Growth, Inflation Trends Persist

For the week ending 30 August 2024

As of midday Friday, global equities were higher on the week, with small-cap stocks performing particularly well. The yield on the US 10-year Treasury note edged up to 3.86% from 3.80% a week ago while the price of a barrel of West Texas Intermediate crude oil added $0.50 to $75.75. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), slipped to 15.5 from 16 last week.

MACRO NEWS

No surprise from Fed’s favorite inflation measure

The core personal consumption expenditures price index held steady at 2.6% in July, in line with economists’ forecasts. After the data were released, investors priced in at least a 0.25% cut from the US Federal Reserve on 18 September with about a 1-in-3 chance of a 0.50% cut. Next Friday’s US employment data will be critical in determining the size of the cut, with a sharp deterioration in the labor data arguing for a larger one. US personal income rose 0.3% in July, slightly beating expectations, while personal spending rose 0.5%.

US Q2 growth revised up

The US economy expanded at a 3% annual rate in the second quarter, up from an initial 2.8% reading. Personal consumption, the biggest driver of US economic activity, expanded a revised 2.9% last quarter, up from a first estimate of 2.3%, while the core PCE price index was revised down to 2.8% from 2.9%. While the data are backward looking, they point to solid US growth and slowing inflation.

China warns of risks from low bond yields

The Financial Times reported this week that China plans to issue billions of dollars’ worth of government bonds before the end of the year, a move that could cause a correction in what some see as a bubble in the country’s bond market. While developed market bond yields have risen in recent years, low investor confidence has pushed the yield on Chinese government bonds toward modern-day lows. China’s central bank is warning that a sudden reversal in the yield environment could threaten financial stability as it did in the United States in the spring of 2023, when a number of regional banks failed due to heavy exposure to low-rate bonds.

US, China hold high-level meetings

US National Security Advisor Jake Sullivan and China’s Foreign Minister Wang Yi met in Beijing this week to try to stabilize relations between the two countries. The talks covered a range of areas over which the two sides are at odds, including trade, the Middle East, Ukraine, and China’s territorial claims over Taiwan and the South China Sea. Chinese President Xi Jinping met with Sullivan on Thursday and agreed to hold talks with President Joe Biden by phone in the coming weeks.

QUICK HITS

Flash inflation data from the eurozone showed that consumer prices rose 2.2% in August from a year ago, close to the European Central Bank’s 2% target. The data help make the case for a further quarter-point rate reduction at the September ECB meeting.

British Prime Minister Keir Starmer said this week that his government’s first budget, to be presented in October, will be painful. Among the taxes analysts say could be raised are those on capital gains, inheritances and fuel, along with cuts to payments to pensioners to help pay winter heating bills.

The Financial Times reported this week that private equity firms are putting the brakes on deals in China due to geopolitical concerns.

The US has offered to escort Philippine ships on resupply missions in the South China Sea after a series of clashes between Philippine and Chinese vessels in the past year. The Philippines said it wouldn’t take the US up on the offer until it had exhausted all other options.

Bloomberg reported this week that the value of US office buildings has fallen 52% from their highs as landlords walk away from aging downtown buildings.

The Case-Shiller national home price index in June rose 5.4% from a year earlier.

Directors at the Federal Reserve Banks of New York and Chicago voted in July in favor of lowering the so-called discount lending rate, records released by the Fed Wednesday showed, a further sign that the Fed funds rate will be trimmed in September.

Australia’s consumer price index rose 3.5% in July, down from 3.8% in June, but it missed expectations of a drop to 3.4%.

Berkshire Hathaway joined the $1 trillion market-cap club on Wednesday. It’s the seventh stock to hit that mark, and the first nontech company.

The Wall Street Journal reported Thursday that looser labor market conditions are now allowing companies to offer workers significantly lower starting salaries than they did a year ago. Signing bonuses are increasingly rare and firms are hiring in lower-cost locales, the paper reported, including overseas. Some firms are laying off entire divisions, renaming them and making new hires at much lower compensation levels.

Reuters is reporting that China’s plan to resolve its property mess is off to a slow start. Only 4% of a 300 billion yuan ($42 billion) relending scheme to help mop up residential inventory has been drawn by local governments and state firms, central bank data show. 

US pending home sales declined 5.5% in July, more sharply than expected. Sales slipped in every region of the country.

On Thursday, Fitch Ratings affirmed the US’ AA+ rating with a stable outlook. The rating is supported by structural strengths in the US, such as high per capita income, its position as the world’s largest economy and a dynamic business environment. The rating, however, is also constrained by large deficits, a high debt load and substantial interest burden.

Brazilian President Luiz Inácio Lula da Silva has chosen Gabriel Galipolo, a political ally, to head the country’s central bank. Lula has been at odds with current Central Bank of Brazil Governor Roberto Campos Neto since the bank jacked up interest rates amid a pandemic-inspired inflation surge. If confirmed by Brazil’s Senate, Galipolo will take office in December.

After rejecting the candidate for prime minister proposed by the left-wing coalition which placed first in July’s parliamentary election, French President Emmanuel Macron said Thursday that he is doing his best to find a PM. There has been a political deadlock over the choice for over a month since there are three electoral blocs in the country, they are roughly equal in size and none holds a majority.

Canada’s economy grew at a 2.1% annualized rate in Q2, more quickly than the expected 1.8% consensus estimate and up from Q1’s 1.8% pace.

THE WEEK AHEAD

US markets are closed Monday for Labor Day. Manufacturing purchasing managers’ indices are set for release globally on Monday (Tuesday in the US). On Wednesday, the US will release JOLTS data for July. Services sector and composite PMIs will be out Thursday along with eurozone retail sales and US unit labor costs and productivity. Eurozone GDP will be released Friday, as will US and Canadian employment data.

EARNINGS NEWS

With about 98% of the constituents of the S&P 500 Index having reported for Q2 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 11.4% compared with the same quarter a year ago, according to data from FactSet. This was faster than the 6% pace set in Q1. Sales growth is up 5.3% year over year. AI bellwether Nvidia, the most eagerly awaited report of the quarter, exceeded analysts’ expectations, though the size of the beat was smaller than in recent quarters. The company’s revenues merely doubled year over year last quarter after nearly tripling during the prior two quarters.