US Manufacturing Demonstrates Resilience Amidst Volatility in August
Economic news and commentary for September 27, 2023
US Durable Goods New Orders
US durable goods activity took a break from a volatile series of readings in August with its first reading between -0.5% and 0.5% since September 2022. Durable goods new orders were up just 0.2% MoM after a massive drop of -5.6% MoM in July (revised down from -5.2% MoM). This is the fifth increase in the last sixth months, and over the course of that time period, the total value of new orders has increased 5.1%. That trend alone suggests that the US manufacturing sector remains resilient.
Of course, this headline figure includes volatile data points so it is important to look at the details. Durable goods new orders (excluding transportation) were up 0.4% MoM, but orders (excluding defense) were down -0.7% MoM. This comes down to volatility in the transport segment: nondefense aircraft orders fell -15.9% MoM while defense aircraft orders jumped 19.2% MoM. The sharp decline in the former is not necessarily something to worry about. Nondefense aircraft orders have been falling consistently since surging up to $37.5 billion in June which is the second highest on record only after an even sharper spike in July 2014 to $77.4 billion.
Beyond the volatility, most segments gained in September. Machinery new orders were up 0.5% MoM, electronics products were up 0.3% MoM, and electrical equipment and components jumped 1.1% MoM. All are were positive components of the “core” segment of durable goods new orders, nondefense capital goods (excluding aircraft). In September, this segment saw a health gain of 0.9% MoM, reversing two straight months of losses. The incline saw the annual increase go from 0.8% YoY to 2.1% YoY, and the current quarterly gain in Q3 improved from a negative reading to up 0.5% MoM which is supportive of optimistic GDP growth estimates (see GDPNow forecast).
The US manufacturing sector once again refuses to capitulate and will go into the final quarter of the year with positive momentum. This is positive momentum that analysts continue to be surprised by. Today’s release of the core segment topped the consensus estimate of no growth by a considerable margin. The unexpected expansion is a sign that manufacturers can operate under tighter financial conditions which give credence to the Fed’s insistence on “higher for longer.” It also means that the US remains on track to avoid a recession and glide into a soft landing.
Still to come…
10:00 am (EST) - US State Street Investor Confidence
10:00 am - US EIA Petroleum Status Report
11:00 am - US Survey of Business Uncertainty
9:30 pm - Australia Retail Sales
Morning Reading List
Other Data Releases Today
Germany's GfK Consumer Sentiment is expected to fall a further -0.9 pts to -26.5 in October. However, the propensity to save index improved 7.5 pts to 8.0, the highest since April 2011. Economic expectations and propensity to buy remain low.
Euro area M3 money supply fell -1.3% YoY in August, down from -0.3% YoY in July. M1 money supply was down -10.4% YoY from -9.2% YoY. Growth of loans to households was 1.0% YoY (prev 1.3% YoY), and the growth of loans to businesses was 0.6% YoY (prev 2.2% YoY).
French household confidence resumed a downtrend in September, falling -2 pts to 83. The standard of living index fell -3 pts to -82, levels last seen during the GFC.
Unemployment expectations increased as well, up 4 pts to 21.
Euro Area Money Supply
Eurozone bank lending still under pressure from higher rates (ING) - Bank lending to businesses in the eurozone dropped sharply in August while household borrowing ticked up slightly. Overall, higher rates and weak economic activity will dampen investment in the quarters ahead, keeping economic activity sluggish at best.
US New Home Sales
New Home Sales Weaken in August on Higher Mortgage Rates (NAHB) - Elevated mortgage rates and challenging affordability conditions pushed new home sales down to their weakest rate since March. Sales weakened in August with average mortgage rates above 7%. While some builders were able to offset that effect via mortgage rate buydowns, rates moved higher this month, suggesting the pace of new home sales will weaken further for September.
New Single-Family Home Sales Declined 8.7% in August (First Trust Portfolios) - New home sales remained choppy, posting a widely expected decline as the housing market tries to digest the recent rise in mortgage rates. Sales have generally been on an upward trend in the past year and are now 24.3% above the low in July of 2022. However, they still remain well below the pandemic highs of 2020.
New Home Sales Pulled Back in August: Higher Mortgage Rates Start to Weigh on New Home Sales (Wells Fargo) - Thus far, builders have been largely successful navigating the headwinds triggered by the Fed’s monetary tightening cycle. Favorable supply dynamics and builders’ use of incentives have prompted new home sales to improve on balance this year despite the rising interest rate environment. Yet, the recent surge in mortgage rates may be weighing on demand as buyers increasingly become discouraged by the prospect of higher financing costs. New home sales dropped 8.7% in August, the largest monthly decline since September 2022.
US Consumer Confidence
Consumer Confidence Falls Again in September (NAHB) - Consumer confidence saw another decline in September as consumers expressed growing concerns about the future, primarily driven by persistent inflation and expectations of higher interest rates lasting for an extended period.
Confidence Is Getting Shaky Just as the Safety Net Gets Smaller (Wells Fargo) - Soft confidence in recent years has not always translated into spending declines partly because consumers were flush with cash and had easy access to affordable credit. But with savings running dry and credit now scarce and costlier, the biggest monthly decline in consumer confidence since 2020 could be more impactful on actual spending.
US
U.S. Government Shutdowns & U.S. Dollar Implications (Wells Fargo) - A potential U.S. government shutdown that could start October 1st looms, the chances of which are more or less seen as a coin flip at this point. Should a shutdown transpire, there could be a negative impact of the U.S dollar, albeit one that is likely to be modest and short-lived. Recent history suggests the U.S. dollar index (DXY) could fall by around 1%-1.5% in the several weeks following the start of the shutdown.
"Higher-for-longer" means "until-something-breaks" (Saxo Bank) - Long-term yields are likely to continue to soar for as long as the Federal Reserve can convince markets it won't need to cut rates aggressively in the foreseeable future. Yet, the intensity of the recent rise in yields calls for a correction, which may come with a government shutdown at the end of the week.
Who Uses “Buy Now, Pay Later?” (Liberty Street Economics, NY Fed) - “Buy now, pay later” (BNPL) has become an increasingly popular form of payment among Americans in recent years. While BNPL provides shoppers with the flexibility to pay for goods and services over time, usually with zero interest, the Consumer Financial Protection Bureau (CFPB) has identified several areas of potential consumer harm associated with its growing use, including inconsistent consumer protections, and the risk of excessive debt accumulation and over-extension.'
China
China Economic Outlook. September 2023 (BBVA) - Chinese economy slowed down in Q2 amid housing crash and deflation expectation. We expect the economy could bottom out in the rest of year with the help of policy support.
Australia
Australia: Inflation back on the rise (ING) - While this is mostly down to less helpful base effects, international energy prices and excise duty hikes, it is not safe to conclude that the RBA rate cycle has peaked.
FX
Gauging EUR/USD downside risks in a bearish bond market (ING) - We estimate that further US bond weakness and 10-year Treasury yields hitting 5.0% would bring EUR/USD to the 1.02 area. While near-term upside risks to back-end yields are non-negligible, short-term USD swap rates should be more capped given a smaller pricing/dot plot gap compared to last June. Our medium-term baseline remains bullish for EUR/USD.
Mexican peso strength noteworthy among emerging markets during Fed tightening (Dallas Fed) - Many emerging-market currencies have depreciated modestly during the Federal Reserve’s tightening cycle that began in March 2022. The Mexican peso, however, has outperformed the group during the period, appreciating around 20 percent against the dollar. The unusual strength of the peso, which makes up 13.8 percent of the Fed’s trade-weighted dollar index, can be attributed to short-run factors such as high interest rate differentials relative to the U.S. and investor positioning, as well as longer-run macroeconomic fundamentals.
Commodities
Gold’s short-term outlook challenged by relentless yield surge (Saxo Bank) - Gold continues to defy the gravitational pull from rising US Treasury yields and a stronger dollar which gathered further momentum after the US Federal Reserve last week delivered a hawkish pause in their aggressive rate hike campaign. But while the normally strong inverse correlation with dollar and yields have faded, thereby reducing selling pressure from algorithmic focused trading strategies, gold's resilience continues to point to demand from investors seeking a hedge against nervous markets and the rising risk of stagflation hitting the US economy in the coming months.
Rates
Fixed-income: How much higher can bond yields go? (Saxo Bank) - In today's fixed income focused podcast we aim to answer the crucial question of how much higher bond yields can go given the latest move higher in the US 10-year yield putting pressure on equities. If energy prices remain bullish and economic data continues to look solid then the US 10-year yield could reach the 5-5.25%. In the case of weakening economic data and lower inflation the narrative in bonds could quickly turn on its head. We also talk about timing and bond carry to understand the dynamics of investing in bonds. Finally, we provide some example of credit bonds for those investors seeking high bond yields with short maturity and high credit quality, with Peter Garnry and Althea Spinozzi.
Rates Scenario for September 26, 2023 (BMO) - Our forecasts for Federal Reserve and Bank of Canada policy rates have changed since our last Rates Scenario (August 24). We still judge that current levels will likely mark the cycle peaks, and it remains a close call (i.e., highly data dependent). But, irrespective of another rate hike, we’ve reduced next year’s total rate cuts to 50 bps from 75 bps on both sides of the border. This reflects the theme of ‘higher for longer’ amid continued economic resiliency (but less so now in Canada) and inflation stubbornness.
US | Higher long-term yields on strong growth (BBVA) - The yield curve has flattened as mid- and long-term yields have moved up sharply “not because of inflation”; it probably has “something to do with stronger growth” and more recently with a more hawkish Fed.
Research
The Expectations of Others (Cleveland Fed) - Based on a framework of memory and recall that accounts for social networks, we provide conditions under which social networks can amplify expectations. We provide evidence for several predictions of the model using a novel dataset on inflation expectations and social network connections: Inflation expectations in the social network are statistically significantly, positively associated with individual inflation expectations; the relationship is stronger for groups that share common demographic characteristics, such as gender, income, or political affiliation.
Green
How climate change affects potential output (ECB) - Climate change and the actions taken to tackle it will profoundly change economic activity in the coming decades. Eliminating carbon emissions requires changes to how people consume and how businesses produce. Without sufficient progress in reducing emissions, average temperatures will increase, sea levels will rise, and climate extremes will become more frequent and more powerful.
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