All Eyes on the Fed

As of midday Friday, global equities were up from the prior week as the US Federal Reserve began its rate-cutting cycle. The yield on the US 10-year Treasury note rose to 3.73% from 3.66% a week ago, while the price of a barrel of West Texas Intermediate crude oil ended the week at $72.01. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 16.17 from last week’s 16.38.

MACRO NEWS

Fed begins rate-cutting cycle

The Fed cut the federal funds rate by 50 basis points to a range of 4.75% to 5.00%. The central bank is expected to cut rates by a total of 100 basis points by end of the year, with another 100 basis points slated for 2025. Many had anticipated a smaller rate cut. Fed Chair Jerome Powell’s decision to implement a larger one was aimed at maintaining labor market strength and highlighting the central bank’s commitment to achieving a soft landing. Powell said further rate decisions will be made on a meeting-by-meeting basis, stressing that 50-basis-point cuts don’t reflect a preset pace. Meanwhile, the Bank of England kept rates steady at 5%, stating it will need to see further evidence of inflation remaining stable before cutting rates further. The Bank of Japan decided to hold rates at 0.25% after hiking at its last two meetings.

US retail sales unexpectedly rose in August

US consumers continue to show resilience, with retail sales rising 0.1% month over month in August, higher than expectations of a 0.2% decline. On a year-over-year basis, retail sales grew 2.1%. The decline in auto sales and gasoline was offset by strong online store sales, which saw a 1.4% increase month over month. The decline in many of the segments within retail sales was due more to lower prices than to reduced volume. Control group sales, which are all sales excluding auto receipts, building-material retailers, gas stations, office supply stores, mobile homes and tobacco stores, was largely in line with expectations, rising at a 5.7% annualized pace, the fastest since August 2023. This measure is used to calculate GDP and is a more precise gauge of consumer spending.

Inflation around the globe

Several countries reported inflation data for August. Canada’s headline inflation rose 2.0% year over year — the slowest pace since February 2021 — driven by lower gasoline prices. This fueled hopes that the Bank of Canada will cut rates by 50 basis points at its October meeting. Prices in the United Kingdom rose 2.2% on an annual basis, unchanged from the prior month, though goods inflation dropped further into negative territory. Eurozone inflation eased to 2.2% year over year, driven by services. ?

More weak data out of China?????

China’s industrial production growth slowed to 4.5% year over year in August, lower than last month and below expectations of 4.8%, largely due to weakness in commodities and autos. Weak car sales also contributed to a decline in retail sales growth from 2.7% in July to 2.1% in August. Furthermore, the unemployment rate unexpectedly rose to 5.3% in August from 5.2% in the prior month. The weaker economic data add to signs of a further slowdown in GDP growth in the third quarter as well as the increased risk of the nation failing to achieve its 5% growth rate target for 2024.

QUICK HITS

Former President Trump was the target of an apparent assassination attempt over the weekend while he was golfing at his club in West Palm Beach, Florida, the FBI said.

The September NY Empire Manufacturing Index unexpectedly grew for the first time since November 2023. The survey came in at 11.5, far ahead of expectations and August’s -4.7. Growth was seen in new orders and shipments while employment continued to decline.

The Bank of America’s Global Fund Manager Survey shows global sentiment improving for the first time since June, with 79% of participants expecting a soft landing while two-thirds think a recession is unlikely.

Canada’s August housing starts came in at 217,405, down 22% from July and behind expectations of 279,804.

August US industrial production rose 0.8%, ahead of expectations of a 0.3% increase. July’s data were revised lower to a decline of 0.9% from a decline of 0.6%.

Germany’s ZEW sentiment reading had investor confidence in the economy at its lowest level in almost a year as the expectations gauge declined to 3.6 in September from 19.2 in August.

Japan’s exports rose 5.6% year over year in August, well below expectations of 10.6% and last month’s revised 10.2%. This marks the ninth straight decrease in exports.

Bank Indonesia surprised with a 25-basis-point rate cut on Wednesday, despite the market expecting no change. This brings its base interest rate to 6% and comes only weeks after Bank Indonesia’s governor, Perry Warjiyo, said the central bank would wait until Q4 before cutting.

August’s US housing starts beat expectations, rising 9.2% month over month. Building permits also came in better than expected, increasing 4.9% month over month. The report highlighted that lower interest rates, for the first time since May, are leading to a positive view on future new home sales among builders. Meanwhile, August existing home sales came in below expectations, falling 2.5% month over month despite declining mortgage rates.

US initial jobless claims for the week ending 19 September were 219,000, below expectations and the lowest level since May. Continuing claims also came in below expectations, at 1,829,000.

New Zealand’s Q2 GDP declined 0.2% quarter over quarter, less than the projected 0.4% decline. The economy shrank 0.5% year over year. While economic growth declined, growth among seven out of sixteen industries increased, with manufacturing rising the most.

Australian employment rose 47,500 month over month in August, well ahead of expectations of 26,400. The unemployment rate remained at 4.2%.

Norway’s central bank left its policy rate unchanged at 4.5%, as expected. Norge Bank said rates were likely to remain at this level through year-end. However, the policy rate forecasts indicate cuts beginning in Q1 2025.

The South African Reserve Bank cut rates by 25 basis points to 8%, the first rate cut since 2020.

THE WEEK AHEAD

Highlights of economic data and events scheduled for next week:

Monday: The preliminary flash purchasing managers’ indices for September will be released for several regions. Consensus estimates for composite PMIs are as follows: US, 55.4; UK, 53.4 eurozone, 50.4.

Tuesday: The Reserve Bank of Australia is expected to maintain its official cash rate of 4.35%. The US Consumer Confidence Index data for September will also be released and are expected to remain unchanged from the prior month.

Thursday: The United States will release the final Q2 real GDP, which is estimated to be 3%. August durable orders are estimated to be -2.8% from 9.8% the prior month. Pending home sales are expected to be 2% month over month.

Friday: The August US Personal Consumption Expenditures is due and estimated to be 2.7% year over year. Prices in France are expected to rise 1.8%, less than 2.2% in the prior month. Germany’s unemployment rate in September is projected to be unchanged from the prior month, at 6%.

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Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.

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