Fed’s Powell Says Rate Cuts Can Sustain Soft Landing, but Sees No Need to Rush Central-bank leader calls the economy solid; ‘we intend to use our tools to keep it there’
Federal Reserve Chair Jerome Powell said officials would continue to reduce interest rates from a two-decade high to maintain solid economic growth, but they didn’t currently see a reason to lower rates as aggressively as they did at their most recent meeting.
“Overall, the economy is in solid shape; we intend to use our tools to keep it there,” Powell said Monday afternoon at a conference in Nashville, Tenn. Because officials have a relatively favorable economic outlook, “this is not a committee that feels like it’s in a hurry to cut rates quickly,” he added. (…)
“If the economy performs as expected, that would mean two more [quarter-point] cuts this year,” Powell said during a moderated discussion. Rates could move “over time” toward a more neutral stance if economic activity remained healthy, though he said rates weren’t on a preset path, meaning bigger cuts were possible if the job market shows greater deterioration. (…)
Policymakers are facing a puzzle because consumer spending and economic output have expanded steadily this year, but labor market data have shown a pronounced cooling trend. Revisions to government data last week suggested income growth, which had lagged behind measures of economic output, has been better than initially reported.
Those revisions mean personal savings rates have been higher than previously thought, and they provided some reasons for policymakers to be less anxious than they might have been about the economic outlook, Powell said.
At the same time, he cautioned that the latest revisions hadn’t resolved the recent tension between data pointing to solid spending but cooler hiring. The better news on recent years’ household income growth “is not going to stop us from looking really carefully at the labor market data,” Powell said.
BlackRock’s Fink Says Market Is Wrong on Fed Rate-Cut Bets Larry sees no landing, says US economy continues to grow
“I don’t see any landing,” Fink told Bloomberg Television’s Francine Lacqua in an interview Tuesday on the sidelines of the Berlin Global Dialogue 2024 conference. “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate.”
Money markets imply a one-in-three chance the Fed will deliver another half-point cut in November, and price a total of about 190 basis points of easing by the end of next year. But Fink said it’s hard for him to see that materializing, as most government policies at the moment are more inflationary than deflationary. (…)
“There are segments of the economy that are struggling. There are segments of the economy that are doing really well,” said Fink. “We spend so much time focusing on the segments that are doing poorly.”
The CEO at BlackRock, the world’s largest asset manager, also said despite assets valuations and some geopolitical issues, the market isn’t facing any real systemic risk and sees corporate earnings continuing to do well.
“I would argue today that because of the expansion of the global capital markets, we’re diffusing more risk than ever,” he said. “There is actually less systemic risk today than ever before.”
MANUFACTURING PMIs
Euro area manufacturing production falls at steepest pace in 2024 to date
After three successive months of no change, the HCOB Eurozone Manufacturing PMI fell in September to 45.0, from 45.8 in August, to signal a marked and accelerated deterioration in the health of the euro area’s goods-producing economy. Notably, the survey’s headline index fell to its lowest level in the year-to-date and was below the average seen across the current 27-month downturn.
As per the general trend in 2024, pockets of growth appeared in the south of the eurozone. National PMI survey data revealed Spain as having the strongest-performing manufacturing economy in September, with growth here quickening to a four-month high. Greece also continued its expansion sequence, although the upturn cooled markedly to its weakest in a year. Improvements in the south were strongly offset by sustained weakness elsewhere, particularly in the euro area’s largest manufacturing sector, Germany, which recorded its most pronounced worsening of factory conditions for 12 months.
Goods production across the eurozone as a whole continued to decline at the end of the third quarter. Moreover, the pace of contraction was the quickest in the year-to-date. Lower output volumes were a response to the prevailing demand environment, which deteriorated further during September. The latest drop in new orders was sharp and the fastest since December last year. Sales performances were also adversely impacted by conditions overseas, with the latest survey data signalling an accelerated decrease in new business from abroad.
The HCOB PMI figures for September also indicated broad-based retrenchment by eurozone factories during the latest survey period. For example, purchasing activity shrank at the quickest pace since last December, while inventories of both pre- and post-production items were depleted more rapidly than in August. Furthermore, staffing capacity continued to be cut and the overall pace of job shedding was the most pronounced since October 2012, excluding pandemic-hit months.
With the level of incoming new orders shrinking further, eurozone goods producers made additional inroads to their backlogs of work at the end of the third quarter. The rate of depletion was sharp overall and the steepest in the year-to-date.
Meanwhile, the recent trend of shortening delivery times came to an end in September, latest HCOB PMI data indicated, as eurozone manufacturers reported minor delays from vendors. Nevertheless, input costs declined for the first time since May. The price of goods leaving the factory gate across the euro area also decreased in the final month of the third quarter. This contrasted with August, where selling prices were raised for the first time since April 2023. Overall, the extent to which charges were discounted was marginal, but the most pronounced in four months.
Looking ahead, eurozone manufacturers remained slightly optimistic on balance, with those forecasting growth over the next 12 months still outnumbering those predicting contraction. Nevertheless, the overall level of positive sentiment was its weakest in ten months and markedly below the series long-run average.
Japan: Manufacturing business conditions deteriorate slightly in September
At 49.7 in September, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped fractionally lower from 49.8 in August to indicate a slight decline in overall operating conditions.
Output fell for the second time in three months at the end of the third quarter, with the respective seasonally adjusted index only fractionally below the neutral 50.0 threshold. Firms often indicated a lack of incoming new business as a result of economic weaknesses. However, this was partially offset by firms opting to complete outstanding orders. As a result, backlogs of work fell at moderate pace that extended the current sequence of depletion to two years.
The level of new orders placed with Japanese manufacturers also fell in September, and at a moderate pace that was little-changed from that in August. Where sales fell, firms mentioned a stagnating economy and staff shortages were behind the reduction. International demand was also subdued, as new export sales contacted at a solid rate that was the strongest since March.
Japanese manufacturers continued to raise employment levels during the latest survey period. That said, the rate of job creation was fractional and the softest in the current seven-month sequence.
Input inventories were also raised in September, following two consecutive monthly reductions as firms held pre-production inventories in preparation for an eventual demand recovery. (…)
The survey’s price indices showed that inflationary pressures remained elevated across Japan’s manufacturing industry. Firms mentioned higher labour, logistics and raw material prices had been key factors behind higher cost burdens. Positively, the rate of inflation eased from August to reach the lowest for five months.
Firms opted to partially pass these higher costs to clients in the form of raised output charges. The rate of output price inflation eased however and was the slowest seen since June 2021.
China: Soft and softer
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 49.3 in September, down from 50.4 in August. Falling past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector deteriorated following a brief improvement in August. While marginal, the rate of decline was the fastest since July 2023.
Incoming new orders for Chinese manufactured goods declined at the fastest pace since September 2022, attributed to falling underlying demand, heightening competition and subdued market conditions, according to panellists. This included export orders, with softening economic conditions abroad negatively affecting foreign demand. Firms in the investment goods sector recorded the fastest fall in overall new work.
Chinese manufacturers nevertheless worked through existing orders to support production, though the rate at which output expanded eased to the joint slowest in the current sequence, matched only by July’s marginal pace. The volume of unfinished work also shrank for the first time since February.
Overall confidence was affected by concerns over the global economic and trade outlooks. Optimism levels at Chinese manufacturers slipped to the second lowest recorded since data collection for this series began in April 2012. Firms also lowered headcounts amid reduced workloads and cost concerns.
Purchasing activity meanwhile declined amid reduced new work inflows and with adequate inventory holdings. In fact, the slowdown in production growth resulted in pre-production inventory holdings rising for a second successive month in September. Stocks of finished goods accumulated as well owing to outbound shipping delays and as new orders fell. Supply constraints and shipment delays notably led to another slight lengthening of lead times for the delivery of inputs to Chinese manufacturers.
The broad reduction in market demand also affected prices. Anecdotal evidence suggested that average input prices declined as orders fell. This included raw material such as metals. Manufacturers thereby lowered selling prices, including export charges, both to reflect lower input costs and to support sales as competition intensified. The rates at which input costs and output prices fell were the most pronounced in 15 and six months respectively.
This is weak!
The seasonally adjusted headline Caixin China General Services Business Activity Index posted 50.3 in September, down from 51.6 in August. (…)
New business inflows for services firms in China expanded for a twenty-first straight month in September as underlying demand conditions improved. New product launches were often mentioned as reasons supporting higher demand as well. That said, the rate of expansion decelerated to the slowest in nearly a year. That was despite a solid expansion of export business. Anecdotal evidence suggested that a widening of sales channels and marketing efforts enabled exporters to bring in higher foreign orders.
Backlogs increased for a second successive monthly as a result of rising new work inflows. Firms therefore hired additional staff to cope with ongoing workloads. While marginal, the latest rise in employment marked only the third rise in staffing levels in the past eight months.
Turning to prices, average input costs increased in September,attributed to higher input material, labour and energy costs according to panellists. Furthermore, the rate of inflation posted above the series average to the highest in nearly two-and-a-half years.
However, firms were hesitant to raise prices despite the intensification of cost pressures. Average output prices fell for a second successive month. Although marginal, this was only the fourth time that selling prices have declined in the past three years. According to survey respondents, prices were lowered, and discounts were offered in an attempt to support sales amid heightened competition.
Finally, overall confidence fell in the latest survey period to the lowest since March 2020. While firms were broadly hopeful that better market conditions and promotional efforts can boost sales in the year ahead,some raised concerns over rising competition and the global economic outlook.
Commenting on the China General Composite PMI® data, Dr. WangZhe, Senior Economist at Caixin Insight Group said:
“In September, the Caixin China General Composite PMI measured 50.3, down 0.9 points from the previous month. Supply in both the manufacturing and services sectors expanded slightly, with a notable contraction in manufacturing demand. The shrunken labor market in manufacturing dragged on employment at the composite level. Moreover, output prices declined in both sectors by different degrees, while service providers faced significantly increased input costs.Notably, market optimism at the composite level fell to a record low.
“Across the board, the latest macroeconomic data have fallen short of market expectations. Insufficient effective domestic demand remains a prominent issue, with significant pressure on employment and weak optimism constraining people’s willingness and ability to spend.
“Meanwhile, a complex and severe external environment creates greater uncertainty for overseas demand. The economy grew 5% year-on-year in the first half of this year, and the recovery momentum in the third quarter was weak, making it challenging to achieve the annual growth target.
“On the policy front, measures currently in the works should be sped up to take effect sooner, while the need for additional policies has only grown more urgent. Currently, there is relatively sufficient policy space. Fiscal and monetary policies should play a greater role in safeguarding people’s livelihoods, improving the job market and stimulating demand.”
China’s official services PMI is weaker than Caixin’s as Ed Yardeni illustrates. This is weak!
ASEAN manufacturing output dips into contraction for the first time in three years
The headline S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) slipped to 50.5 in September, from 51.1 in August. While posting above the neutral 50.0 threshold for a ninth straight month, the latest reading signalled only a fractional improvement in ASEAN manufacturing operating conditions, and one that was the weakest since February.
The slowdown was largely owed to cooling underlying demand trends. Growth in new orders eased, with the latest uptick the softest recorded in seven months. The upturn was hindered by consistently underperforming trade volumes, which have been declining since June 2022. Moreover, the latest drop in new export sales was sharp and the most marked in over three years.
Weaker demand trends led to a fresh decline in output, with ASEAN goods producers experiencing their first drop in three years. However, the overall rate of contraction was minimal. Whilst manufacturers continued to increase their purchasing, the rate of growth also softened from August and was only mild.
More positively, a fresh rise in payroll numbers was noted in September. Months of improving sales volumes supported the modest rise in employment, which was also the joint-strongest (along with February’s reading) in two years.
The rate of input price inflation cooled since August, with cost burdens rising at the weakest pace in 13 months. The rate of charge inflation also softened and was marginal overall.
Lastly, confidence in the outlook for output registered an improvement, with optimism reaching its highest level since the start of the year. ASEAN manufacturers are hopeful that output will grow over the next 12 months.
China’s Housing Glut Collides With Its Shrinking Population Many cities are stuck with empty homes that they will likely never fill, adding to the country’s economic woes
The country could have as many as 90 million empty housing units, according to a tally of economists’ estimates. Assuming three people per household, that’s enough for the entire population of Brazil.
Filling those homes would be hard enough even if China’s population were growing, but it’s not. Because of the country’s one-child policy, it is expected to fall by 204 million people over the next 30 years.
“Fundamentally, there are not enough people to fill the homes,” said Tianlei Huang, a research fellow at the Peterson Institute for International Economics.
Some unused real estate will be bought up and lived in, especially if more government support—which economists have been calling for—convinces Chinese buyers that values will rise again. Big cities like Beijing, Shanghai and Shenzhen will almost certainly absorb their excess housing, given their dynamic economies and migrant inflows, which have helped keep their populations growing.
The problem is much harder to solve in smaller cities, which often have weaker economic prospects and declining populations. In China, researchers informally group cities into tiers, and many of the nearly 340 cities classified as third-, fourth- and fifth-tier—with populations from few hundred thousand to several million people—are struggling economically.
At least 60% of China’s third-, fourth- and fifth-tier cities saw their populations shrink from 2020 to 2023, according to Wall Street Journal calculations based on official data.
Those cities have more than 60% of China’s housing inventory, according to Harvard economics professor Kenneth Rogoff. Many encouraged developers to build more—even when their populations were falling—because land sales and construction boosted economic growth and fattened local governments’ wallets. (…)
Many will become long-term burdens to cities and investors who get saddled with assets they can’t sell and which have lost their value, yet still must be maintained. Some will just wither away, economists say. (…)
In such places, “it is very hard to maintain law and order, even probably in China,” he said. “I think it’s going to be a big social and governance problem in the future.” (…)
Of the up to 90 million units that are unoccupied, as many as 31 million were fully or partially built but never sold. Such properties could be bulldozed, but many are tied up in litigation related to developers’ bankruptcies. In many cases, cities and developers hope to finish them.
Another 50 to 60 million units were bought but remain empty. (…)
Approximately 74% of Chinese households in first- and second-tier cities owned more than one home across China, while nearly 20% owned three homes or more, according to a recent survey by Citi Research.
These homes are potentially more difficult to deal with because their owners still hope for appreciation. Many are in partially occupied buildings that can’t be torn down.
An additional 20 million units were sold but were left largely unbuilt by developers due to cash-flow problems and poor market conditions. The owners still want them, but developers don’t have money to finish them. (…)
In China, many owners of empty properties are likely to keep maintaining their units, since management fees in China are low and property taxes are only levied in special cases. Tough personal-bankruptcy rules in China make it hard to walk away from properties, and many want to hang on to them for a possible market rebound.
Still, some economists fear a negative spiral in which declining home prices spur more owners to try to unload empty units, depressing values for everyone. (…)
Property prices in most cities have returned to 2017 and 2018 levels, said Yi Wang, head of China real-estate research at Goldman Sachs. If prices drop to 2015 levels, many more owners might choose to sell unoccupied properties. That’s because 2015 was the beginning of the last boom, and owners who bought early won’t want to see their units’ values fall below what they paid, Wang said.
That might be inevitable, though, given China’s falling population.
“I don’t think the housing oversupply problem has a solution, really,” said Huang, of the Peterson Institute. “Fundamentally, it’s the problem of declining demographics. Ghost cities will remain ghostly.”