Fed's Beige Book: Economic Activities in More Districts Experiencing Stagnation, Inflationary Pressures to Stabilize

Economic

Data Interpretation

Summary:

The Fed's Beige Book on economic conditions on Wednesday indicates that the number of Districts experiencing stagnant or declining economic activity has increased to 9, up from 5 in July. Consumer spending has notably decreased in the majority of Districts, and there is a reduction in manufacturing activity. Moreover, there is a widespread expectation that price pressures will stabilize in the foreseeable future.

On September 4, the Federal Reserve released the August Beige Book, with the highlights as follows:

Economic activity grew slightly in three Districts, while the number of Districts that reported flat or declining activity rose from five in July to nine in August.

Consumer spending ticked down in most Districts, having generally held steady during the prior reporting period. Auto sales continued to vary by District, with some noting increases in sales and others reporting slowing sales because of elevated interest rates and high vehicle prices. Manufacturing activity declined in most Districts, and residential construction and real estate activity were mixed. Looking ahead, District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though contacts in three Districts anticipated slight declines.

Employment levels were generally flat, and some firms only saw slight or modest increases in overall headcounts. A few Districts reported that firms reduced shifts and hours, left advertised positions unfilled, or reduced headcounts through attrition—though accounts of layoffs remained rare. Employers were more selective with their hires and less likely to expand their workforces, citing concerns about demand and an uncertain economic outlook. Accordingly, candidates faced increasing difficulties and longer times to secure a job. On balance, wages rose at a modest pace, in line with the slowing trend described in recent reports.

Prices rose modestly, with increases in non-labor input costs and selling prices ranging from slight to moderate. A number of Districts observed that both freight and insurance costs continued to increase. By contrast, some Districts noted that cost pressures moderated for food, lumber, and concrete. Looking ahead, contacts generally expected price and cost pressures to stabilize or ease further in the coming months.

August Beige Book

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United States Department of Labor

Economic

Data Interpretation

On September 4, the U.S. Bureau of Labor Statistics released the JOLTS job openings data for July:

The number of job openings was 7.673 million in July, while the expectation was 8.1 million and the previous month recorded 7.91 million (revised).

The rate of layoffs and discharges was 1.1:1, compared to the previous 1.2:1.

Data shows that the number of job openings fell to the lowest level since the beginning of 2021, far lower than the expected 8.1 million. The previous reading was revised downward from 8.184 million to 7.91 million. The rate of layoffs and discharges was 1.1, slipped significantly compared to June, and hit the lowest level in three years.

Job openings increased in professional and business services (+178,000), but declined in private education and health services (-196,000). Meanwhile, job openings dropped in trade, transportation and utilities (-157,000), as well as in federal government (-92,000).

Hires: In July, the number and rate of hires changed little at 5.5 million (an increase of 273,000 from June) and 3.5 percent (up from 3.3 percent), respectively. Both remained at a low level. Leisure and hospitality were low, rebounding from the abnormal 4.5 percent in June to 5.5 percent. The federal hiring rate plunged from 1.7 percent in March to 1.4 percent in July.

Separations: Separations increased to 5.4 million in July, or 3.4 percent. The number of job openings was substantially decreased in health care and social assistance. Moreover, the number of quits was unchanged at 3.3 million but was down by 338,000 over the year. Over the month, the quits rate changed a little at 2.1 percent. The number of separations hit 1.76 million, the highest level since March 2023 with the majority in leisure and hospitality. The rate of layoffs and discharges rose slightly to 1.1 percent.

The balance between labor supply and demand is shifting due to declining job openings, and rising layoffs and unemployment. In addition, signs of labor market weakness become more pronounced, heightening concerns about a potential recession and heating up expectations for a rate cut. After the JOLTS report was released, the market's expectations for a 50-bps rate cut in September rose to 45 percent.

U.S. July JOLTs

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BOC

Remarks of Officials

Central Bank

On September 4, following the BOC's August interest rate decision, Governor Tiff Macklem held a press conference. He said:

Our decision reflects two main considerations. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to the target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.

In the second quarter, the economy grew by 2.1%, led by government spending and business investment. This was slightly stronger than forecast in July. Together with first-quarter growth of 1.8%, this suggests the economy grew by about 2% over the first half of 2024. Our July projection has growth strengthening further in the second half of this year. Recent indicators suggest there is some downside risk to this pickup.

The unemployment rate has risen over the last year to 6.4% in June and July. The rise is concentrated in youth and newcomers to Canada, who are finding it more difficult to get a job. Business layoffs remain moderate, but hiring has been weak. The slack in the labour market is expected to slow wage growth, which remains elevated relative to productivity.

Turning to price pressures, CPI inflation eased further to 2.5% in July, and our preferred measures of core inflation also moved lower. With the share of CPI components growing above 3% now around its historical norm, there is little evidence of broad-based price pressures. But shelter price inflation is still too high. It remains the biggest contributor to overall inflation, despite some early signs of easing. Inflation also remains elevated in some other services.

It (inflation) may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be stronger than expected. At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.

Let me conclude. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.

Macklem's Press Conference

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Stocks

Economic

September starts with a bang

Historically, September has been a challenging month for investors in global markets. Unlike other months that might offer more predictable returns, September often delivers disappointing outcomes. This phenomenon has earned the month a reputation for underperformance, with many investors bracing for potential declines. On average, the S&P 500 tends to end September with negative returns.

Trading volumes spike in September

One of the contributing factors to this trend is the increased trading volume that typically occurs after Labor Day. As summer winds down and traders return to their desks, the markets experience a surge in activity. This uptick in trading can lead to higher market volatility, which often translates into sharper price movements. The combination of increased trading volumes and heightened volatility creates a challenging environment for investors, leading to the underperformance seen during this month.

Recent poor performance for the month

Over the past four years, the S&P 500 has dropped in September, reinforcing the perception that this month is particularly difficult for the markets. This pattern has left many investors wary, prompting them to carefully consider their investment strategies as September approaches.

Fed and payrolls dominate the month

This year, September promises to be no different, with several key events on the calendar that could further impact market performance. One of the most significant is the Federal Reserve's (Fed) policy meeting scheduled for 18 September. The meeting is expected to see a 25 basis point cut, following on from chairman Jerome Powell’s comments at Jackson Hole in August.

Another critical event is the release of the August jobs report on 6 September. This report provides a snapshot of the labour market's health, and strong or weak employment data can sway investor sentiment. If the report shows robust job growth, it could signal a strong economy, potentially leading to a more hawkish stance from the Fed. Conversely, weaker job numbers could raise concerns about an economic slowdown, influencing the Fed to consider easing monetary policy.

The outcomes of these events will likely play a significant role in shaping market performance throughout September. Additionally, they could impact the Fed's interest rate decisions, which are crucial for investors. A change in rates can affect everything from bond yields to stock valuations, making the Fed's decisions a focal point for the markets.

Election years see weakness extend into October

In election years, the volatility that typically characterizes September can extend into October. This is due to the uncertainty surrounding the election outcomes, which can keep markets on edge. However, once the election results are known, markets often experience a relief rally as uncertainty dissipates. This pattern has been observed in previous election cycles, providing a glimmer of hope for investors navigating the turbulent waters of September and October.

A time to reassess portfolios?

Despite the challenges that September often presents, experts advise against making drastic portfolio adjustments based solely on seasonal trends. While it can be tempting to react to the historical underperformance of the month, a more measured approach is usually recommended. Instead of making wholesale changes, investors might consider adjusting their portfolios to better align with current market conditions.

For instance, if interest rates are expected to fall, dividend-paying stocks in sectors like utilities and consumer staples might be attractive. These stocks tend to offer more stable returns and can be less sensitive to economic fluctuations. On the other hand, if the US dollar is expected to depreciate, sectors like healthcare and aerospace/defence could benefit, as these industries often have significant international exposure.

Another strategy that has proven effective over time is buying during market lows in September or October. Historically, markets have tended to rally towards the end of the year, making these months potentially opportune times to invest. This strategy capitalises on the seasonal weakness and positions investors to benefit from the subsequent recovery.

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BOC

Remarks of Officials

Central Bank

The BOC reduces policy rate by 25 basis points to 4.25% on September 4. Its monetary policy statement shows:

In Canada, the economy grew by 2.1% in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July. The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.

As expected, inflation slowed further to 2.5% in July. The BOC's preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm. Inflation also remains elevated in some other services. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow.

With continued easing in broad inflationary pressures, the Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. The Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and the assessment of their implications for the inflation outlook.

BOC Monetary Policy Statement

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FastBull Featured

Daily News

Central Bank

Economic

Political

[Quick Facts]

1. U.S. labor market cools further.

2. Bank of Canada makes its third consecutive rate cut.

3. BOC's Macklem: More rate cuts possible if inflation eases as expected.

4. White House pushes new plan to break Gaza negotiation deadlock.

5. Harris pushes 28% capital gains tax rate on $1 million earners.

6. Fed's Beige Book: Most districts saw stagnant economic activity and expected pricing pressures to stabilize.

7. Bostic: Risks to Fed's jobs and inflation goals now in balance.

8. Canada's NDP pulls support for Trudeau's Liberals.

[News Details]

U.S. labor market cools further

The Bureau of Labor Statistics reported on Wednesday that U.S. Job openings fell to 7.67 million in July from the revised 7.91 million in June, dropping to the lowest level since the beginning of 2021. The ratio of job vacancies to unemployed workers fell to 1.07 from the revised 1.16 in June, suggesting that the labor market is looser than it was before the pandemic.

Thus, the labor market may be cooling faster than the Federal Reserve expects. With layoffs and unemployment increasing amid a decline in job openings, the balance of labor supply and demand is shifting to show more pronounced weakness in the labor market.

Bank of Canada makes its third consecutive rate cut

The Bank of Canada lowered its benchmark interest rate for a third consecutive time on Wednesday, reducing the policy rate by 25 basis points to 4.25%, citing continued easing in broad inflationary pressures. Currently, Canada's inflation is edging closer to the central bank's target, with headline inflation falling to a 40-month low of 2.5% in July. Elevated housing prices remain the main driver for headline inflation, but they have begun to slow. The Bank of Canada forecasts continued economic growth, with GDP expected to rise 1.2% this year and 2.1% in 2025. Markets widely expect the Bank of Canada to cut rates again at the end of October.

BOC's Macklem: More rate cuts possible if inflation eases as expected

Bank Of Canada (BOC) Governor Tiff Macklem said Wednesday that the central bank is encouraged by slowing price growth and hopes to use this opportunity to boost economic growth again. While corporate layoffs have been mild, hiring activity has noticeably slowed down, and a weaker labor market may dampen wage growth. As inflation approaches the target, there is a growing need to guard against the risks of an overly weak economy and excessive inflation decline. If inflation eases as expected, it is reasonable to expect further rate cuts.

White House pushes new plan to break Gaza negotiation deadlock

The White House is busy working on a new proposal for a Gaza cease-fire and the release of hostages in the coming days, two U.S. officials, two Egyptian security sources and an official familiar with the matter said. The U.S. officials said the new proposal is aimed at resolving the main sticking point in the months-long stalemate in cease-fire talks.

A senior U.S. official said Wednesday that much of the deal has been agreed upon, but negotiators are still trying to hammer out solutions to two main obstacles, the hostage exchange and the area from which the Israeli army will withdraw. A revised draft deal could be generated next week or earlier. Both U.S. officials said the revised plan would not be a final take-it-or-leave-it offer and that Washington would continue working towards a ceasefire if it fell through.

Harris pushes 28% capital gains tax rate on $1 million earners

U.S. Vice President Kamala Harris called on Wednesday for raising the capital gains tax to 28% for those earning more than $1 million a year at a campaign event in Portsmouth, New Hampshire. "While we ensure that the wealthy and big corporations pay their fair share, we will tax capital gains at a rate that rewards investment in America's innovators, founders and small businesses," Harris said.

The current capital gains tax rate is 20%, which current President Biden has proposed raising to 39.6% for top earners. Harris' proposal lower than Biden's marks her effort to craft a distinct economic vision in the election. Tax policy took center stage in the Harris and Trump campaigns. Trump has called for a series of tax cuts for businesses, individuals and retirees. Regardless of who enters the White House in November, the U.S. will face a significant new tax bill next year, as parts of Trump's 2017 tax cuts for families and small businesses are set to expire at the end of 2025.

Fed's Beige Book: Most districts saw stagnant economic activity and expected pricing pressures to stabilize

The Federal Reserve's Beige Book on economic conditions Wednesday showed the number of Districts that reported flat or declining activity rose from five in July to nine in August. Consumer spending fell in most Districts, and manufacturing activity also declined. Employment levels were steady overall, layoffs remained low, and wage growth was moderate. Looking ahead, contacts generally expected price and cost pressures to stabilize or ease further in the coming months.

Bostic: Risks to Fed's jobs and inflation goals now in balance

Atlanta Fed President Raphael Bostic said Wednesday that stable prices and maximum employment are now in balance for the first time since 2021, though he added he is "not quite prepared" to declare victory over inflation. While inflation has fallen sharply, risks to achieving price stability remain and vigilance is necessary. Loosening monetary policy prematurely is a dangerous gambit. The central bank cannot wait until inflation has actually fallen all the way to 2% to begin removing restriction because that would risk labor market disruptions.

Canada's NDP pulls support for Trudeau's Liberals

According to Canada's CTV Network, Jagmeet Singh, leader of the New Democratic Party (NDP), announced to pull out of a confidence and supply agreement with the Liberals led by Prime Minister Justin Trudeau.In a statement released on social media, Singh said he had decided to break ties with the ruling party before the fall session of Parliament, as he believes the Liberals are "too weak" and "too self-serving" to fight for the middle class or stop the Conservatives.

This agreement between the two parties was first signed in March 2022 and was set to expire in June 2025. It aimed to bring stability to the minority parliament, with the Liberals and the NDP working together on key livelihood-related legislation. In return, the NDP agreed to support the Liberals on confidence and budget matters and not obstruct their key legislative efforts. The NDP's latest announcement means that if Prime Minister Trudeau wants to remain in power, he will need to seek support from other opposition lawmakers.

[Today's Focus]

UTC+8 10:00 Reserve Bank of Australia Governor Bullock Speaks

UTC+8 17:00 Eurozone Retail Sales MoM (Jul)

UTC+8 20:15 U.S. ADP Employment (Aug)

UTC+8 22:00 U.S. ISM Non-manufacturing PMI (Aug)

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