EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 7, 2024

What Trump’s Win Means for the Economy President-elect plans tariffs and tax cuts, as in his first term. There are risks with both, but also lots of caveats.

(…) Trump’s main economic tools will be the same as in that first term: tariffs and tax cuts. But there’s a difference. The tariffs he’s planning will be broader and higher, and the tax cuts more narrowly targeted.

The consensus of economists and investors is that tariffs will put upward pressure on inflation while tax cuts could spur growth and add to deficits, together tending to nudge interest rates higher. And indeed, long-term Treasury bond yields had risen recently on strong economic data and Trump’s improved polling, and shot up early Wednesday, along with stock-index futures, as Trump’s victory became apparent.

(…) In his first term, 11 months elapsed between initiation of the case against China and imposition of tariffs. Tariffs may also be rolled into broader negotiations on extending the 2017 tax cut.

Trump’s first-term tariffs had no noticeable effect on inflation because they were relatively modest, and globally subdued demand and investment and slack labor markets were pushing in the opposite direction. On the eve of his election, wages were rising just 2.4% a year. Bond investors expected future inflation to average 1.8%, below the Fed’s 2% target.

This time Trump has proposed much higher tariffs—at least 60% on China, and 10% to 20% on everyone else. Such a combination would lift U.S. tariff rates to their highest since the 1930s. And it would come when demand is brisk, supply chains are vulnerable to geopolitical conflict, and memories of inflation are fresh. Wages are growing 3.8% a year, and bonds see future inflation at 2.3%.

This suggests tariffs could pose more of an inflation risk than in his first term. Morgan Stanley estimates Trump’s 60% and 10% plan would raise U.S. consumer prices 0.9%. That’s a one-off effect: Eventually, inflation should fall back to its underlying trend.

But other factors could result in a smaller impact. Importers could absorb more of the tariff into their margins. The dollar could rise, offsetting higher import prices. Most important, some advisers say Trump is using tariffs as a negotiating tactic to lower other countries’ trade barriers, so actual tariff increases will be less than he has threatened. And if Trump sees tariff fears hurting stocks or pushing up interest rates, he may compromise. (…)

Portions of the tax law that Trump and congressional Republicans passed in 2017, such as for lower rates for individuals and businesses who pay their taxes on their individual returns, expire at the end of 2025 and they have given priority to extending the law. That would cost about $5 trillion over 10 years, the Committee for a Responsible Federal Budget estimates. The process is likely to consume a lot of next year.

Full extension shouldn’t have much effect on growth or interest rates because that’s already built into the behavior of investors and the public.

Not so with Trump’s other proposals, which have at times included lower corporate tax rates; exempting tips, Social Security benefits and overtime pay from taxes; and deductions for car loan interest and state and local taxes. These proposals would, the CRFB estimates, add about $4 trillion to the deficit over 10 years.

Tariff revenue would reduce that cost somewhat as would spending cuts, though Trump also plans some spending increases.  (…)

Deutsche Bank estimates that a unified Republican government would boost growth by 0.5 percentage point in 2025 and 0.4 in 2026 without higher tariffs. With a 60% tariff on China and 10% on everyone else, Deutsche estimates the net effect on growth becomes negative.

Tax cuts would also add to the deficit and put upward pressure on interest rates. John Barry, rates strategist at JP Morgan, estimates Treasury’s current schedule of debt auctions is enough to fund next year’s deficit, but would fall $3.3 trillion short from 2026 through 2029, without extension of the 2017 tax cut. The shortfall would be even larger if the tax cut is extended and Trump’s plans are enacted.

If the Treasury starts upping auction sizes to finance larger deficits, that is likely to put upward pressure on yields. Barry estimates a unified Republican government would raise 10-year yields by 0.4 percentage point, of which the market had already built in 0.15 point through Friday.

But with the last fiscal year’s budget deficit at $1.8 trillion, triple the level of eight years earlier, even a Republican Congress may not give Trump all he wants. (…)

• President-elect Trump has proposed a 10% across-the-board tariff on America’s trading partners with a 60% tariff levied on China. If implemented shortly after Inauguration Day on January 20, these tariffs would impart a modest stagflationary shock to the U.S. economy in 2025. Our model simulations show that the core CPI inflation rate next year would shoot up from its baseline value of 2.7% to 4.0%. Under this scenario, U.S. real GDP would rise by a sluggish 0.6% in 2025. (GS)

What’s at Stake With the Fed, Now That Trump Has Won? The president-elect has said he wants a say on interest rates, and his policies might alter the outlook for growth and inflation

(…) Trump has said he should be consulted on the Fed’s interest-rate decisions, and a group of his allies drafted proposals earlier this year that would require candidates for Fed chair to privately agree to consult informally with Trump on the central bank’s decisions, The Wall Street Journal reported.

But Trump has also told Bloomberg that while he wanted to weigh in on monetary policy, he didn’t necessarily want to order the Fed what to do. Some advisers have asserted the importance of the Fed’s independence. (…)

Trump’s most direct way of increasing his influence at the central bank would be to install loyalists on its seven-member board of governors, in particular the chair. Powell’s term as chair expires in May 2026. His separate term as governor expires in January 2028.  Most legal experts say he can’t be removed before the end of his term without cause.

Trump has limited opportunities for replacing Fed policymakers. Only two of the current seven governors have a term that expires in the next four years: Adriana Kugler in 2026 and Powell in 2028. At one point in Trump’s first term, there were four vacancies.

Even then, the Senate must confirm a president’s nominees. Senate Republicans effectively blocked some of Trump’s intended candidates in 2019 and 2020, believing them susceptible to presidential cajoling.

Moreover, the Fed chair and six other governors hold only seven of 12 voting seats on the committee that sets interest rates. Presidents of five of the Fed’s 12 regional reserve banks fill the other slots on a rotating basis. Most are apolitical technocrats who prize the central bank’s institutional tradition of independence. (…)

What Donald Trump’s victory means for China

(…) While Trump is widely expected to ramp up tariffs in his second term, when and how this will be done are still up for discussion. We think that the 60% tariff call may be a starting point for negotiations rather than a set-in-stone number – you may recall that the first Trade War saw a truce after an agreement from China to increase imports of US agricultural goods.

There are two roads to narrowing the US-China trade deficit: either reducing China’s exports to the US or increasing China’s imports of US goods. Given the respective impacts on inflation and job creation, we would assume the latter would also be a welcome outcome for the Trump administration.

If we do take the 60% tariff threat at face value, despite various preparations being made for a potential Trump return, there is no denying that a 60% blanket tariff would have a significant impact on Chinese exports to the US.

It’s also worth noting that the US has also gradually become a less important export destination for China as well since the first trade war, with exports to the US falling from 18.2% to 14.3% of total exports in 2024 year-to-date.

A question to ask is will the US target Chinese companies’ overseas production? Is this feasible and if so it could lead to a game of cat and mouse and searches for loopholes?

China will undoubtedly retaliate if we do get aggressive tariffs from the US. Key import categories including agricultural products, minerals and chemicals, and machinery and mechanical appliances. If tariffs are significant, it could be a catalyst for higher inflation in China as well.

Could a Trump win have a stimulus impact? Over the last few months, a common argument has been that a Trump win and the perceived shock from additional tariffs would lead to a more aggressive stimulus response from China to offset the likely loss from exports. 

This week’s National People’s Congress concludes on Friday, and the delayed timing from the originally expected late October meeting was very likely at least in part considering the new window gave policymakers a chance to address a possible Trump win.

In our view, the odds for a larger policy support package will rise somewhat with a Trump victory, though it may not necessarily be announced immediately. According to a recent Reuters report, the expected package size is RMB 10tn over 3-5 years, with RMB 6tn spent on addressing local government debt issues and RMB 4tn on supporting the property market.

Top officials have signalled multiple times this week that the PBOC is ready and able to ease policy further if necessary – we expect to see further rate and RRR cuts moving forward as well as expanded open market operations to help support financial stability whenever necessary.

Chinese exporters have become less reliant on the US in recent years

Financial flows: the initial Chinese equity market reaction to Trump’s victory showed modest capital outflow pressure.

• The larger decline seen in the Hang Seng Index versus onshore indices indicates that foreign investors tended to be more concerned than domestic investors on a Trump win’s impact on Chinese companies.  
• Foreign holdings of Chinese domestic assets fell around 15% from the peak in 2021 to the start of 2024 before rebounding 12.6% since then, in large part thanks to a very strong close to the third quarter. Chinese assets have been underweight by many global investors, and a Trump victory could be a catalyst for some further pullback and a continuation of the “de-risking” trend, especially if we see measures to discourage or ban US investment into Chinese firms. However, we are of the opinion that China’s domestic catalysts, including the upcoming scale and efficacy of stimulus policies, should play a bigger role relative to the US election outcome.   

Non-financial flows: Net foreign direct investment into China has cratered to historical lows this year, and new US investment into China has been muted for the last several years already. A Trump win sparking further US-China tension certainly will not help matters on this front. Asymmetric tariffs could accelerate China’s outward direct investment.

Since the first trade war in 2017, the US trade deficits with China have narrowed but widened versus other Asian economies. This increases the odds that China may not be the lone target of Trump’s next possible trade war. However, taking into consideration other geopolitical considerations, tariffs imposed on other Asian economies are expected to be lower than what is ultimately levied on China. If this is the case, we could see an acceleration of outward direct investment from China to at least partially mitigate some of the impact of tariffs.

Xi Congratulates Trump on Victory, Urges Stable US-China Ties Two sides should ‘find a way to get along,’ Xi Jinping says

The Chinese leader sent a congratulatory message to the president-elect and expressed his desire to keep relations “healthy and sustainable,” state broadcaster China Central Television reported Thursday. (…)

China and the US should “find a way to get along correctly in the new era, which will benefit both countries and the world,” Xi added. The Chinese leader sometimes refers to a fresh era for China that creates an opening for his nation to become more influential globally while the US declines. (…)

China Sets Yuan Fix at Weakest Since 2023 Amid US Tariff Risk

China slashed the daily reference rate for its currency to a level unseen since late 2023, a sign the central bank is allowing depreciation under the threat of trade tensions with the US under a Donald Trump presidency. (…)

The effect of a depreciating currency on China’s economic growth may be smaller this time compared with the the trade-war during the last Trump presidency, due to China’s smaller trade exposure with the US, Xing wrote. In 2018/19, the yuan depreciated by 11.5% versus the greenback and offset about two thirds of the tariff hike, according to the banks analysis.

Meanwhile, bearish views on the currency are still growing. UBS AG sees the yuan trading toward 7.4 per dollar amid trade tensions, while BNP Paribas SA expects it to reach 7.5 in 2025 under a 60% tariff scenario and likely China retaliation.

“They will devalue the currency in reaction to any tariffs from Trump with the magnitude of devaluation matching their perception of the economic impact to them,” Brad Bechtel, global head of FX at Jefferies LLC. wrote in a note to clients. “They almost have no choice.”

• Vietnam Sets Dong Fix Rate at Record Low Amid Dollar Strength

Vietnam set its reference rate for the dong at a record low, setting the stage for more weakness in the Southeast Asian nation’s currency as the dollar’s surge pummels emerging markets. (…)

Asian central banks are adapting to a strong dollar world after Donald Trump’s election win this week fueled a rally in the greenback, with the South Korean won tumbling to a two-year low. China on Thursday slashed the daily reference rate for its currency to a level unseen since late 2023, a sign the central bank is also allowing depreciation. (…)

• Trump Win May Spur BOJ Hike If Yen Falls More, Ex-Official Says

China Export Growth Jumps to Two-Year High as Tariff Risks Loom Growth driven in part by firms front-running potential tariffs

Exports rose 12.7% from a year earlier to $309 billion, the customs administration said Thursday, significantly exceeding any economist’s forecast. The trade surplus in the month climbed to the third-highest on record, as factories ramped up shipments ahead of Christmas holidays and likely in anticipation of worsening trade tensions. (…)

October has historically been a weaker month for exports before a final rush in the last two months of the year. The rise was off a weak base in the same period a year earlier, when shipments abroad dropped almost 7%. (…)

Exports to the US rose 8.1%, the most in three months. Shipments to most markets climbed, with double-digit increases to Asean, the European Union, South Africa and Brazil. Shipments to Russia jumped almost 27%, the fastest growth this year. (…)

China’s steel exports jumped almost a million tons in October from September, with the 11.2 million tons of metal shipped in October, the second-highest on record. In reaction to that rising tide of exports, the world’s largest steelmaker outside China called for stronger trade measures. (…)

Highlighting a weakness in consumption, imports fell 2.3% to $213 billion last month. (…)

Last year, Chinese companies shipped $500 billion in goods to America, accounting for 15% of the value of all its exports. (…)

• After Trump’s Victory, One Company Prepares to Shift Production From China Most of Breville’s products are manufactured around Shenzhen

When the leader of global appliance maker Breville spoke to shareholders at its annual meeting on Thursday, he moved quickly to address the elephant in the room.

“Now that [Donald] Trump has won the U.S. Presidential election, the near-term risk of material tariff increases on consumer goods coming out of China has solidified,” Chief Executive Jim Clayton said. (…)

For Breville, the threat of new tariffs is a problem. The Australian company sells appliances such as espresso machines, toasters, juicers and microwaves in more than 70 countries, including the U.S. Most of its products are manufactured in the area around Shenzhen, a sprawling Chinese city on the border with Hong Kong. (…)

Clayton said the company is already responding to Trump’s election, including by moving more of its production out of China as quickly as possible to protect itself against any new U.S. tariffs. “We will continue our inventory build in the U.S., unabated, likely until the increased tariffs are enforced,” he added. (…)

Pragmatic business people are already preparing for increased tariffs. First, easy decision is to boost inventories. More examples from The Economic Times:

• Hong Kong-based M.A.D. Furniture Design will ramp up by 50% shipments of its Chinese-made, modern-style chairs, tables and lighting to its Minneapolis warehouse “to buy ourselves some time to react after the election,” co-founder Matt Cole said.
• In Chicago, Joe & Bella co-founder Jimmy Zollo already has quadrupled orders for the online retailer’s best-selling Chinese-made shirts and doubled orders for its most popular pants for adults who have trouble dressing themselves due to arthritis, dementia or being in a wheelchair.

Wall Street Salivates Over a New Trump Boom Wednesday’s epic, postelection rally augurs big, lucrative opportunities, investors and analysts say

(…) The enthusiasm is especially heated in a few areas, investors and bankers said. Banks and other financial companies climbed, with the KBW Bank Index rising 11%. Investors expect regulatory scrutiny will ease in a Trump administration.

Some also expect more dealmaking, potentially among smaller and midsize banks. The expected departure of Lina Khan, who leads the Federal Trade Commission and has been a thorn in the side of executives hoping to work out tech acquisitions, was cheered by investors and bankers.

“A lot of these mergers have been thwarted by the current administration,” the activist investor Carl Icahn said in an interview late Tuesday. Given a Trump victory, he said, “That’s going to change.”

The rally in shares of smaller companies caught many portfolio managers’ attention, with the Russell 2000 index of small companies rising 5.8%. Investors said a shift from accelerating globalization, which helped multinational companies, toward a focus on aiding domestic manufacturers and other companies will be beneficial.

“There is an expectation of economic policy pivoting inwardly for domestic growth, thus benefiting small-caps through broader growth,” said Michael O’Rourke, chief market strategist at JonesTrading.

There is no guarantee that Wall Street’s dreams will be fulfilled, of course. The expected Trump policies bring twin threats of higher inflation and larger budget deficits, economists have warned, potentially discouraging the Federal Reserve from cutting interest rates as aggressively as some had hoped. 

Key members of the incoming administration, including Vice President-elect JD Vance, have advocated for greater scrutiny of mergers. Many are also outspoken in favor of tariffs, government intervention in the economy and a weaker dollar—positions that put them at odds with many in finance. (…)

The Trump administration is likely to soften capital rules proposed for the biggest banks, said bankers and people close to his campaign, while rising interest rates should aid bank profitability throughout the industry. Investors are hopeful that a more positive economic environment will ease pressure on regional banks and other smaller lenders, which have suffered in part in the midst of the worst commercial real-estate bust in years. (…)

“Relative to the last Trump term, it’s looking like he doesn’t have to worry about some congressional check on his actions, and of course he’s not running for re-election,” Kelly said. “That gives him a great deal of scope to pick and choose which policies he wants.”

• If the Trump proposal to reduce the statutory domestic corporate tax rate from 21% to 15% were enacted, it would boost our EPS estimate by approximately 4%. (GS)

• Likewise, during the trade conflict experience in 2018-2019, domestic-facing and defensive industries generally outperformed cyclical industries with elevated international business exposure. (GS)

The most powerful (unelected) man ever

Elon Musk — the most influential backer of President-elect Trump, thanks to his money, time and X factor — now sits at the pinnacle of power in business, government influence and global information (and misinformation) flow. Trump has the White House and four short years. Musk has so much more since his influence cuts across government, media, business, the world, space and time. (…)

It’s unmatched. As this election showed, politics and influence flow downstream from information control.
Musk, once seen by many as a fool for buying Twitter, now controls the most powerful information platform for America’s ruling party. X makes Fox News seem like a quaint little pamphlet in size, scope and right-wing tilt.

Virtually every powerful voice in the Trump media ecosystem congregates on X — where their reality, whether tethered to facts or fiction, are set. X will be the prosecutor, defender, jury and judge of Trump governance. “You are the media now,” he proclaimed on X.

Musk transcends X, with close friends running the most-listened-to podcasts and every mainstream media platform eager for his appearance. He’s the rare figure with global swat.

Imagine you wanted to help mold America. You would instantly realize you need information dominance and vast political influence.

• With X and now Trump, Musk has both.
• The guy did a Mar-a-Lago sleepover on election night after throwing himself into the election — donating at least $119 million to Musk’s America PAC to help Trump, pushing JD Vance for the presidential ticket, then helping get Trump and Vance onto Joe Rogan’s top-rated podcast. (…)

Musk is helping staff the top ranks of the incoming White House and will run an unregulated entity to recommend ways to cut and reorganize government. Name another American figure with this kind of political juice. (…)

This creates conflicts of interest at an epic scale. But it’s hard to see the Trump White House caring, or Musk letting it slow him down. And, when you control a big chunk of the information flow, you get to shape how lots of people view it, anyway.

Importantly, there is now a very tech savvy influencer at the White House. Musk will be a powerful leader pushing the U.S. administration to quickly accelerate technology innovation and implementation, likely boosting economic growth and productivity, but also potentially counterbalancing President Xi’s policies that are making America lagging behind China in many key technologies.

The Morning After

From Richard Bernstein Advisors:

We previously highlighted (see “Fade the Election” and “Fade the Election – Part 2: Debt & Deficits“), what is anticipated at this stage of the election cycle often doesn’t come to fruition, so one should take these ideas with proper skepticism.

Importantly, these comments do not suggest we think any policies are particularly good or bad. We are simply dispassionately offering some thoughts that seem unlikely to appear in the broader discussion.

• Deglobalization remains our primary secular investment theme. Adding to a decade of outperformance, US small/mid-cap Industrials could be major beneficiaries of the new administration.
• Tariffs and movement to less efficient production suggest investors should position for higher secular inflation. Accordingly, bond market volatility is unlikely to subside. Truly tactical fixed-income investing could gain in importance.
• The debt and deficit issues will likely remain. There seems to be little enthusiasm regarding raising taxes and cutting spending, so US Treasury spreads versus AAA sovereign bonds will likely persist and could widen.
• Fiscal largess should normally be met with tighter monetary policy, but that hasn’t been the Fed’s plan over the past several years and seems unlikely to be so going forward.
• The US dollar could be in a strange limbo. A stronger USD might be needed to finance further deficit spending, but a strong dollar could hurt exports. However, a lack of fiscal and monetary discipline could weaken the dollar, which might help exports but hinder financing.
• The risk to European stocks could increase as solutions to the Ukraine/Russia war might exclude NATO.
• The risk to Taiwan is probably somewhat overstated, but the risks to various other Asian nations bordering the South China sea could be greater than is currently anticipated. EM investing could present country- or region-specific risks and opportunities.
• Energy seems attractive with respect to inflation, but Energy was the worst performing sector during the 2016-2020 period. The US remains highly dependent on foreign oil because the US doesn’t have refineries that can process shale oil. Virtually all shale oil is for export and not for domestic use.
• States rights could alter a broader set of laws. That could spur population relocation to more socially progressive or conservative states, and might impact the housing, real estate, and municipal bond markets.
• Cryptocurrencies remain highly speculative and a significant source of illegal monetary transactions. Government enthusiasm, however, could keep this game alive and, oddly enough, undermine the USD.

Then and now (David Rosenberg)

(…) The forward P/E multiple was 17 times in November, 2016, versus 22 times currently. Every valuation metric from price-to-earnings, price-to-sales, price-to-book, the Buffett Indicator (market cap-to-GDP) and the CAPE multiple are completely off the charts today – which was not the case the first time Donald Trump won. And that’s not even taking into account an S&P 500 dividend yield over 2 per cent then and barely over 1 per cent today.

High-yield bond spreads were 500 basis points then and are 280 basis points now. Investment grade spreads were 140 basis points versus 85 basis points today. Like equities, a whole lot of good news and then some is embedded in the credit markets at current levels. Not the case back in 2016.

For bonds, the starting point for the 10-year T-note yield in November, 2016, was 1.8 per cent. One could have easily argued for a cyclical bear market in Treasuries at that yield level – but today’s 4.5 per cent yield offers coupon protection that did not exist eight years ago.

The stock market already had a tailwind in November, 2016, with or without the GOP sweep, as there was no competition from a 0-per-cent real risk-free rate (using the yield of the 10-year Treasury minus the impact of inflation). Today, that inflation-adjusted rate is north of 2 per cent. Big difference.

The Fed Funds rate was near the zero mark at 0.5 per cent back then – and it had only one way to go (to 2.5 per cent at the December, 2018, peak). At 5 per cent today, and coming off the cycle peak, there’s only one way to go on this score – lower. The only question is the magnitude.

With respect to the economy, 2016 was more mid-cycle in nature with an unemployment rate near 5 per cent versus the current late-cycle 4 per cent jobless rate. That is a huge difference. What it means for Donald Trump’s policy plank is that there are more acute capacity constraints today compared with the 2016 election win.

The deficit-to-GDP ratio of 3 per cent and federal debt-to-GDP ratio of 95 per cent were far less of a fiscal constraint on Mr. Trump’s fiscal ambitions then compared with today, where the deficit tops 6 per cent of GDP and the debt ratio is fast approaching 130 per cent. This is a fiscal straitjacket that the market bulls, yet again salivating over prospective tax relief, may not be factoring in.

And there is an added constraint on fiscal finances – back in 2016, debt-servicing costs were absorbing just over 10 per cent of the revenue pie. That interest expense ratio is double that today and even before Mr, Trump’s tax measures, that ratio is set to spiral to over 30 per cent within two or three years. This structural debt and deficit dilemma is not on anyone’s mind right now. But once the debt service ratio tops 30 per cent, what follows are failed Treasury auctions, a destabilizing decline in the dollar, and credit rating downgrades that will pose a threat to America’s reserve currency status.

Ask anyone who was in Canada back in the early 1990s as to what life is like once the government fails to prevent the debt service ratio from piercing the 30-per-cent threshold. Not a pretty picture. And something that the credit default swap market, unbeknownst to the equity market bulls, is beginning to sniff out.

Also:

(..) a further sharp increase in 10-year Treasury yields would likely limit the magnitude of any potential rally in stock prices. In mid-September, Treasury yields reached a YTD low of 3.62% before climbing by 80 bp to the current level of 4.42%. All-else equal, a backup in rates of that size would typically be accompanied by a decline in equity prices.

Historically, the speed limit for stocks has been a 2 standard deviation increase in 10-year yields, a pace that currently equates to about 60 bp in a month. Instead, the S&P 500 index rose by nearly 3% concurrent with the jump in bond yields.

Equities have digested this move because it has been primarily driven by better economic data. Our US Economics team forecasts the Fed will cut the funds rate by 25 bp (to 4.5%-4.75%) on Thursday and reduce the policy rate by another quarter-point at the December 18th meeting. (GS)

EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 6, 2024

U.S. PMI Services:

S&P Global: October sees further marked increase in business activity

The seasonally adjusted S&P Global US Services PMI^® Business Activity Index signaled further strong growth of service sector output in October, ticking down only slightly to 55.0 from 55.2 in September. Activity has now increased in each of the past 21 months.

The latest rise in activity coincided with a further solid expansion in new business, with companies reporting the securing of new clients and a willingness among customers to commit to new projects. New orders rose for the sixth month running, with the rate of expansion broadly in line with that seen in September.

The rise in total new business was much faster than that seen for new export orders, as subdued international demand meant that new business from abroad increased only marginally and at the slowest pace in the current four-month sequence of growth.

Business confidence rebounded in October, rising to the highest since June. Hopes of improved demand conditions following the Presidential Election supported confidence, with lower interest rates also predicted to feed through to growth of activity.

While new orders and business activity continued to rise, firms remained reluctant to expand staffing levels. Employment was down for the third month running. The latest fall was only marginal, however, as some companies did take on additional workers, in part through the backfilling of vacant positions.

Despite the restraint on hiring, companies were able to keep on top of workloads, meaning that outstanding business was unchanged in October following a rise in September.

As part of efforts to secure sales, companies limited the pace at which they raised their selling prices. The rate of output price inflation slowed sharply and was the joint-weakest in nearly four-and-a-half years of rising charges, equal with that seen in January.

Where output prices were increased, this reflected the passing on of higher input costs, which continued to rise sharply and at a pace that was above the series average. Respondents indicated that higher staff costs had been the main factor pushing up input prices.

The S&P Global US Composite PMI Output Index ticked up to 54.1 in October from 54.0 in September, registering a further solid increase in business activity at the start of the final quarter of the year.

The overall expansion again reflected marked increases in services activity as manufacturing production continued to fall.

Modest reductions in employment across both monitored sectors meant that overall staffing levels decreased for the third month running.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence :

(…) “The services economy’s consistently impressive growth in recent months has helped the US outperform all other major developed economies. October’s strong performance is consistent with GDP continuing to rise at an annualized rate in excess of 2%.

“Particularly welcome news comes from the cooling inflation picture. Average prices charged for services rose at a sharply reduced rate in October, showing one of the smallest increases seen for over four years, as competition intensified in the services economy. (…)

ISM Riddle for the Fed: Service Activity Soars as Factories Slump

Coming on the heels of last week’s manufacturing ISM, which showed yet another month in contraction, today’s ISM services report showed an increase to 56.0, or the broadest pace of service sector expansion since the summer of 2022. The gap between the two bellwethers is the second largest on record and has not been so large in more than 22 years. (…)

New orders also worked against the grain, coming down two points to a still-expansionary reading of 57.4. The upswing in the composite likely reflects employment swinging from a net drag in September to a net boost in October. (…)

The employment component rose nearly five points to 53.0 last month which is consistent with the broadest expansion in services-hiring since the summer of 2023. Recall, it was just last week that employers reported adding just 12,000 net new jobs in the very same month.

  

Note that survey participants mentioned that their businesses were negatively affected by hurricanes and port strikes. Yet, the PMI rose from 54.9 to 56.0, highest since 2022.

CONSUMER WATCH

From The Transcript:

• “In the U.S., total payments volume grew 5% year-over-year, in line with Q3… Consumer spend across all segments from low to high spend has remained relatively stable to Q3. Our data does not indicate any meaningful behavior change across consumer segments from last quarter.” – Visa ($V ) CFO Christopher Suh
• “I mean the consumer continues to be healthy. We continue to see positive trends from a consumer health standpoint. They’re spending in a very healthy manner… there’s no doubt in my mind that the consumer continues to show strength.” – Mastercard ($MA ) CFO Sachin Mehra
• “There’s no doubt about that. I mean, I think consumers are under pressure… I think consumers continue to be discerning with where and with whom they’re spending money… certainly lower-income consumers and families are consumers that are under more acute kind of pressures.” – McDonald’s ($MCD ) Global CFO Ian Borden
• “While mortgage rates have decreased from their highs earlier this year, many potential homebuyers expect rates to be lower in 2025. We believe that rate volatility and uncertainty are causing some buyers to stay on the sidelines in the near term.” – DR Horton ($DHI ) CEO David Auld
• “Consumers remain trepidatious in their spending patterns and are demonstrating more price elasticity than we saw in the early months of the year… we were seeing a broader pullback by shoppers in the lead up to the election.” – Wayfair ($W ) CEO Niraj Shah

Ed Yardeni:

By the way, consumers’ plans to buy cars in the coming months surged in October as well. The jump in plans to buy used cars could put upward pressure on used car prices. And, the percentage of consumers intending to take foreign vacations is around record highs. Clearly US consumers are planning to keep spending. Adding additional fiscal and monetary stimulus to the mix could result in a sugar high.

Restaurant sales are booming, up 7.4% YoY in August after +6.0% in Q2 and 7.0% in Q1 well above price increases:

This while fast-food chains are struggling:

Data: Company earnings reports; Chart: Axios Visuals

Canada: Service sector expands marginally in October

In October, the seasonally adjusted Business Activity Index moved back above the crucial 50.0 no-change mark to signal a return to growth of service sector output. The index posted 50.4, compared to 46.4 in September, thereby signalling a marginal expansion, but nonetheless the first rise in activity since May. Latest sub-sector data revealed that growth was especially strong in the Finance & Insurance and Business Services sectors.

New business volumes also improved slightly during October for the first time in five months. Panellists commented that market demand was firmer, with sales also supported by the opening of new services and commercial actions. New export business remained weak however with sales to foreign clients down markedly again in the latest survey period, albeit to a lesser extent than in September.

The net increase in overall new work led firms to hire additional staff in October. Although marginal, it was the first time that staffing levels have improved in three months and growth was the best since June. Additional capacity helped firms to keep on top of their workloads, with levels of work outstanding declining for a twenty-eighth successive month. The rate of contraction was solid, though eased since September.

Service providers pointed towards higher salary costs as a source of accelerated input cost inflation in October. Overall, operating expenses rose to the greatest degree for a year with respondents noting that vendors were increasingly willing to increase prices. Several service providers sought to protect margins by raising their own charges, although competitive pressures served to limit pricing power. Output charge inflation subsequently remained modest in the latest survey period and unchanged since September.

Finally, confidence in the outlook remained positive during October, with sentiment edging up to its highest level since March. Expected cuts in interest rates, plus greater political stability both at home and abroad, were cited as reasons that could support higher business activity in the year ahead.

There was a return to marginal growth of Canada’s private sector economy in October following four months of contraction. This was highlighted by the S&P Global Canada Composite PMI Output Index* improving to 50.7, from 47.0 in September. Both goods producers and service providers recorded growth in output.

Higher activity reflected similar-sized increases in new business volumes, and this was sufficiently encouraging for firms to hire additional staff. Overall, the size of the private sector workforce expanded in October for the first time in three months. Rising staff costs meant input price inflation accelerated to a one-year high, although competitive pressures meant output charges rose only modestly.

Confidence in the outlook improved slightly meanwhile, reaching its highest level since March. Firms looked towards lower interest rates to underpin growth in the year ahead.

Eurozone economy starts fourth quarter in stagnation

The seasonally adjusted HCOB Eurozone Composite PMI Output Index recorded 50.0 in October, which indicates no change in private sector output levels when compared with the month prior. This did mark an increase from 49.6 in September but was well beneath the survey average of 52.5.

The stagnation of the euro area economy masked considerably different trends at a sector level, however. Services activity rose for a ninth straight month and growth even ticked slightly higher, while manufacturing production decreased solidly.

Of the eurozone nations which have Composite PMI available, the October survey data showed mixed results. It was the currency bloc’s two biggest economies, Germany and France, which continued to drag on the union’s performance. However, while France fell deeper into contraction, Germany’s downturn cooled.

Declines in activity in these two nations were sufficient to counteract growth elsewhere across the euro area. Spain remained the fastest-growing euro area country in October, despite a slight loss of momentum. Ireland and Italy saw modest upturns, with the latter signalling a renewed expansion.

The level of new work received by private sector firms in the eurozone shrank for a fifth successive month as the final quarter of 2024 got underway. A sharp (albeit softer) deterioration in demand for goods was accompanied by the quickest drop in sales at services companies since January. Factory order books fell at a much stronger margin than that seen for services, in part due to manufacturers experiencing a more pronounced drag on sales from abroad. Aggregate new export business decreased for a thirty-second month in a row during October.

October saw the volume of outstanding business across the euro area shrink as lower demand allowed firms to focus more resources on backlogged orders. The monthly reduction, which was the nineteenth in a row, was solid overall and broad-based by sector.

Subsequently, euro area companies lowered their staffing capacity at the start of the fourth quarter. Albeit marginal, the rate of job shedding was the quickest since December 2020. Cuts to headcounts were exclusive to goods producers, although employment came close to stalling in the service sector.

Surveyed companies in the euro area were less optimistic towards the 12-month outlook for business activity in October. In fact, business confidence weakened for the fifth month running and was at its lowest in the year-to-date.

HCOB PMI data meanwhile indicated a continuation of benign cost pressures across the euro area. In addition to being well below its long-run average, the rate of input price inflation held close to that seen in September and was the third-softest for nearly four years. Eurozone companies raised their prices charged, but only modestly and to the second-slowest extent since February 2021.

The HCOB Eurozone Services PMI Business Activity Index edged slightly higher in October to 51.6, from 51.4 in September, therefore moving further inside expansion territory (above 50.0). Overall, this pointed to a modest and accelerated expansion in services activity across the euro area, although the pace of growth was subdued by historical standards.

Demand presented a drag for service providers in the single-currency market in October. New business receipts fell for a second month running and at the quickest pace since January. Sales made to non-domestic customers weakened in particular, with the respective HCOB index for new export orders registering beneath that for total new business. The decline in new business from abroad was the sharpest for ten months.

Backlogs of work across the service sector declined as less incoming new orders led firms to clear those pending completion. Employment levels rose nonetheless, although the rate of job creation was marginal and the weakest since February 2021. When anticipating activity levels in 12 months’ time, survey respondents were optimistic of growth, although the degree of confidence slipped compared to September.

Lastly, October survey data showed accelerated increases in input costs and output charges, although rates of inflation held close to the lows seen in September.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

(…) “It is not clear if stagnation of the Eurozone economy will be prevented given the Composite PMI recorded 50.0 in October. Our GDP nowcast for the fourth quarter, based on the PMIs and several other indicators, signals a slight contraction, although GDP growth is still possible if the manufacturing sector improves over the next two months, for which the October figures provide some, albeit very tentative, hope.

“Christine Lagarde, President of the European Central Bank, noted at the last ECB press conference that services inflation remains rather sticky. The PMI price indicators support this view. Costs rose at a faster pace in October than in previous months, as did selling prices. In our view, this stickiness is a structural problem related to the demographically induced labour shortage, which is exerting upward pressure on wages. The ECB will find it difficult, if not impossible, to achieve the 2% inflation target in a sustainable manner in this environment.”

China’s provinces push personnel to meet targets as end of year approaches Local governments in China are urging officials to spare no effort in meeting annual economic targets as 2024 nears its end

Chinese localities are redoubling their efforts to meet annual targets for economic growth in the final quarter of the year, calling on officials to accelerate investment, enhance consumption, and increase foreign trade as the window of opportunity begins to narrow.

The southern island province of Hainan, in a meeting of its standing committee on Sunday, emphasised the importance of doing “everything possible” to achieve this year’s economic and social development goals. The committee, the province’s highest political authority, urged government personnel to take a “no excuses” attitude and “make every second count,” according to a statement released after the session.

The committee also instructed officials to “stay sharply focused” on year-end targets, and “use extraordinary measures to spur economic growth and development.” (…)

The provincial meetings follow a speech by President Xi Jinping to senior officials at the Central Party School – China’s foremost ideological training centre – last Tuesday, where he instructed cadres at all levels to do their utmost to reach annual economic targets. (…)

Quarterly growth has slowed consistently over the year, down from 5.3 per cent in the first quarter to 4.7 per cent in the second and 4.6 per cent in the third.

Economists say growth in the final quarter would need to rebound sharply to reach the annual target – with estimates ranging from 5.2 to 5.4 per cent – a daunting task as the nation continues to grapple with a prolonged slump in the property market, hefty debt burdens for local governments and weakened demand across sectors. (…)

Shenzhen, often referred to as “China’s Silicon Valley”, a city of 17.8 million people just across the border from Hong Kong, saw its gross domestic product increase by 5.4 per cent over the year’s first three quarters while outpacing the country’s overall growth for the same period, according to an online statement by the city government on Tuesday. (…)

Dozens of companies based there are now on Washington’s so-called Entity List, which comprises companies and individuals, from a range of countries, that are seen as representing a threat to US national security.

Despite sanction risks, Shenzhen’s hi-tech sector has continued to show robust growth. Its investment in hi-tech manufacturing surged by 42.2 per cent in the first nine months – more than four times the national average. (…)

Shenzhen now boasts 34 unicorn companies – start-ups valued at more than US$1 billion – similar to the total number in Germany, according to a study by the Hurun Research Institute in April.

Shenzhen’s research and development investment accounted for 5.81 per cent of its GDP.

Trade is another key growth driver for Shenzhen. The value of the city’s exports rose by 19.7 per cent to 2.1 trillion yuan in the first three quarters.

According to the Shenzhen government, private enterprises accounted for 70 per cent of this growth.

Shenzhen is currently the world’s leading city for Amazon sellers, hosting more than 102,000, which is 3.6 times higher than second-place Guangzhou, according to the latest data by SmartScout, an analysis tool for Amazon.

25bps Cut? We Strongly Dissent!

We may not know tonight who will be the next president, but we should know which party will win a majority in the Senate and the House. It appears that Republicans are likely to do so. In this case, a Harris administration would be gridlocked, while a Trump administration would have more power to implement his policies, including higher tariffs (raising inflation risks) and lower taxes (ballooning the federal deficits). That could push the 10-year yield up to 4.75%-5.00%, which should attract lots of buyers.

Meanwhile, the Fed is widely expected to cut the federal funds rate (FFR) by 25bps on Thursday. If we were on the Federal Open Market Committee (FOMC), we would strongly dissent in favor of a pause. By most measures, including today’s nonmanufacturing PMI report, the economy has been roaring even before the Fed’s September 18 meeting when the FFR was cut by 50bps.

When the Fed cut by 50bps rather than 25bps on September 18, we immediately concluded that was too much, too soon. The Bond Vigilantes have agreed with our assessment, raising their expectations for long-term inflation and taking the 10-year US Treasury yield from 3.65% on September 16 to 4.44% this evening. (…) (Ed Yardeni)

Goldman Sachs:

Donald Trump has won the White House and Republicans have won a larger-than-expected majority in the Senate. The outlook for the House is still unclear but leans toward a very narrow Republican majority and therefore a Republican sweep. This is likely to lead to a modest fiscal expansion, increased tariffs primarily focused on China, and lower net immigration levels. (…)

If Republicans win a narrow majority in the House, this would allow for full extension of the 2017 tax cuts that expire at the end of 2025, likely including reinstatement of some expired business investment incentives. We expect that congressional Republicans would support modest additional tax cuts to accommodate some of Trump’s campaign proposals, but expect these proposals would be scaled down and would cut taxes by a few tenths of a percent of GDP, primarily focused on individual income taxes (not corporate).

In a Republican sweep, we would also expect federal spending growth to rise somewhat, particularly on defense. While a larger Senate margin (e.g. 55 or 56 seats) could result in greater Republican support for spending cuts in other parts of the budget (i.e., “mandatory” spending on benefit programs), the thin margin in the House might nevertheless pose an obstacle to such plans.

By contrast, in the less likely scenario that Democrats win a very slim House majority, we would expect somewhat greater fiscal restraint as the modest net tax cuts we expect under a Republican sweep would be unlikely, and some of the upper-income tax cuts would be more likely to expire at the end of 2025.

On tariffs, we would expect Trump to impose tariffs on imports from China that average an additional 20pp. While the 10-20% across-the-board tariff that Trump has proposed is not our base case, we believe it is very possible (40% chance) that such a tariff will be implemented. We expect auto tariffs to come into focus and we assume tariffs on auto imports from the EU, though this could be applied more broadly. We estimate that this combination of tariff policies would provide a one-time boost to core PCE inflation that peaks at 30-40bp and a modest drag on GDP.

On immigration, we expect an incoming Trump administration will reduce immigration to around 750k/year, slightly below the 1mn pre-pandemic trend. In the event that Democrats manage to win a narrow House majority, we would expect immigration to decline less, to a pace around 1.25mn/yr. The difference arises from the greater enforcement funding a Republican-controlled Congress would likely approve that would be unlikely in a divided government scenario.

On regulation, an incoming Trump administration would likely take a lighter-touch approach, particularly with regard to energy, financial, and labor policies. By contrast, while some aspects of antitrust policy might ease slightly, we would expect scrutiny of the tech sector to continue.

ING:

Reduced immigration and forced repatriation could become a major constraint on the US economy, particularly in industries such as agriculture. American-born worker numbers are falling and are a million lower than in 2019. The downtrend in US birthrates suggests little prospect of a demographic-driven turnaround.

Employment growth is coming from foreign-born workers, who now make up 19.5% of all US employees. If the foreign-born workforce also shrinks, it could create significant supply-side challenges, driving up wages and inflation. To counteract this, productivity would need to increase substantially. Additionally, fewer active people in the country would mean reduced economic demand.

American-born workers are falling in numbers, foreign-born are rising (millions)

Source: Macrobond, ING

(…) We suspect that the economic implications from reduced population growth, global trade protectionism and the prospect of higher borrowing costs will make it difficult for the US economy to grow rapidly enough to generate tax revenues to fully cover Trump’s fiscal plan.

At the same time, the Federal Reserve may take the view that if fiscal policy is going to be loosened relative to their previous baseline forecast then it needs to run monetary policy tighter, implying a higher neutral interest rate to keep inflation at its 2% target. An environment of higher inflation from tariffs could amplify the risk of a higher, steeper yield curve over the next four years relative to what the US economy has experienced over the previous decade.

That said, we have to remember that Jerome Powell’s term as Fed Chair ends in February 2026 and with the Republicans controlling the Senate President Trump has an easy pathway to nominating and installing a candidate that is more willing to accommodate his views on interest rate policy. One example could be a more compliant Fed that is willing to adopt some form of “yield curve control” should higher Treasury yields threaten to undermine the growth story. Nonetheless, such action risks damaging the central bank’s credibility, potentially prompting an adverse market reaction.

Of course, what Trump proposes during an election campaign and what he eventually delivers as president may be very different. Our view is that while the growth trajectory in the near term looks fine, the more aggressive he goes on fiscal and immigration policies the more challenges this may present for the US economy over time.

A looming new trade war could push the eurozone economy from sluggish growth into a full-blown recession. The already struggling German economy, which heavily relies on trade with the US, would be particularly hard hit by tariffs on European automotives. Additionally, uncertainty about Trump’s stance on Ukraine and NATO could undermine the recently stabilised economic confidence indicators across the eurozone. Even though tariffs might not impact Europe until late 2025, the renewed uncertainty and trade war fears could drive the eurozone economy into recession at the turn of the year. (…)