Week of October 7, 2024
The global economy is presenting a complex picture as we head into October, with varying signals from major economies regarding job markets, consumer spending, inflation rates, and the manufacturing sector. This week, notable trends have emerged, particularly in the US, Eurozone, and Asia, indicating both strength and vulnerabilities in the economic landscape.
The US Job Market is Much Stronger Than Expected
Contrary to prevailing assumptions that the US labor market was softening, recent government reports revealed a robust job growth scenario, leading investors to reassess their outlook. In September 2024, the establishment survey recorded an impressive 254,000 new jobs, marking the largest monthly increase since March. Key sectors such as healthcare (71,700 jobs), leisure and hospitality (78,000 jobs), and construction (25,000 jobs) drove this growth, while manufacturing remained stagnant. The unemployment rate dipped from 4.2% to 4.1%, indicating a resilient labor market.
Wage growth also saw a significant uptick, with average hourly earnings rising 4% year-over-year. This increase is likely to capture the Federal Reserve’s attention, given that higher wages could complicate their inflation goals. Following this report, futures markets adjusted, indicating a 94% probability of a 25-basis-point cut at the Fed’s upcoming November meeting, contrasting sharply with previous expectations of a larger reduction.
US Household Income and Consumer Spending Grow Modestly
In August, real disposable income and consumer spending both increased by 0.1%, suggesting that the consumer segment is stabilizing after recent fluctuations. Interestingly, spending growth was attributed solely to service purchases, while spending on durable and nondurable goods remained unchanged. The personal savings rate saw a slight decline from 4.9% to 4.8%, indicating households are regaining confidence in their financial situation.
The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) deflator, showed a year-over-year increase of 2.2% in August, comfortably within target ranges. With core inflation (excluding food and energy) at 2.7%, these figures reinforce the Fed’s cautious stance on interest rate adjustments.
Eurozone Inflation Continues to Ease
In the Eurozone, inflation fell below the European Central Bank’s (ECB) 2% target, registering at 1.8% in September—the lowest rate in three years. This decrease could encourage further interest rate cuts, although the ECB remains cautious. Core inflation, which excludes volatile items, also reflected a decrease to 2.7%.
Expectations are mounting for another 25 basis point cut during the ECB’s upcoming meeting, following the recent inflation report. However, equity markets reacted negatively, reflecting concerns over the eurozone’s economic state, as bond yields in major economies dropped, and the euro weakened.
BIS Offers a Sobering View of Future Central Bank Policy
The Bank for International Settlements (BIS) has issued a stark warning regarding future central bank policies amid increasing global economic volatility. Deputy General Manager Andrea Maechler highlighted that geopolitical tensions and climate issues could lead to frequent price spikes, necessitating more aggressive monetary tightening from central banks to keep inflation in check. She emphasized that demographics and trade restrictions may exacerbate these shocks, suggesting a possible shift towards a regime of higher and more volatile inflation.
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Bank of Japan Urged to Slow Down Monetary Easing
In Japan, the Bank of Japan (BOJ) is under pressure to adjust its monetary policy as inflation begins to stabilize. BOJ Governor Asahi Noguchi indicated that interest rate hikes may be on the horizon, albeit at a cautious pace to avoid hampering economic recovery. The new Prime Minister, Shigeru Ishiba, echoed this sentiment, asserting that the economy is not prepared for significant interest rate increases, contributing to fluctuations in the yen’s value.
Global Manufacturing Industry Continues to Weaken
The latest purchasing managers’ indices (PMIs) signal a declining trend in the global manufacturing sector. The composite global PMI fell from 49.6 to 48.8 in September, reflecting broader declines in output, new orders, and employment across many major economies. The US PMI recorded a slight decrease to 47.3, while the eurozone’s PMI plummeted to 45.0, the lowest in nine months.
Conversely, manufacturing activity in India remained strong, with a PMI of 56.5, indicating robust expansion. As global manufacturing faces numerous challenges, including supply chain disruptions and declining demand, many analysts anticipate further easing of monetary policies by central banks to stimulate growth.
As we assess the current state of the global economy, it is clear that while some regions are exhibiting signs of strength—such as the US job market and Indian manufacturing—others are grappling with significant challenges, notably in the Eurozone and Japan. Central banks are likely to navigate a complex path of policy adjustments in response to evolving economic indicators, with a focus on sustaining growth while managing inflationary pressures. As we move further into October, investors and policymakers alike will be keenly observing these developments.
