recently as investors reassess their expectations for economic growth and inflation. She warned that this decline could potentially “counteract” the ECB’s efforts to control inflation effectively.
In a set of prepared remarks, Atlanta Fed President Raphael Bostic noted emphasizing that the current restrictive stance is appropriate. He urged for a cautious and patient approach, warning against the potential for “unnecessary economic pain” if the Fed tightens policy too aggressively.
Importantly, Bostic clarified that his endorsement for a patient approach should not be interpreted as support for easing monetary policy in the near term. He stated, “that does not mean I am for easing policy any time soon.”
He argued that Fed must remain “resolute” in keeping policy tight until it is clear that inflation is moving towards the 2% target within a reasonable time frame. “I believe policy is already restrictive enough to get us there,” he added.
China’s official PMI Manufacturing for August rose slightly to 49.7, surpassing market expectations of 49.5. Despite the increment, this marks the fifth consecutive month that the metric is below the 50-threshold, signaling a contraction in the manufacturing sector.
Key sub-indexes within the PMI data painted a mixed picture. Production sub-index saw improvement, rising from 50.2 in July to 51.9 . Similarly, the gauge for new orders nudged up to 50.2 from 49.5. On the downside, new export orders sub-index stayed low at 46.7, though it was slightly up from 46.3 , marking its fifth consecutive month in contraction territory.
Manufacturers’ business expectations did see some improvement, rising from 55.1 to 55.6, indicating a slight uptick in future outlook despite current headwinds.
Zhao Qinghe, a senior official from China’s National Bureau of Statistics, commented on the situation. “The survey results show that insufficient market demand is still the main problem that enterprises are facing, and the foundation for the recovery and development of the manufacturing industry needs to be further consolidated,” he said.
Meanwhile, PMI Non-Manufacturing fell from 51.5 to 51.0, missing market expectations of 51.1, although it still remains in the expansionary territory above 50.
New Zealand’s ANZ Business Confidence index showed a marked improvement in August, rising from -13.1 to -3.7. The data suggests a positive shift in the economic outlook among New Zealand businesses. Own Activity Outlook also jumped from a tepid 0.8 to a robust 11.2.
Several other sub-indicators within the report signaled optimism. Export intentions rose from 1.5 to 7.5, indicating that businesses are more confident about overseas demand. Investment intentions climbed from -3.3 to -1.3, suggesting that companies are less hesitant about capital expenditures. Employment intentions also saw a notable uptick, moving from -1.6 to 4.6, pointing to potential job market expansion.
On the inflationary front, businesses appear to be less worried. Cost expectations decreased from 80.6 to 75.3, pricing intentions fell from 48.1 to 44.0, and inflation expectations eased marginally from 5.14 to 5.06. This cooling in inflationary pressure might be a welcome sign for both the market and RBNZ.
In their commentary, ANZ stated: “Many firms appear to have been pleasantly surprised at how well demand has held up, considering; and the Reserve Bank has stopped raising the OCR (Official Cash Rate), (while reserving the right to change their minds), which may be creating a sense that the worst is over.”
In a marked contrast to fellow BoJ board member Naoki Tamura’s recent remarks, Toyoaki Nakamura, known for his dovish stance, stressed the need for a more cautious approach towards tightening Japan’s monetary policy. Speaking at an event, Nakamura noted, “Sustainable and stable achievement of our 2% inflation isn’t in sight yet. We therefore need more time before shifting to monetary tightening.”
Nakamura emphasized the necessity for “close scrutiny of conditions and cautious decision-making” when it comes to modifications in Japan’s ultra-loose monetary policy. He further cited weakening economic signs in China and potential ripple effects of aggressive US interest rate hikes as risks clouding Japan’s economic outlook.
Interestingly, Nakamura was the sole dissenting voice last month against the BoJ’s decision to loosen its grip on yield curve control, underscoring his position as the board’s most dovish member. His comments are in stark contrast to those of board member Naoki Tamura, who expressed optimism yesterday that BoJ could have sufficient data by the first quarter of 2024 to assess whether the 2% inflation target could be met sustainably.
Japan’s industrial production took a hit in July, falling by a worse-than-expected -2.0% mom, versus consensus forecast of -1.4% mom. The seasonally adjusted production index stumbled to 103.6, based on 2020 base of 100.
Production was primarily pulled down by substantial drops in electronic parts and devices, which declined -by 5.1% mom. Also, production machinery output shrank by -4.8% mom, with semiconductor manufacturing equipment segment plunging a stark 16.4% mom. However, not all was grim. Production of automobiles showed a modest uptick of 0.6% mom, attributed to the easing of supply chain bottlenecks.
A Ministry of Economy, Trade, and Industry official remarked that the slump in output across various sectors was largely due to diminishing domestic and overseas orders. Consequently, METI has revised its assessment of industrial output from “showing signs of moderately picking up” to “fluctuated indecisively.”
Despite the grim industrial landscape, manufacturers surveyed by METI are optimistic, projecting a 2.6% rise in output for August and a 2.4% increase in September.
In contrast to the industrial sector’s lackluster performance, retail sales exhibited considerable strength. Sales surged 6.8% yoy in July, beating expectations of a 5.4% yoy increase. This marks the 17th consecutive month of expansion since March 2022. Additionally, retail sales increased 2.1% mom in July, recovering from a -0.6% mom decline in the previous month.
August’s US ADP Private Employment report showed a lower-than-expected gain of 177k jobs, falling short of the consensus forecast of 205k. The data, which is often viewed as a precursor to the official non-farm payrolls report, painted a nuanced picture of the American labor market.
By sector, goods-producing sectors added 23k jobs, while service-providing sectors accounted for 154k new positions. By establishment size, small companies added 18k jobs, medium-sized companies contributed 79k, and large companies rounded out the additions with 83k.
Compounding the modest employment gains was a noticeable slowdown in wage growth. For those staying in their current roles, the year-over-year pay increase was 5.9%, marking the weakest growth since October 2021. Meanwhile, job changers experienced a deceleration in pay growth to 9.5%.
Nela Richardson, chief economist at ADP, provided context for these numbers. “This month’s figures are consistent with the pace of job creation before the pandemic,” she said. “After two years of exceptional gains tied to the recovery, we’re moving toward more sustainable growth in pay and employment as the economic effects of the pandemic recede.”
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Eurozone PMI manufacturing finalized at 43.5, glimmers of hope despite persistent weakness
Eurozone PMI Manufacturing was finalized at 43.5, marking a slight uptick from July’s 38-month low of 42.7. Country-level readings reveal that Germany, the largest economy in the Eurozone, remains a cause for concern. Although it reported a two-month high, its PMI of 39.1 underscores its struggles. Spain (46.5), France (46.0), the Netherlands (45.9), Italy (45.4), and Austria (40.6) remained in contraction. Greece and Ireland were above 50-mark at 52.9 and 50.8 respectively.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented on the situation, stating, “These numbers aren’t as terrible as they might look at first glance.”
Despite the obvious weakness signaled by a PMI below 50, de la Rubia pointed out that all twelve subindices either improved or remained stable. “This indicates that the downward trend from the past few months is starting to lose steam across the board,” he added.
However, the cloud over Germany continues to darken. “Germany remains a negative outlier among the big euro countries,” de la Rubia noted. This latest data will likely rekindle debates about Germany being the “sick man of Europe”, even though it remains one of the most diversified economies in the region.
Full Eurozone PMI manufacturing release here.