North American News
US Indices Dip Despite Strong Services Sector Performance – The ‘Good News is Bad News’ Conundrum
- US equities close
- Dow -198.78 at 34443.19
- Nasdaq -148.48 at 13872.48
- S&P -31.35 at 4465.48
Today’s trading session began with a mixed sentiment, as there was a lack of strong conviction from investors on either side of the market. This resulted in the major stock market indices trading close to their closing levels from the previous day. However, things took a downturn as market interest rates reacted to the ISM Services PMI data.
The ISM Services PMI showed a notable increase, rising from 52.7% to 54.5%, indicating a positive outlook for the services sector. Additionally, the Prices Index, which measures inflationary pressures, increased from 56.8% to 58.9%. This combination of a stronger PMI and rising prices suggests that the Federal Reserve may be inclined to keep interest rates elevated for a longer period.
Specifically, the 2-year Treasury note yield, which is highly sensitive to changes in the federal funds rate set by the Fed, was at 4.95% before the release of the data. It subsequently increased by eight basis points to settle at 5.04%. Similarly, the 10-year Treasury note yield, which was at 4.25% prior to the data release, settled at 4.29%.
In summary, the mixed start to the trading day evolved into a broader market retreat as rising interest rates, driven by strong ISM Services PMI and inflationary pressure, led investors to believe that the Federal Reserve might keep rates higher for a more extended period.
US August ISM services 54.5 vs 52.5 expected
- August 2023 US services survey from the Institute for Supply Management
- Prior was 52.7
Details:
- employment index 54.7 versus 50.7 prior
- new orders index 57.5 versus 55.0 prior
- prices paid index 58.9 versus 56.8 prior
- new export orders 62.1 versus 61.1 prior
- imports 52.3 versus 52.3 prior
- backlog of orders 41.8 versus 52.1 prior
- inventories 57.7 versus 50.4 prior
- supplier deliveries 48.5 versus 48.1 prior
- inventory sentiment 61.5 versus 56.6 prior.
Comments in the report:
- “Restaurant sales and traffic trends remain positive year over year and compared to pre-pandemic (levels). Hiring is stable, with quality employees available. New California regulations in July included (municipal) minimum wage hikes and implementation of Proposition 12 (a farm animal health and welfare legislation), resulting in much higher pork prices.” [Accommodation & Food Services]
- “Sales on a national level have been strong. Commodity material prices remain stable, and we are finding areas for cost reductions. Material availability has returned to pre-COVID-19 levels.” [Construction]
- “While labor costs continue to soften, costs of pharmaceuticals and supplies remain stubbornly high, negatively impacting operating margins. Supply chains are operating consistently, though some categories of supply remain constrained. Patient volumes and revenues were down slightly (for the month) but appear to be rebounding as back-to-school season approaches. Forecast remains cautiously optimistic.” [Health Care & Social Assistance]
- “The supply chain challenges affect a portion of our buys, as they include products and components made outside of the U.S. and are subject to shipping delays and issues. The prices of materials and other products have slightly increased. Distribution of some direct materials has been altered due to a key supplier financial issue.” [Management of Companies & Support Services]
- “Steady oil and gas production and sales volume. Declining commodity prices seem to have bottomed out.” [Mining]
- “The summer slowdown is similar to those in recent years due to vacations. Third-quarter projections are close to expectation. Inflationary costs are mostly in fuel and fuel-related commodities, having an adverse effect on profits.” [Professional, Scientific & Technical Services]
- “Prices have settled. Warnings of a possible recession in 2024 are not being taken very seriously by top management. The same experts warned that the country would be in a recession by now. Our general feeling is that the (Federal Reserve’s) strategy for taming inflation and building a soft landing for the economy is working better than expected. The city has proposed reducing its municipal tax for the fiscal year beginning October 1.” [Public Administration]
- “Overall conditions seem quite good, although there is definite slowdown in residential construction driven by rapidly increasing interest rates.” [Real Estate, Rental & Leasing]
- “Business activity continues to be lower year over year, but we are meeting the year-to-date forecast.” [Retail Trade]
- “Utility contractors in high demand.”
S&P Global final August US services PMI 50.5 vs 51.0 prelim
- The final reading from S&P Global on the US services sector, along with the composite index
- Lowest in seven months
- A weaker rise in output was primarily driven by a renewed contraction in new business
- New orders fell for the first time in six months
- Prelim was 51.0
- Prior was 52.3
- Composite final 50.2 vs 50.4 prelim (prior 52.0)
There are risks to the downside for the ISM services data at the top of the hour.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:
“The survey data send a hint of rising stagflation risks, as stubborn price pressures are accompanied by a near-stalling of business activity.
“The PMI numbers for the third quarter so far point to a faltering of economic growth after a robust second quarter, as a renewed manufacturing downturn is accompanied by a deteriorating picture in the service sector.
“While a post-pandemic revival of travel, recreation and hospitality spend contributed to an improved economic performance in the spring and early summer, this tailwind is losing momentum. Companies increasingly report customers to have become reticent to spend amid gloomier prospects as higher interest rates and the increased cost of living take their toll. However, financial services and business services providers are also increasingly feeling the pinch from weakening demand.
“Persistent wage growth is meanwhile being accompanied by renewed upward pressure on energy, fuel and transport costs, as well as some broader firming of materials prices, driving cost growth higher. Competitive forces have kept a lid on selling price inflation, but the rate of increase of service sector charges remains elevated to the extent that consumer price inflation is likely to remain stubbornly above the Fed’s target in the coming months.
“The key data to watch in the coming months will be the degree to which any further waning of demand for services translates into lower pricing power and reduced inflation.”
US July international trade balance -65.0B vs -68.0B expected
- US July 2023 trade balance data
- Prior was -65.5B (revised to -63.7B)
- Goods trade -90.92B vs -91.18B prior
US MBA mortgage applications w.e. 1 September -2.9% v +2.3% prior
- Latest data from the Mortgage Bankers Association for the week ending 1 September 2023
- Prior +2.3%
- Market index 183.6 vs 189.0 prior
- Purchase index 141.9 vs 144.9 prior
- Refinance index 388.1 vs 407.1 prior
- 30-year mortgage rate 7.21% vs 7.31% prior
Beige Book: Most Districts indicated economic growth was modest
- Highlights from the Fed’s anecdotal report on the economy
- Most Districts indicated economic growth was modest during July and August
- Consumer spending on tourism was stronger than expected but other retail spending continued to slow, especially non-essential
- Some Districts highlighted reports suggesting consumers may have exhausted their savings and are relying more on borrowing to support spending
- New auto sales did expand in many Districts, but contacts noted this had more to do with better availability of inventory rather than increased consumer demand.
- Manufacturing contacts in several Districts also noted that supply chain delays improved
- New orders were stable or declined in most Districts, and backlogs shortened
- Nearly all Districts reported the inventory of homes for sale remained constrained
- Some Districts reported higher delinquencies on consumer credit lines
- Job growth was subdued across the nation
- Nearly all Districts indicated businesses renewed their previouslyunfulfilled expectations that wage growth will slow broadly in the nearterm.
- Most Districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-goods sectors.
Senate votes to confirm Philip Jefferson as Fed vice chair
- Jefferson gets Senate approval
Fed’s Collins: IT’s time for monetary policy to be patient and deliberate
- Comments from the Boston Fed President
- Fed should ‘allow time’ when making monetary policy choices
- Too soon to say inflation sustainably moving back back to target
- Fed must balance lowering inflation against slowing economy too much
- Fed can likely achieve goals without causing notable economic pain
- Still too much job market demand
- Wage growth remains elevated
- Core services inflation moderation has been modest
- Expects economy to slow into end of year
Key passage:
The risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown in activity than is needed to restore price stability. This context calls for a patient and careful, but deliberate, approach to policy, allowing time to assess the effects of policy actions to date, and then acting appropriately. Importantly, patience does not mean indecision, or a change in the commitment to the 2 percent target, but rather time to ensure that the economy is on a clear trajectory to achieve price stability.
US Commerce Sec expects no change to Trump’s China tariffs until review completed
U.S. Secretary of Commerce Gina Raimondo comments from an interview with CNBC:
- says does not expect any changes to the US tariffs imposed on China by the Trump administration until the ongoing review but the US Treasury is complete
Morgan Stanley on sticky US inflation: “more worried about 2024 than about 2023”
An analyst at Morgan Stanley Investment Management is worried about persistent US inflation:
- “I’m more worried about 2024 than I am about 2023”
- “Right now, the monthly year-over-year inflation numbers are coming down, but that’s going to get tougher next year. The bar is going to get harder, and a time when the Fed is still pressing on this 2% goal, I see that as a tough thing to overcome.”
As for US equities, though:
- the election could delay a selloff, with excessive stimulus taking hold in Q4 of ’24
Comments via NBC report.
Morgan Stanley says US investors are pricing in too much optimism in equities
Michael Wilson, Morgan Stanley’s chief investment officer, sounding the warning on US stock prices again.
Summary points from a client note:
- Breadth remains weak for S&P 500 and Nasdaq
- AI beneficiaries continue to support
- US investors are pricing in too much optimism in the stock market
- economic growth is set to be weaker than expected
- “At current prices, markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year, especially for the consumer, which aligns with our economists’ forecast for slowing PCE growth”
- Personal Consumption Expenditures (PCE) index slowed considerably in the second quarter of 2023 and appears to be getting weaker
- “The rally in some of the major averages over the last few weeks may have investors feeling a bit better again but given the underlying weakness in breadth and in some of the more cyclical parts of the market, we think that optimism should be faded”
Expect worry over a US government shut down to begin again – September 30 funding deadline
Remember all the folks screaming about how awful a US government shutdown and potential default would be?
And then Fitch listened and downgraded the US on governance worries?
And then all those folks screaming about a default laughed at Fitch?
Anyway, here we go again. The upper house of the US Congress has returned to session, while the lower house comes back on September 12.
BoA analysts on what’s ahead:
- Funding the government for next year is perhaps number one on its to do list as the fiscal year ends on September 30. Absent a funding bill or continuing resolution, the Government would shutdown at the end of the month.
- As it stands today. we maintain our outlook for Congress to pass a continuing resolution averting a shutdown on October 1. With so little time before the fiscal year is up. leaders from both parties have signaled that a continuing resolution would likely be needed to avoid a shutdown and provide more time to finalize appropriations. Indeed, even House Speaker Kevin McCarthy (R-CA) has voiced support for a stopgap bill.
Which all sounds encouraging, right? BoA is not so sure, saying that the likelihood of a shutdown is:
- close to a coin flip
- While party leaders have publicly supported using a continuing resolution to avoid a shutdown, not all members of Congress are on board. Critically, the House Freedom Caucus—a group of about three dozen conservative Republicans—has said they would only support a continuing resolution that includes the Secure the Border Act of 2023 and other demands that are likely non-starters in the Senate.Given Republicans slim majority in the House, the stance of the House Freedom Caucus greatly increases the risk of a government shutdown, in our view.
- If there is a shutdown, we expect it to be brief
Bank of Canada holds rates at 5.00% as expected
- Highlights from the Bank of Canada rate decision on Sept 6, 2023
- Prior was 5.00%
- The Canadian economy has entered a period of weaker growth
- The tightness in the labour market has continued to ease gradually
- Recent CPI data indicate that inflationary pressures remain broad-based
- With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again
- With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5%
- Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed.
- growth prospects in China have diminished
- In the United States, growth was stronger than expected
The market was pricing in a 14% chance of a rate cut ahead of the decision.
Canada July trade balance -0.99B vs -3.65B expected
- Canada July trade balance
- Prior was -3.73B (revised to -4.928B)
Commodities
Silver breaks to near $23 due to strong US Dollar, Services PMI eyed
- Silver price extends its five-day losing spell amid firmer US Dollar.
- The appeal for the US Dollar has improved as fears of a recession in the US economy are mild.
- Silver price corrects vertically to near the 200-day EMA, which trades around $23.30.
Silver continues its five-day losing spell after slipping below Tuesday’s low of $23.48 in the early New York session. The white metal faces immense selling interest as the US Dollar remains resilient due to deepening global recession fears.
Investors continue to pump money into the US Dollar as developing economies are expected to report recession due to restrictive monetary policy by the Western central bankers. The appeal for the US Dollar has improved as fears of a recession in the United States economy are mild. Disappointed Chinese economic growth is the major driver of strength in the US Dollar.
Oil climbs for the ninth consecutive day
- Crude oil is on fire
Oil is getting harder to ignore, both as a macro factor and for its own sake. WTI settled up 85-cents today to $87.54. It’s another high settlement dating back to November.
The breakout from the 2023 range has been confirmed now and the only question is where it tops out. Obviously with 9 days of gains, there are some overbought conditions so a return to $85 would be healthy. However whenever profit taking seems to hit, there are fresh bids. Even today with the US dollar strengthening, oil rallied anyway as Saudi Arabia raised prices for its crude.
Looking out the curve, December 2024 crude rose 17-cents today to $78.10, adding to the spread and backwardation. Both are seen as bullish signs.
Brent settled today up 56-cents to $90.60.
On the macro side, higher oil prices should keep the Fed in a higher-for-longer stance but some might argue that core inflation could fall faster as more of the family budget goes to fuel.
Gold price refreshes weekly low amid firmer US Dollar, Services PMI
- Gold price extends a two-day losing spell as investors channel funds into the US Dollar.
- US recession fears recede sharply due to cooling inflationary pressures and stable job growth.
- US ISM Services PMI for August landed at 54.5 vs. expectations of 52.5 and July’s reading of 52.7.
Gold extends correction after a speech from Boston Fed President Susan Collins and upbeat US ISM Services PMI for August. Fed Collins cited that this phase of monetary policy calls for patience and policy decisions will be based on incoming data. The ISM reported a sharp increase in service activities to 54.5 vs. expectations of 52.5 and July’s reading of 52.7.
The precious metal remains under pressure as investors keep pumping money into the US Dollar due to deepening global recession fears.Investors underpinned the US Dollar as a safe haven as developing economies are facing the wrath of higher interest rates from Western central banks and potential upside risks of deflation to the Chinese economy.
EU News
European equity close: A break to the downside?
- Closing changes in Europe
- Stoxx 600 -0.6%
- German DAX -0.2%
- UK FTSE 100 -0.2%
- French CAC -0.8%
- Italy MIB -1.4%
- Spain IBEX -0.8%
Eurozone July retail sales -0.2% vs -0.1% m/m expected
- Latest data released by Eurostat – 6 September 2023
- Prior -0.3%; revised to +0.2%
UK August construction PMI 50.8 vs 50.5 expected
- Latest data released by S&P Global – 6 September 2023
- Prior 51.7
“UK construction companies experienced another slump in house building activity during August as rising interest rates and subdued market conditions resulted in cutbacks to client demand and new build projects in particular. Aside from the pandemic, the recent downturn in residential work has been the steepest since spring 2009.
“Resilient demand for commercial work and infrastructure projects are helping to keep the construction sector in expansion mode for now, but the survey’s forward-looking indicators worsened in August. Total new orders decreased at the fastest pace for more than three years amid worries about the broader economic outlook and the impact of elevated borrowing costs. Rising risk aversion also meant that construction firms pared back their own output growth projections, with business activity expectations slipping to the weakest since January.
“August data pointed to a welcome stabilisation of costs across the construction sector and another sharp improvement in suppliers’ delivery times. Adding to signs of fewer capacity pressures, the latest survey revealed the sharpest rise in subcontractor availability for more than 13 years.”
Germany August construction PMI 41.5 vs 41.0 prior
- Latest data released by HCOB – 6 September 2023
HCOB notes that:
“In August, construction work kept on plummeting at a fast pace, primarily due to a sharp decline in house building. The dismal condition of this sector can be traced back to a blend of higher interest rates, real income erosion from inflation, and needless bureaucratic obstacles. It’s not just that the government’s goal of 400,000 residential units won’t be achieved this year. It also seems like Germany will fall considerably short of the roughly 290,000 units that were constructed last year.
“Expectations among companies point to a much weaker activity level in twelve months’ time, which fits to the continued sharp decrease of new orders and the fact that material buying has been trimmed down more rapidly.
“The overall miserable environment is causing input prices to decline more rapidly. In the same vein, subcontractor rates have increased again at a softer rate, continuing a trend that has been underway since the middle of last year.
“The construction sector is scaling back its workforce at a less rapid rate than its overall activity. The reason could be theconsistently tight labour market we’ve had so far which is now adjusting to a somewhat more equilibrated level.
“Civil engineering is a bright spot in the construction sector, as activity has increased in August.However, we shouldn’t draw broad conclusions from a solitary number, as activity in this sector has a history of being quite erratic.”
Germany July factory orders -11.7% vs -4.0% m/m expected
- Latest data released by Destatis – 6 September 2023
- Prior +7.0%; revised to +7.6%
Poland central bank delivers a surprise 75 bps cut vs -25 bpd expected
- Poland’s central bank gets dovish
Poland cuts its main interest rate to 6.00% from 6.75%.
BOE’s Bailey: Many indicators are signalling a fall in inflation, which will be marked
- Comments from Bailey and others in parliament
- Wage bargaining has surprised to the upside
- There has been a very large terms of trade shock in this country
- Many indicators are signalling a fall in inflation, which will be marked by the end of this year
- Question is: As headline inflation comes down, will we see inflation expectations continue to come down and will that impact wage bargaining?
- There is not group think at the MPC at the moment
Dhingra:
- Labour market continues to ease as MPC’s hiking cycle takes effect with a lag
- Pass-through of level changes to wages would not necessarily pose a risk to our target in the medium term
- Not yet evidence to suggest firms will seek to increase their margins
- Domestic factors are likely to continue to ease the pressure on CPI inflation
ECB’s Kazimir: The preferable option would be to hike rates by 25 bps next week
- Remarks by ECB policymaker, Peter Kazimir
- One more, likely last rate hike, still needed
- The alternative option would be to hike in October or December
- Inflation remains stubbornly high, price growth expectations too far above 2%
ECB’s Villeroy: There is a slowdown but no recession
- Remarks by ECB policymaker, Francois Villeroy de Galhau
- Had first successes against inflation but need to persevere
- Must bring inflation down to 2% level between now and 2025
ECB’s Knot: Markets may be underestimating September rate hike chances
- Remarks by ECB policymaker, Klaas Knot
- Bringing inflation to 2% by the end of 2025 is the bare minimum
- Rate hike is a possibility, not a certainty
- We are near or very near the peak on interest rates
- Our option are open at the next and upcoming rate meetings
- Maintaining rates for a sufficiently long period now counts more than further rate hikes
Other News
Chinese state media says property restrictions not appropriate, should be removed
- Curbs on home purchasing in non-1st-tier will be removed ASAP
Chinese state media outlet the Securities Times had an article today saying that restriciton in place in the past are no longer appropriate.
- restrictive policies such as housing purchase restrictions, loan restrictions, and sales restrictions in the real estate market were measures implemented in the past to curb speculation during periods of market overheating
- these measures are no longer needed given the supply-demand dynamics of the real estate market are undergoing a drastic change
- To further bolster the real estate market and stabilize the confidence and expectations of potential homebuyers, restrictive policies on real estate purchases and sales in non-first-tier cities shall be swiftly removed based on the specific circumstance of the individual cities
Goldman Sachs says a risk is that China faces a more persistent, Japan-style, slowdown
Goldman Sachs compares the Chinese economy to the US economy, noting its now revised its US recession forecast down to 15%, from 20%.
On China though, not so optimistic:
- China faces short- and long-term challenges from its property market and demographic outlook
- While a “sudden stop” remains unlikely, we see risks of a more persistent Japn-style slowdown
Australian data: Q2 GDP +0.4% q/q (vs. expected +0.3%)
Economic growth data from Australia in the April to June quarter of 2023.
+0.4% q/q
- expected +0.3%, prior +0.2%
+2.1% y/y
- expected 1.8%, prior 2.3%
The Chain Price Index inflation indicator is at -2.2% for the quarter.
A better than expected result for the growth data ended June 30. Its not all good news though, labour productivity fell in the Q.
CBA expect the first RBA rate cut in Q1 24, but the risk is for later
Commonwealth Bank of Australia analysts after yesterday’s RBA decision. In summary:
- cash rate steady at 4.10% in September, the third consecutive on hold decision
- A tightening bias was retained, with uncertainty around services inflation still top of mind.
- China risks were also noted.
- The RBA sound comfortable that higher interest rates are working and we expect the hurdle to hike again remains high.
- We expect 4.10%to be the peak in interest rates.
- The next move in the cash rate should be down. We expect the first rate cut in Q1 24. However the risks are for a later start to the easing cycle.
NAB expect one final RBA interest rate rise, +0.25% in November
The Reserve Bank of Australia remained on hold at its meeting on Tuesday
Of Australia’s four big banks ANZ, CBA and Westpac have forecast no further cash rate rises from the Reserve Bank of Australia. National Australia Bank, however, is still tipping one more, at the November meeting (the RBA meet next on October 3 then on November 7).
Via NAB, in brief:
- economic “risks are still tilted to the upside”
- RBA is “very data dependent”
- RBA remains committed to tightening further if required
If the data suggests it the RBA “may have to do a little more tweaking”, as soon as October but NAB expect November is more likely.
And, while:
- “We remain concerned about services inflation printing strongly in August”
The November meeting is the first that’ll follow Q3 inflation data to be published in Australia on October 25.
Chile’s central bank lowered its benchmark interest rate to 9.5% from 10.25%
Banco Central de Chile with a 75bp rate cut.
- a 100 bp cut was the consensus expected
- cites falling inflation, was 6.5% in July, down from 7.6% in June (peaked just over 14% in August 2022) …
- “The macroeconomic scenario has evolved as anticipated, projecting that inflation will converge to the 3% target in the second part of 2024”
BOJ’s Takata: We won’t evaluate currencies by focusing on certain levels
- Further remarks by Takata
- Overseas factors having greater impact on currencies
- We need to stand ready to flexibly respond to uncertainty
- Action in July was a flexible response
- No comment on FX levels
- There is still distance to achieve 2% inflation target
- Uncertainty is high on price outlook
Japan’s Matsuno says watching FX moves with high sense of urgency
- Remarks by Japan chief Cabinet secretary, Hirokazu Matsuno
- Sharp FX moves are undesirable
- Important for FX to move stably reflecting fundamentals
- Will respond appropriately if necessary without ruling out any option
Japan official with verbal intervention on yen – Kanda “won’t rule out response”
Japan’s Finance Ministry’s Vice Finance Minister for International Affairs Kanda. He is the guy who will instruct the BOJ to intervene, when he judges it necessary. Often referred to as Japan’s ‘top currency diplomat’.
- Seeing speculative moves in forex, speculative moves are behind the recent move
- FX rates should move stably
- Watching forex with high sense of urgency
- Won’t rule out any options if FX moves continue
Cryptocurrency News
Dogecoin likely in the accumulation phase with 20% DOGE wallets sitting on unrealized profits
- Dogecoin wallets sitting on unrealized profits climbed to 20.73%, analyst noted a strong accumulation on the monthly chart.
- DOGE price range between $0.05 and $0.093 is likely an accumulation phase for the next bullish breakout in the meme coin.
- Crypto analyst Poseidon has set a target of $0.18 for DOGE, based on the weekly price chart.
Pseudonymous technical analyst, Poseidon, concluded that Dogecoin price is likely in its accumulation phase after analyzing the monthly, weekly and daily charts. On-chain metrics from IntoTheBlock reveal that 20.73% of DOGE wallet holders are profitable at the current price level.
Coinbase will launch a new lending platform that’s aimed at large institutional investors
Crytocurrency exchange Coinbase Global has told Reuters that its launching a digital asset lending platform.
- To be aimed at large institutional investors
Reuters adds that Coinbase has raised US$57 million for its new crypto-lending platform according to a regulatory filing.
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