Roll with it (then pivot)

The Fed had been rolling with it in recent months. Labour market data had been robust on the surface, enabling the Fed to keep the focus on the inflation side of its mandate. But more than a few question marks around the true health of the US labour market have emerged. As expected, last week brought the Fed pivot. Fed Chairman?Powell indicated rate cuts are on the way. But many think the Fed is late. And markets think the Fed will be cutting faster than the Bank of England over the coming year. Over here economic growth still looks solid, and while that’s being reflected in a number of sectors, it’s not yet boosting tax revenues.

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Check out a glossary of key terms here.

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What’s the latest in the UK?

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The UK PMI signals healthy growth, retreating inflation, and rising employment. The composite PMI rose to 53.4 in August from 52.8, beating the consensus of 53. It suggests that the UK economy has remained firmly in growth mode in Q3 so far, maybe just not quite the pace we saw in the first half of the year. Within the index manufacturing rose to 52.5 from 52.1. Moreover, the input and the output price balance, including for services, fell in July, indicating softening inflationary pressures. This would undoubtably please the MPC. But the employment balance increased to a 14-month high of 52.5, suggesting a tightening labour market and potential wage growth pressures. Overall, the PMI shows a healthy economic outlook, but it won’t make rate-setters’ lives easier. Read more here.

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CBI orders and prices balances rebound as expected. In August, the CBI orders balance improved to -22 from -32 in July, exceeding the -25 consensus. The average selling prices balance rebounded to +15 from +2, countering last month’s deflation signal, but is still consistent with a low pace of producer price inflation. On the flip side, the balance measuring firms expectations of output growth dropped sharply to +9 in August from +25 in July. Taken together with the PMI the manufacturing sector appears to be in recovery mode, but it looks set to be bumpy. Read more here.

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Money’s too tight to (not) mention. Government borrowing was ￡3.1bn in July, ￡1.9bn higher than last July and the highest July borrowing since 2021. Initial estimates suggest that although tax receipts rose by ￡1.7bn vs. July ’23, Government spending rose more, by ￡3.5bn. That’s largely the result of policy. The reduction in the National Insurance rate in the Conservatives last budget meant NICs receipts fell by ￡1.1bn, or 7.3% vs. July ‘23, while April’s inflation-linked benefit uplift saw social benefit expenditure up ￡2.7bn in July. All this means that borrowing this fiscal year is now almost ￡5bn more than forecast by the OBR. Whatever’s Labour’s inheritance, there’s tough decisions coming in Rachel Reeves' first Budget on the 30th October. Read more here.

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Consumers still waiting for Godot the feel-good factor. More than we’d care to admit, our readiness to splash the cash depends not on rational thought but on what Keynes calls our “spontaneous optimism” or “animal spirits”.? So news that the gradual recovery in consumer confidence took a breather in August – remaining at mid-2021 levels of -13 – suggests the long-awaited household spending recovery may take longer still. Yes, consumers are feeling increasingly optimistic about prospects for their personal finances. But more and more believe now’s a good time to save (up 11pts to +33 in just two months). Read more here.

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The UK property market shows signs of rejuvenation. Rightmove reported a seasonally unusual 1.5% drop in new seller asking prices in August (+0.8% on annual basis), but buyer activity has surged following the Bank of England's recent rate cut. The number of potential buyers contacting estate agents is up 19% compared to last year (was 11% in July). This uptick has prompted Rightmove to revise its 2024 forecast from a 1% fall to a 1% rise in prices. Mortgage rates continue to decline, with the average 5-year fixed rate now at 4.80%. Despite lingering economic uncertainties, experts anticipate a positive autumn market, buoyed by improved home-mover sentiment, and increased political stability. Read more here.

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What’s the latest in the US?

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Time to talk about cuts. Both the minutes of last month's FOMC meeting and Fed Chair Jay Powell's speech pointed to rate cuts in the US. It's been employment data giving the stock markets the jitters, and so it was notable that Powell emphasised that the Fed "neither seeks nor welcomes further cooling in labour market conditions". Unemployment is roughly a percentage point higher, at 4.3%, than it was a year ago.? The Fed clearly feels that's high enough to be consistent with its 2% inflation target and that the risks are predominantly on deterioration, rather than over-heating. Markets continue to expect a cut at its next meeting on 18th September, with the focus of the debate likely to be on the scale, rather than the timing. Read more here.

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What’s the latest in the Eurozone?

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Olympic boost masks underlying weakness. The Eurozone's composite PMI jumped to a three-month high of 51.2 in August from 50.2 in July with the spike driven by French Olympic-fuelled services growth. That pushed the services index to a four-month high of 53.3. However, this headline masks deepening economic weaknesses. New orders continue to decline, particularly in manufacturing where the index fell to 45.6. A silver lining was visible in services input costs, rising at their slowest pace in over three years - potentially reassuring the European Central Bank that inflation will continue to stabilise and strengthening the case for a September rate cut. Read more here.

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European Central Bank rate-setters to approach September meeting with an open mind. The July meeting minutes revealed that the ECB remains cautious around the pace of inflation moderation. But that view was finely balanced against the risk of keeping rates too high and damaging the economy. The ECB signalled that its consideration would be data dependent but won’t be beholden to individual data points. The meeting-by-meeting approach will instead be informed by developments in the labour market, inflation, and growth. And negotiated wage settlement growth falling from 4.7% to 3.6% in second quarter of 2024 supports the case for a rate cut next month. Markets are convinced, with a rate cut all but certain according to pricing. Read more here.