Macro Trader: Short-, Medium-, And Long-Run Thoughts On The FOMC Outlook

Economic

Summary:

The September FOMC decision will see the normalisation process get underway, though markets might not get the degree of easing that they seek just yet, even if a more rapid return to neutral could well be on the cards in the longer-run.

A collection of thoughts on the Fed’s short-, and longer-run, outlook:

•The August jobs report was, in an ideal world, meant to resolve the ‘25bp vs. 50bp’ debate over the September decision. Instead, the Fed’s hawks can point to a drop in unemployment, to 4.2%, and a doubling in the pace of earnings growth, to 0.4% MoM, as reasons to begin normalisation with a ‘run of the mill’ 25bp cut. On the other hand, the doves can point to a slowing in headline job growth, with the 12-month average of job gains now under 200k for the first time in three years, as reason to instead plump for a ‘jumbo’ 50bp cut.

•Pending a potential surprise in the August CPI report, a 25bp cut seems like the most likely outcome at this stage – data suggests a gradually normalising, not a crumbling, labour market, and it would be sensible for policy to also normalise in a ‘slow and steady’ manner.

•This creates an interesting dynamic where, it appears, market participants desire a greater degree of short-term policy easing than the Fed are likely to deliver. Where participants wish policymakers would ‘get on with it’ in returning rates to neutral, those policymakers seem likely to plot a more careful path. That mixture, for now, is a rather dismal one for sentiment, and could create some short-term headwinds for equities.

•Over the medium-term, however, what the Fed do at their next meeting doesn’t matter especially much.

•As with the entirety of 2024, so far, the most important factor for global equities, and sentiment more broadly, has not been what the Fed will do next, but what they can do next. Here, policymakers still have >500bp of room to cut rates, were the economy, or financial conditions, to require it. This is the essence of the ‘Fed put’.

•This ‘put’, of course, has become stronger of late, since Chair Powell’s remarks at Jackson Hole, whereby Powell clearly stated that policymakers “seek or welcome” a further cooling in labour market conditions. Clearly, a forceful policy response would be delivered were the labour market to soften further, with such a response likely acting as a backstop for equities were it to be required. Knowledge of this ‘put’ should underpin investor confidence to remain further out the risk curve, and keep dips relatively shallow in nature.

•Looking even further ahead, into next year, the USD OIS curve currently discounts 227bp (i.e., 9 cuts) by July 2025. Although I think near-term pricing is too aggressive, I find it easier to envisage an environment where this rapid degree of rate cuts were to be delivered, particularly from the present starting point, where the fed funds rate resides 200bp above neutral.

•Though the election complicates matters, and a cut larger than 25bp to kick-off the normalisation process would smack of panic, cutting in larger clips could well be warranted later this year/early next, particularly if the current combination of solid growth + gradually falling inflation + slowly rising unemployment continues to hold true. The ‘why wait?’ question becomes an easier one to answer the more inflation fades, and the more confidence that policymakers obtain in a sustainable return to the 2% inflation target.

•The other factor to consider, here, is quantiatitve tightening. At the current pace of balance sheet run-off, the balance sheet looks set to return to its July 2020 level by the end of the year – we may as well now call this neutral, since the covid-era QE will likely never be entirely unwound (nor will the GFC-era purchases, by the way), effectively monetising $7tln of US government debt. A 25bp cut coupled with another QT taper, or even the end of QT entirely, would probably have the same macro impact as a 50bp move, albeit without the potential to cause a similar degree of market panic.

•To sum up – markets want a 50bp cut, asap, but are unlikely to get it; nevertheless, the ‘Fed put’ remains firmly intact, and has actually grown more forceful throughout the year; faster, deeper, cuts could well come to fruition however, in the longer-run, if data gives the Fed confidence to get to neutral sooner rather than later; hence, short-term headwinds for sentiment could well emerge, amid consternation over the September meeting, though the longer-run ‘path of least resistance’ continues to point to the upside.

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Samantha Luan

Economic

Canadian gross domestic product in the third quarter is likely to fall well short of the Bank of Canada's forecast, possibly coming in at less than half the estimate, with growth flagging and joblessness still rising, economists said.

In July, the BoC had forecast Canada's annualized GDP in the third quarter would grow by 2.8%, led by falling borrowing costs, growth in exports and increase in household spending.

Economists' lower expectations for growth reflect constrained consumer spending in recent weeks and the difficulty of Canada's growing ranks of immigrants to find jobs.

A slide in growth projections, especially if substantial, could force the central bank to make larger interest rate cuts than previously envisioned to prevent the economy from slipping into recession in the coming quarters, according to a half dozen economists interviewed by Reuters.

"I think it's looking less likely that the Bank of Canada's Q3 projections are actually going to take hold," said Andrew DiCapua, a senior economist at Canadian Chamber of Commerce.

In the third quarter ending Sept. 30, Canada will probably record gross domestic product growth of around 1% to 1.5% on an annualized basis, DiCapua said, adding it looked more likely that the bank would be making deeper cuts.

A slew of disappointing economic indicators coming from Statistics Canada on GDP and the labor force have pushed economists to update their models.

Last month, Statscan said economic growth in June was flat and is likely to be unchanged for July. The labor force survey last week showed that unemployment hit 6.6% in August, a seven-year peak, excluding the pandemic period. The number of hours worked by employees in August also contracted, hitting income levels.

"We have seen months and months for now that essentially the labor market has flattened out, no growth," said Pedro Antunes, chief economist at Conference Board of Canada, an independent think tank.

"That's suggesting a very weak growth for Q3," he said, adding that bank's forecast could fall short by half or more.

Household spending in Canada, which contributes 57% to the GDP, slowed to 0.2% in the second quarter as higher interest rates put a damper on consumer purchases. High mortgage costs and rent increases have eaten into disposable incomes.

Population growth at a faster rate than economic expansion also bloated unemployment numbers, with a tepid economy failing to absorb a huge influx of immigrants. That dynamic has put pressure on growth, with per capita GDP contracting for five quarters in a row.

DOWNSIDE RISKS

Bank of Canada Governor Tiff Macklem conceded last week that while the bank said it saw growth strengthening, there were some downside risks to the expected pick-up.

The BoC, after keeping its key policy rate for over two-decade high of 5% for a year, trimmed it by a quarter point three times in a row since June, bringing it down by 75 basis points to 4.25%.

David Doyle, head of economics at Macquarie, said the jobs data reinforces the risks to BoC's growth outlook and the potential for a 50 basis point rate cut in October.

The central bank is also likely to be wrong with its outlook on the output of the Trans Mountain Expansion (TMX) pipeline and growth and vehicle exports, said Randall Bartlett, senior director of Canadian economics at Desjardins.

The bank had said in its monetary policy report from July that export growth is expected to rise over the second half of the year, led by TMX and motor vehicle exports which would boost GDP.

"We really think the Bank of Canada was overly optimistic in those two sectors in particular," he said.

Desjardins is tracking a third quarter GDP of 1% against the central bank's 2.8% forecast, Bartlett said.

Source: Theedgemarkets

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WELLS FARGO

Economic

G10 Central Banks Cautiously Transition Toward Monetary Easing

One important theme so far during 2024 has been a significant, albeit cautious, change in approach to monetary policy from major economy central banks as they have started to get the upper hand in their respective inflation battles. After a pronounced global tightening cycle and a sustained period of restrictive monetary policy, an ebbing of inflation pressures has allowed many G10 central banks to begin lowering policy interest rates.

The Swiss National Bank was the first major economy central bank to deliver a rate cut in March, and has been joined by many other peer major economy central banks since. However, even as G10 central banks transition to monetary easing, some have continued to express concern about elevated wage growth and lingering inflation pressures, especially in the services sector. Over time, the views of select central banks have evolved, with the focus of concern shifting from elevated inflation to unexpected weakness in employment and economic growth. In that context, market participants continue to question how quickly monetary easing of various G10 central banks will progress. In this article, we examine major economy productivity and labor costs with the aim of offering insights into the potential pace of G10 central bank monetary easing.

The evolving central bank landscape is best illustrated by the evolution of policymaker commentary over the past several months and quarters:

•Early this year the Federal Reserve was attentive to inflation risks and needed “greater confidence” that inflation was moving sustainably toward its target. Given some easing in wage growth and a pickup in productivity, the Fed no longer views the labor market as a source of elevated inflationary pressures. With an increased focus on the employment aspect of its dual mandate, the Fed appears to be on the cusp of easing monetary policy.

•The European Central Bank (ECB) and Bank of England (BoE) have both delivered initial rate cuts; however, even as both central banks have begun their monetary easing cycles they remain concerned about underlying inflation pressures—including those from services inflation and wage growth—which might lend itself to more gradual paces of monetary easing.

•The Bank of Canada (BoC) and Reserve Bank of Australia (RBA) are two other central banks that have expressed an attentiveness toward the ways that labor market developments—such as wage or productivity growth—can affect the inflation outlook. The BoC has cut rates by a cumulative 75 bps so far, though continues to express some caution toward wage growth and services inflation. While noting improving inflation trends, the BoC has said “wage growth remains elevated relative to productivity.” Finally, the RBA has remained vigilant on wage and productivity growth. The central bank has said inflation remains high and sticky, and that there are upside risks to inflation due to high unit labor costs, as wage growth is “above the level that can be sustained given trend productivity growth.”

Other central banks have also focused on wage, productivity and cost trends at times in their monetary policy announcements. Certainly from a theoretical perspective the interaction of wages, productivity and unit labor costs is a relevant influence behind cental banks' assessment of inflationary pressures. Wage gains that are not matched by productivity increases could make the production of goods and services more costly, input cost pressures that firms could potentially pass onto consumers in the form of higher prices. In contrast, a combination of slowing wage growth or rising productivity could reduce cost pressures, potentially leading to lessening inflation trends over time.

Measuring Wages, Productivity and Unit Labor Costs

Having established the significance and relevance of productivity and labor costs for G10 central bank policymakers, a comparison of these productivity and cost developments can potentially offer insight into how different central banks from different countries may approach their respective monetary easing cycles.

Of course, the main difficulty, in our view, in providing a snapshot of productivity and costs across countries is identifying data that is comparable and timely enough in order to provide sufficiently useful insight. By necessity, there will always be some-tradeoffs involved. For our purposes, we believe the productivity and cost figures produced by the Organization for Economic Cooperation and Development (OECD) offer the best compromise. The data are quarterly in frequency, and include:

•Labor compensation per employee (a proxy for wage growth)

•GDP per person employed (a proxy for productivity)

•Unit labor costs (employment based)

Depending on the exact measure or economy chosen, the latest available data are for either Q1-2024 or Q4-2023. In that sense and because some data will relate to slightly different time periods, the figures are not fully comparable. That said, we still think they are comparable enough, and recent enough, to provide some insight into the economic environment the respective central banks face, and the approach those central banks may take.

Looking first at labor compensation per employee, it's clear why many central banks continue to express concerns about elevated wage growth. Until very recently, several economies and regions fell into the high wage growth category, which for this analysis we define as gains of 5% year-over-year or higher. These include New Zealand (6.1%), Norway (8.3%), Sweden (5.6%), the United Kingdom (6.4%) and the Eurozone (5.0%). A few fall into a moderate wage growth category of 2.5% to 5.0%, including Australia (3.9%), Canada (3.9%) and the United States (4.4%). Only a couple fall into a low wage growth category, including Japan (0.6%) and Switzerland (2.3%).

Of some note, and with the exception of Japan, recent wage growth is also significantly above the levels that prevailed from 2010-2019. Depending on the country, recent wage growth is anywhere between 1 percentage point to 5 percentage points above the levels that prevailed during that decade. Finally, in terms of the most recent developments, while some economies saw a slight easing in wage growth in late 2023 and early 2024 period, wage growth was steady-to-stronger in recent quarters in Canada, Norway, Sweden, Switzerland, the United States and the Eurozone during that period. With the possible exception of Japan and Switzerland, recent wage developments in our view offer at least some caution against easing monetary policy at an excessively rapid pace.

A Snapshot of Major Economy Productivity and Costs_1

The concerns emanating from elevated wage growth are compounded, we believe, by the recent underwhelming productivity performance of most major economies, as measured by GDP per employed person.

Among the major economies, only in the United States has there been any significant uptick in productivity, with the latest figures showing GDP per employed person rising 2.4% year-over-year. This in part might reflect an accelerated path toward the utilization of Artificial Intelligence (AI) technology, not necessarily in terms of the adoption of the technology in everyday use, but in terms of the build-out and infrastructure required to support the eventual widespread use of AI across the economy. A few countries have shown rather modest productivity gains, including Japan (0.7%), Norway (0.3%) and Sweden (0.3%). Many countries and regions, however, have shown a cyclical downturn in productivity during the most recent quarters. The most recent figures indicate productivity declines in Australia (-1.6%), Canada (-1.3%). New Zealand (-2.6%), Switzerland (-0.6%), United Kingdom (-0.6%) and the Eurozone (-0.6%).

A Snapshot of Major Economy Productivity and Costs_2

The lack of any perceptible productivity increase for many economies to offset elevated wage trends acts to exacerbate overall cost pressures. In fact, combining the labor compensation and productivity estimates above, the OECD calculates and estimates Unit Labor Costs—as the name suggests, the cost of labor required to produce a unit of output. Here, the contrast in cost pressures across the major economies becomes even more stark. For the most part, growth in unit labor costs are rising well in excess of 5% year-over-year or more, perhaps explaining why services and domestic inflation (areas that are more heavily influenced by wage and labor costs) are proving stubbornly persistent across many economies.

Among the economies where the most recent figures are showing accelerated growth in unit labor costs are Australia (5.7%), Canada (5.2%), New Zealand (9.0%), Norway (7.9%), Sweden (5.8%), United Kingdom (7.0%) and the Eurozone (5.6%). Unit labor cost growth is moderate in the United States (1.9%) and Switzerland (2.9%). Only in Japan are cost pressures absent, with unit labor costs dipping 0.1% year-over-year at the most recent reading. Overall, however, considering elevated wage growth and recent disappointing productivity trends, growth in unit labor costs is in many cases running around 4 to 6 percentage points above the averages from the 2010-2019 period, a potential source of costs pressures that could contribute to some persistence in inflation.

While not directly comparable to the OECD figures, data from national statistical agencies for more recent quarters are nonetheless illuminating. For the United States, labor compensation per hour and unit labor costs both slowed slightly further in Q2, reinforcing the trend of reducing costs pressures. In Canada, hourly compensation saw some slowing through Q2, also translating to some moderation in unit labor costs, an encouraging development. In the United Kingdom, a combination of some pickup in productivity in Q1 combined with some deceleration in hourly compensation has contributed to some slowing in unit labor cost growth, though likely still elevated at around a 5%-6% pace. And finally, Q2 data from Australia's national statistical agency indicated growth in unit labor costs that are still running in excess of 5% year-over-year.

Potential Implications For Inflation, Monetary Policy

Our assessment of productivity trends and labor cost pressures offers, in our view, some potential insights into the outlook for inflation and monetary policy across the major economies. To be sure, mapping labor cost pressures to inflationary trends is not a mechanical or one-for-one exercise. Several inflationary influences, including among others commodity prices, corporate profit margins and exchange rate fluctuations, can also act to influence inflationary trends. Moreover, the trade-off we highlighted above in identifying a data source that is sufficiently comparable as well as sufficiently timely means that key insights will be somewhat generic. With these caveats in mind, we still see some broad takeaways from this snapshot of productivity and cost trends across the major economies.

•The Federal Reserve could deliver a relatively forceful and somewhat truncated rate cut cycle.

Unit labor pressures are much lower in the United States compared to most other G10 economies, potentially offering the greatest potential for a reduction in underlying inflation trends and thus rapid rate cuts. Moreover, more highly productive economies are likely to be associated with higher neutral or long-run policy interest rates. This combination suggests a relatively aggressive and short-lived monetary easing cycle from the Fed, consistent with our view for Fed rate cuts to come to an end by mid-2025.

•Slower and steadier policy easing from Australia, Canada, Sweden and the Eurozone.

Unit labor costs for these economies were running between 5%-6% in late 2023 and early 2024, while these regions have also shown cyclical declines in productivity to varying degrees. That suggests that underlying inflation might decelerate only slowly for these economies, while somewhat lower productivity could also equate to a somewhat lower terminal policy interest rate. That backdrop suggests a steady and orderly pace of interest rate reductions. Indeed, some of these central banks that have begun lowering interest rates in a relatively regular manner (Bank of Canada, Riksbank) might still need to pause at times during their monetary easing cycle.

•Lingering inflation concerns in New Zealand, Norway and the United Kingdom.

Unit labor costs for these countries are still growing in excess of 6%, while the United Kingdom and New Zealand are experiencing cyclical productivity declines. Services and underlying inflation might take longer to abate, or be more subject to upside surprises, than for other major economies. Thus, although the Bank of England and Reserve Bank of New Zealand recently delivered initial rate cuts, we think these central banks are most at risk of needing to pause, and for longer than expected, during their respective monetary easing cycles.

•In Switzerland and Japan, limited cost pressures means only limited need for policy restriction.

We characterize Switzerland and Japan as relatively low growth economies with limited labor cost pressures. For the Swiss National Bank, that suggests few near-term impediments to further rate cuts. For the Bank of Japan, that suggests a sustainable increase in underlying inflation trends could remain something of a challenge, suggesting some risk of more gradual rather than more rapid monetary tightening.

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Cohen

Economic

Prime Minister Datuk Seri Anwar Ibrahim said on Tuesday that the Malaysian government is willing to learn and adapt from China to foster a conducive environment to strengthen investment in the country.

Anwar said while the policies have been implemented under the Madani framework, the government remains open to suggestions for further improvements.

“We are not here to suggest that this [Malaysia] has a perfect system and policies. We are here to govern and to learn and make the necessary adjustments [to our policies],” Anwar said in his keynote speech at the 17th World Chinese Entrepreneurs Convention (WCEC).

“You (China) advise us (Malaysia) what else needs to be done to foster an environment that is conducive to investment and innovation,” Anwar said.

The prime minister stressed that Malaysia and China have enjoyed a long-standing bilateral relationship, underpinned by robust trade and investment ties.

“We believe that a stronger bond and strategic relations with China would not only help Malaysia but the region immensely, and we will continue to embark on that policy,” he said.

He noted that China remains Malaysia’s largest trading partner for 15 consecutive years, and the fifth largest foreign investor in 2023, with total trade reaching US$98.80 billion (RM450.84 billion).

“The visit of Chinese Premier Li Qiang in June this year reaffirmed the enduring friendship and mutual respect between Malaysia and China,” Anwar added.

Li’s official visit to Malaysia in June saw a total of 14 memorandum of understandings and agreements (MOUs and MOAs), protocols and joint statements involving nine Malaysian ministries exchanged between China and Malaysia.

Source: Theedgemarkets

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Justin

Cryptocurrency

The digitalisation of large parts of everyday life and of the economy also extends to payment transactions. In the euro area, for example, the share of cash payments at the point-of-sale (i.e. in physical shops) declined from 79% to 59% between 2016 and 2022, mainly for the benefit of card payments. If this trend continues or even accelerates, the role of cash and thus central bank money would decrease significantly for the benefit of private payment service providers. This also raises concerns about insufficient competition, inclusiveness, privacy protection as well as strategic autonomy of sovereign states.

Against this backdrop, a heated debate about retail digital money issued by central banks – central bank digital currency – began in 2016. Due to the growing number of papers that present macroeconomic models examining CBDC and, on the other hand, quite detailed plans by central banks to issue CBDC, the question is to what extent the assumptions and scenarios contained in these macroeconomic models of CBDC correspond to the objectives and emerging design choices communicated by central banks.

What central banks have announced on CBDC

All central banks working on CBDC have announced that CBDC would not be remunerated, that holdings would be limited, and that CBDC issuance would aim to preserve the roles of central bank money in retail payments in a digitalised world. Another set of key features announced for CBDCs are those that allow to somewhat decouple the store of value from the means of payments function of CBDC and that facilitate the preservation of a single pool of money for citizens. For example, the European Central Bank announced a so-called ‘reverse waterfall’ so that users would not have to prefund a digital euro account before making payments because the digital euro account can be linked to a commercial bank account. Last but not least, central banks have announced access restrictions for CBDC. For example, the ECB plans to only allow natural persons who are permanent residents of the euro area (or possibly of the European Union), and temporary residents (e.g. travelers) to be able to hold digital euro within the limits.

Gaps and fallacies in the macroeconomic literature on CBDC

Our paper identifies in particular the following issues which future research on the macroeconomics of CBDC should address.

First, the modelling in all the papers assumes that the decision to issue CBDC hits a static monetary and financial system. But the decision to issue CBDC is a ‘conservative’ response to profound changes of the monetary system relating to digitalisation. In other words, the macroeconomic effects of not issuing CBDC are likely to be more relevant than the ones of issuing it. Overlooking this means very likely ending with wrong conclusions.

Second, many papers do not consider the design features of possible CBDCs as outlined more recently by central banks. Most papers assume remunerated CBDC, or that CBDC is of considerable volume.

Third, as real-world CBDCs are expected to be unremunerated, it is difficult to specify a clear difference between CBDC and cash in macroeconomic models. None of the papers develops this difference in a way that could imply macroeconomic consequences.

Fourth, and relating to previous points, the papers generally tend to assume, in line with earlier narratives, that the issuance of CBDC will considerably increase the amount of central bank money in circulation. But it is more likely that the combined decline of banknotes in circulation (relating to their lesser use) and the announced CBDC design features will lead to a declining volume of central bank money in circulation, even if CBDC is issued.

The way forward on understanding the impact of CBDC

Under the assumption of ever-progressing digitalisation of society, the macroeconomic effects of issuing CBDC should be identified starting from the counterfactual. If retail payments are exclusively left to the private sector and central bank money would be marginalised, then the amount of central bank money in circulation will significantly shrink, the length of central bank balance sheets would decline and the banks would benefit from deposit inflows, payment costs will increase (due to increasing market power of the successful firms), monetary and financial stability will be weakened (as the unifying convertibility test of all private moneys, i.e. to be exchangeable at sight against central bank money, will have become remote or inexistent), and strategic autonomy. In this sense, the issuance of CBDC aims at preserving economic efficiency and stability by preserving the current role of central bank money – a genuine public good.

Of course, it cannot be excluded that some central banks and legislators will, in the future, design CBDCs which better match the assumptions taken in the macro models reviewed. For this reason, the models remain useful for future scenarios. Moreover, macroeconomic researchers could review the macroeconomic predictions of the models for CBDCs designed as in recent central bank communications.

Source:Ulrich Bindseil

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ING

Economic

After the positive surprise in June, Hungarian industry was not quite able to maintain the momentum in July. The latest data is not terrible, but it is not good either. On a monthly basis, industrial production adjusted for seasonal and calendar effects stagnated in July 2024. If anything, it is encouraging that, unlike in Germany, the previous month's rise was not followed by another significant negative correction.

As the base of the previous year was quite high, the calendar-adjusted figure in Hungary still shows a significant year-on-year decline of 6.4%. With two more working days in July this year, the raw data paints a much more positive picture than the actual performance.

So the overall picture is very mixed and rather disappointing. This is reinforced by the fact that industrial production is still 3.4% below the average monthly volume in 2021, and we are still quite close to the trough in 2021.

Volume of industrial production

Source: HCSO, ING

Detailed data is yet to be published, but the preliminary release from the Hungarian Central Statistical Office (HCSO) shows a similar structure to what we have seen in recent months. Of the four main industrial sub-sectors, food is able to grow, while neither transport equipment (cars), electrical equipment (EV batteries), nor computer, electronic and optical products (electronics) segments are able to expand. But this is hardly surprising given global trends. Recent industry surveys and confidence indicators around the world continue to point to further weakening or, at best, stagnation. Of course, the reliability of these surveys remains highly questionable, but for now, anecdotal evidence does not really contradict this gloomy picture.

One piece of evidence is that Volkswagen is considering closing German plants for the first time in its 87-year history. This is clearly a red flag, as jobs at VW in Germany are supposed to be protected until 2029, but the company may now renege on this promise. Zooming out, German industry is still at a low point, and the July data was a very big negative surprise. German industrial production is still more than 10% below pre-pandemic levels.

Moreover, the expected loss of momentum in the US and Chinese economies and the tensions in international trade hardly point in the direction of a positive breakthrough for German or even euro-area industry. Further anecdotal evidence of challenging times ahead for the car industry is the recent news from Volvo that it is reversing its much-publicised plans to produce only electric vehicles by 2030 as a result of slowing demand.

Performance of Hungarian industry

Source: HCSO, ING

It is, therefore, difficult to pin hopes for a short-term recovery in Hungarian industry on a revival in export demand. Global order books are dismally low and inventories of manufactured goods have barely come down from their peaks. It is no coincidence that recent surveys suggest that lack of demand is currently the biggest obstacle to growth for manufacturers.

In other words, only a turnaround in inventories and an improvement in consumer confidence can make a lasting difference and begin to restore order books. This means that the recovery in external demand will be a slow and gradual process. The outlook for sectors producing for the domestic market is not encouraging either. According to the latest data (June), domestic order books for the monitored manufacturing sectors were 5.5% lower than a year earlier. The export order book is almost 29% below last year's level. This may be behind the recent deterioration in the Hungarian manufacturing PMI.

Manufacturing PMI and industrial production trends

Source: HALPIM, HCSO, ING

The combination of low domestic consumer confidence, a strong propensity to save and sluggish business investment also makes the outlook for the domestic market fragile. Towards the end of the year, however, domestic demand may improve to the extent that at least some industrial sectors will be able to grow sustainably. But this will not be enough to save the year. Hungarian industry as a whole could be a significant drag on GDP growth in 2024.

Turning to the shorter-term outlook, the July retail sales and industrial data do not yet give much cause for optimism about economic performance in the third quarter. It could well be that another negative surprise is in the offing, although we wouldn't go so far as to call for another technical recession just yet.

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S&P Global Inc.

Economic

FOMC, BoE, BoJ meetings, UK and Japan inflation in focus

The focus is on monetary policy in the fresh week with central bank meetings in the US, UK and Japan as well as Brazil, South Africa, Turkey, Indonesia and Taiwan. Key inflation updates will meanwhile be watched in the UK and Japan, while US data watchers await retail sales, industrial production and housing market releases.

The September Federal Open Market Committee (FOMC) meeting is expected to be when the US Fed will start lowering rates, though uncertainty persists over how much the Fed will lower rates this year. While the latest S&P Global Investment Manager Index survey outlined increased conviction of monetary policy being a supportive driver for equity returns, investors remained mixed with equal proportions of US equity investors seeing the likelihood for just 50 or 75 basis points worth of cuts in 2024. The earliest S&P Global Flash US PMI data showed that prices may well ease to a level consistent with the FOMC's 2% target, and is therefore supportive of the Fed's endeavour to lower rates, though how the Fed guide expectations at the September meeting will be paramount. Meanwhile, higher-than-expected core CPI has pushed the odds of the September meeting closer to just 25 basis points of cuts.

Over in the UK, monetary policy will also be in the spotlight as the Bank of England (BoE) meets. The BoE is in a group of central banks that has already started lowering rates, but will be proceeding cautiously amid still-elevated service sector inflation. While the BoE may resume cutting rates later in the year, they are widely expected to stand pat in September. Reactions towards inflation data, with the latest August numbers in the UK to be updated just ahead of the monetary policy meeting and expected to show easing inflationary pressures in line with PMI price trends, will be important clues for the monetary policy outlook.

Finally, the Bank of Japan (BoJ), which holds a hawkish bias, will also convene with no imminent changes to interest rates expected. Interest rate differentials have nevertheless been a strong engine behind the USD/JPY decline of late and the BoJ's stance will be key here. This is especially as easing inflationary pressures in August, alluded to by the au Jibun Bank Japan PMI prices data, add to uncertainty regarding the urgency of a BoJ hike.

US inflation descent to continue

The annual rate of US inflation dropped from 2.9% in July to 2.5% in August, its lowest since February 2021, with a further cooling ahead signalled by the S&P Global PMI.

The softer rate of inflation signalled by the headline consumer price index has followed the trend depicted by the PMI's average selling price index, the latter covering prices charged for both goods and services. This PMI index tends to lead changes in CPI inflation by around four months, and has fallen in August to its second-lowest since June 2020, down to a level historically consistent with inflation running at the Fed's target rate of 2.0%.

Some of the shine was taken off the good news from the August headline CPI print, as core CPI (excluding food and energy) rose 0.3% on the month, indicating a firming of underlying price pressures and holding the annual rate at 3.2%. However, the services PMI data - which align closely with core price pressures - hint that this core CPI measure should fall back again in the coming months to around 0.2%.

Key diary events

Monday 16 Sep

China (Mainland), Japan, Indonesia, Malaysia, South Korea, Mexico Market Holiday

Italy Inflation (Aug, final);Eurozone Balance of Trade (Jul);Italy Balance of Trade (Jul);United States NY Empire State Manufacturing Index (Sep)

Tuesday 17 Sep

China (Mainland), South Korea, Taiwan Market Holiday

Singapore Non-oil Exports (Aug);Indonesia Trade (Aug);Eurozone ZEW Economic Sentiment Index (Sep);Germany ZEW Economic Sentiment Index (Sep);Canada Inflation (Aug);Canada Housing Starts (Aug);United States Retail Sales (Aug);United States Industrial Production (Aug);United States Business Inventories (Jul);United States NAHB Housing Market Index (Sep).

Wednesday 18 Sep

Hong Kong SAR, South Korea Market Holiday

Japan Trade (Aug);Japan Machinery Orders (Jul);United Kingdom Inflation (Aug);Indonesia BI Interest Rate Decision;South Africa Inflation (Aug);Eurozone Inflation (Aug, final);United States Building Permits (Aug, prelim);United States Housing Starts (Aug, prelim);United States FOMC Interest Rate Decision;Brazil BCB Interest Rate Decision.

Thursday 19 Sep

New Zealand GDP (Q2);Australia Employment Change (Aug);Malaysia Trade (Aug);Norway Norges Bank Interest Rate Decision;Taiwan CBC Interest Rate Decision;Turkey TCMB Interest Rate Decision;United Kingdom BoE Interest Rate Decision;United States Current Account (Q2);United States Philadelphia Fed Manufacturing Index (Sep);South Africa SARB Interest Rate Decision;United States Existing Home Sales (Aug).

Friday 20 Sep

Japan CPI (Aug);China (Mainland) ;Loan Prime Rate (Sep);Japan BoJ Interest Rate Decision;United Kingdom Retail Sales (Aug);Hong Kong SAR Inflation (Aug);Canada Retail Sales (Jul);Canada New Housing Price Index (Aug);Eurozone Consumer Confidence (Sep, flash).

What to watch in the coming week

Americas: FOMC and BCB meetings; US retail sales, industrial production, building permits, housing starts data; Canada inflation.

Central bank meetings in the US and Brazil unfold in the fresh week, with the focus on the highly anticipated FOMC meeting in the US. Uncertainty over whether the Fed may lower rates by 25 or 50 basis points (bps) has been widespread, though a higher-than-anticipated core CPI print for August has tilted the dial towards 25 bps. There is some added uncertainty however due to the next Fed meeting coming only after the November 5th Presidential Election. Overall, US equity investors are also mixed regarding whether the Fed will lower rates by 50 or 75 basis points by year-end 2024 according to the latest S&P Global Investment Manager Index survey, and therefore clarity will be sought with the upcoming Fed meeting.

On the data front, we will also see the release of key US activity indicators such as retail sales and industrial production, in addition to building permits and housing starts. Canada releases inflation numbers on Tuesday with early S&P Global Canada PMI data having shown output price inflation intensified in August.

EMEA: BoE, TCMB, SARB meetings; UK, Eurozone inflation data; Germany ZEW index,

The BoE convenes on Thursday with the consensus indicating that the UK central bank may hold off cutting rates further in September before resuming later in the year. This is as service sector inflation remains elevated, though most recent S&P Global UK PMI prices data showed that inflation further lowered in August which we will seek to confirm with official August UK inflation data, released on Wednesday. UK retail sales data will also be published.

Over in the eurozone, final August inflation figures will be released, while the ZEW economic sentiment index for the eurozone and Germany will also be updated.

APAC: BoJ, BI, CBC meetings, China Loan Prime Rate, Japan inflation, trade, New Zealand GDP, Australia employment data

In APAC, central bank meetings take place in Japan, Indonesia and Taiwan, while mainland China's loan prime rates will also be published on Friday. While the BoJ is still mulling a rate hike, Bank Indonesia (BI) is expected to lower rates post the Fed meeting, though neither are likely to shift rates in their September meetings. Inflation data will meanwhile be due from Japan for August. Other key updates include New Zealand Q2 GDP and Australia's August employment report.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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