Talking Trends: Signs of Slower Economic Activity

Summary:

Flash estimates point to more moderate growth in economic activity in early Q3 relative to Q2. Retail lending and consumption expanded at a slower pace. However, overall demand still far exceeds supply.

Monthly Summary

Current growth of prices was persistently high between July and August, including in the underlying components of inflation. A further rise was seen in household and business inflation expectations. At the same time, there were tentative signs of an emerging disinflationary trend, with demand posting a more moderate pace. This came on the back of a slowdown in retail lending and less dynamism in household consumption. This is expected to encourage a switch to more moderate production plans and, combined with gradually increasing productivity, help soften a tight labour market.

In July, the seasonally adjusted growth of consumer prices – even excluding utility rates – was highest since the start of the year. It was driven by fruit and vegetable and petrol prices. However, considerably less growth was seen in the underlying components of inflation. While seasonally adjusted price growth declined in August, it is premature to speak of a steady reduction in inflationary pressures. To return inflation to 4% in 2025, tighter monetary conditions are needed than in 2024 H1. Whether this will require an additional increase in the key rate will depend on incoming data.

The July–August data and surveys mostly signal slower growth in economic activity, including in household consumption. Retail lending progressed at a slower pace, excluding car loans. Overall, this enables a gradual reduction in overheating in the economy and a transition to more moderate but sustainable growth, providing that price stability is achieved.

Between late July and August, developments in domestic financial markets were driven by a hostile geopolitical environment as well as an investor rethink on the timeframe of tight monetary policy. The foreign currency market grew more fragmented, with further complications in yuan-ruble pricing. Negative trends prevailed in the equity and fixed–income bond markets, while variable yield bonds and money market funds retained investor appeal.

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Alex

Commodity

Shell has alleged that LNG producer Venture Global had wrongfully earned $3.5 billion from selling cargos from long-term contracts on the spot market instead.

According to a Financial Times report, Shell had commissioned a study “to assess how much more revenue Venture Global wrongfully earned by denying certain European customers their contracted cargoes”.

Shell did not stop there, however. It went on to allege that Venture Global had caused serious LNG sourcing difficulties for one company that had to resort to sourcing the gas from five other U.S. producer, incurring additional costs of $1.5 billion, the FT report also said. The report identified Poland’s state energy company Orlen as the one most exposed to Venture Global’s tactics.

The supermajor is one of several companies suing Venture Global for failing to deliver cargos contracted under long-term agreements and instead selling the gas on the spot market, using a loophole that allows it to trade on the spot market before its facility is officially finalized. Venture Global has been seeking to extend the construction period for its Calcasieu Pass LNG plant.

Once the Calcasieu Pass facility is officially recognized as completed and fully operational, Venture Global would need to start servicing its long-term contracts with Shell, BP, and Spain’s Repsol.

The three supermajors, along with two other European energy companies, were foundation buyers for the Calcasieu Pass facility, meaning they provided Venture Global with the money to build the place in Louisiana in exchange for a commitment from the company to supply them with certain volumes of LNG over a long-term period.

The facility has a capacity of 10 million tons, and it started producing in early 2022—right on time for Europe, which was beginning to experience a shortage. But instead of honoring its contracts with the European buyers, Venture Global chose to sell more LNG on the spot market.

Source: OILPRICE

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Warren Takunda

Commodity

Crude oil prices fell for the second consecutive trading day amid weak economic data from both China and the US this week.

The WTI futures price dropped below $70 per barrel for the first time since December 2023, while Brent futures slumped to under $74 per barrel, a level not seen in nine months.

Both benchmark oil futures have plunged by more than 10% since their recent highs on 27 August.

Risk-aversion sentiment has also contributed to the downward pressure on the oil market, as the Nvidia-led tech selloff caused global markets to tumble on Tuesday.

Investors fled risky assets amid rising recession fears, with the CBOE Volatility Index, known as the market's fear gauge, spiking above 20 - the highest level in a month.

In late August, oil prices surged due to escalating military conflict between Iran and Israel, alongside production disruptions in Libya, which also fuelled the upsurge.

However, concerns of a wider regional war have eased as recession fears overshadowed geopolitical tensions, and a potential resolution to Libya's dispute is expected to restore its oil output.

Rising fears of a recession

Several disappointing data releases from the US have sparked concerns about deteriorating economic conditions and a weakening oil demand outlook.

The world's largest economy reported a weaker-than-expected Manufacturing Purchasing Manager Index (PMI), indicating that factory activity contracted for the fourth consecutive month in August.

On Wednesday, the JOLTS job openings data also revealed that the number of available jobs fell to its lowest level since January 2021.

The worsening economic data has significantly increased the likelihood of a deeper rate cut by the Federal Reserve next month, causing the yield on 2-year and 10-year US government bonds to briefly reverse their inversion for the second time since 2022.

Shorter-term government bond yields are more sensitive to imminent interest rate movements.

Historically, an economic recession tends to occur when the spread between the two benchmark US government bond yields returns to positive territory after an inversion.

Furthermore, China, the world's largest oil importer, reported softer-than-expected Manufacturing PMI over the weekend, indicating that factory production remained in contraction for the third straight month in August.

China's Caixin Services PMI, released on Wednesday, also came in lower than expected, suggesting the country's economic recovery continues to falter.

OPEC+ to delay output increase

OPEC+ may delay its plan to increase production in October amid plunging oil prices, according to a report by Reuters.

The organisation had previously agreed to raise production by 180,000 barrels per day as part of its plan to gradually unwind output cuts.

Ongoing production cuts could provide some support to the weakened crude market, although the news has not immediately lifted prices because of the prevailing risk-averse sentiment.

In June, OPEC and its allies agreed to extend production cuts of 3.66 million barrels per day until the end of 2025, with additional voluntary cuts of 2.2 million barrels per day continuing until September this year.

The organisation, which supplies over 37% of the world's total oil, has been reducing output since 2022, leading to a total cut of 5.86 million barrels per day, representing 5.7% of global demand.

Source: EuroNews

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Thomas

As the incoming Asean chairman in 2025, Malaysia is committed to accelerating the clean energy transition, and will work on strengthening regional cooperation and enhancing connectivity across the region’s energy systems.

By doing so, Malaysia’s Deputy Prime Minister Datuk Seri Fadillah Yusof, who is also the Minister of Energy Transition and Water Transformation, said Asean could make significant strides towards a sustainable and resilient energy future for all member states.

“Malaysia recognises that initiatives aimed at integrating our energy systems and advancing the use of renewable and low-carbon energy sources such as the Asean Power Grid and Trans-Asean Gas Pipeline will be prominent drivers for our collective energy future,” he said at the Indonesia International Sustainability Summit (ISF) on Thursday.

In his address titled “Green Industry: Advancing Low Carbon Energy Sources”, Fadillah expressed satisfaction with the region’s progress in cooperation, highlighting the Asean Plan of Action for Energy Cooperation (APAEC) as a key framework for driving the region’s low-carbon transition.

Speaking to reporters later, Fadillah highlighted Malaysia’s commitment to reducing its carbon footprint, improving energy efficiency and boosting renewable energy to create a greener industry.

Malaysia aims to raise its renewable energy capacity to at least 70% of its power generation mix, from the current 27%, by enhancing the deployment of renewable energy, leveraging natural resources, strategic location, and technological advancements.

Key focus areas include solar energy, supported by initiatives like the large-scale solar programme and net energy metering scheme, as well as hydropower projects in East Malaysia and mini-hydro developments in West Malaysia.

“Malaysia plans to invest in biomass and biogas technologies to diversify its renewable energy portfolio and promote a circular economy,” he said.

Fadillah joined several ministers from various countries at the ISF, with the theme “Towards Sustainable and Inclusive Growth”, which was officiated by Indonesian President Joko Widodo.

The forum, attended by over 8,000 participants, discussed topics such as the green economy, energy transition, biodiversity and nature conservation, sustainable living, and the blue economy.

Fadillah is expected to attend a gala dinner with approximately 500 invited guests at the National Monument area, hosted by Indonesian Vice President Maruf Amin on Thursday evening.

Source: Theedgemarkets

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Pepperstone

Stocks

Central Bank

Economic

Where We Stand –

So, yesterday. A relief rally? Not quite. Better than the day before? Most definitely!

I suppose the bulls, like me, will at least be pleased that yesterday didn’t see another brutal equity sell-off, though both the S&P and Nasdaq ending the day marginally in the red isn’t exactly enough to completely allay worries sparked by Tuesday’s chunky lurch lower. In many ways, the short-term lack of conviction to buy the dip was unsurprising, with anticipation – and nerves – ahead of Friday’s nonfarm payrolls print likely dampening conviction to a significant degree.

On that note, it should perhaps not come as a surprise that equities started the month on such shaky footing. This year, the S&P 500 has ended the first trading day of the month on 5 of 9 occasions, notching an average loss of 0.73% on those red days. That, for context, compares with the average daily performance of the index this year, which is an 0.19% daily advance.

Stats are interesting, but past performance is of course not a reliable indicator of future returns. Friday’s jobs report continues to hold the key for sentiment, and riskier assets, in the short-term, while the longer-run direction of travel remains to the upside, amid strong economic and earnings growth, coupled with the forceful ‘Fed put’ remaining in place.

Elsewhere, yesterday, we had yet another example of the UK government shooting itself in the foot from a macroeconomic point of view, with the FT reporting that the so-called ‘British ISA’ scheme, to encourage greater retail investment in the domestic equity market, would be scrapped. Quite what those in Number 10, and the Treasury, are drinking at this stage, I’m not sure – though I wouldn’t mind trying some of it!

These reports do feel like a mere taste of things to come, with the Budget still almost 2 months away, and the prospect of further ISA changes, in addition to the already-announced winter fuel allowance means testing, and potential tweaks to capital gains, and corporation, taxes remains on the table. Whether or not one believes that the £22bln fiscal ‘black hole’ is real, or a political concoction designed to blame the Conservatives for any potential negative economic developments, the downside growth risks that the continued tightening in fiscal policy will create, and downside risks to the GBP that subsequently emerge, are undeniable.

In actual fact, the ‘worst economic inheritance that any government has ever received’ – I perhaps over-egg the pudding a little – is far from the truth. Yesterday’s final August PMI figures pointed to a fairly chunky upward revision to the services gauge, which stood at 53.7 in August, its highest level since April. Still, I suppose we shouldn’t get too excited, as a steam-roller will soon be taken to this solid momentum.

As for other developments yesterday, the Bank of Canada delivered a third straight 25bp rate cut, as the sell-side had fully expected, and markets had adequately discounted in advance. The loonie was, hence, unchanged over the decision, even as Governor Macklem indicated that further cuts remain likely, so long as inflation continues to ease. The CAD OIS curve already fully discounts 25bp cuts at the remaining two meetings this year, which seem likely to be delivered, potentially leaving the CAD vulnerable to downside if curves elsewhere – such as in the US – reprice in a hawkish direction, with the 100bp of Fed cuts priced by year-end still looking too punchy.

On which note, Fed doves would’ve been further emboldened by yesterday’s JOLTS figure, with job openings in July falling to 7.673mln, well below the bottom end of the forecast range, and the lowest level since the start of 2021. Such a figure, naturally, raises the stakes for Friday's jobs report, and provides additional signs that 'bad news is bad news' at present, with participants more focused on downside growth risks, than the potential for additional policy stimulus, given the equity downside/Treasury upside seen as the data crossed news wires. The 2s10s spread also flipped back into positive territory, for just the second time this year, as the front-end outperformed in the aftermath of the figures, with 2s down about 10bp on the day, with benchmark yields slipping to the lowest since early-August.

Crude, though, was perhaps the most interesting market on the day, experiencing incredibly choppy conditions as a deluge of OPEC+ ‘sources’ stories arrived. The long and the short of said reports is that it is becoming increasingly likely that October’s planned output hike looks set to be delayed, by virtue of both recent market volatility, and the continued weak demand outlook. Isn’t it amazing how much a 5% fall in price can change OPEC’s mind?! In any case, front WTI failed to reclaim $70bbl, and remains unlikely to achieve any kind of sustainable rally, unless a significant pick-up in global demand comes to pass.

Look Ahead –

We continue to inch towards this week’s main event – Friday’s US labour market report – with a relatively quiet calendar ahead of us.

Today’s highlight stands as the August US ISM services PMI, which is seen broadly unchanged at 51.3, compared to the 51.4 print in July. After Tuesday’s downside surprise – and subsequent violent market reaction – to the equivalent manufacturing gauge, the figures will be closely watched for any further signs of economic woe, particularly with participants continuing to display a heightened sensitivity to negative data surprises, as shown by yesterday’s JOLTS figure. The employment sub-index, meanwhile, will also be parsed for any potential read-across to tomorrow’s jobs report.

Away from the ISM report, a handful of reads on the US labour market are due. Both, however, can be safely ignored – the ADP employment figure is little more than a ‘random number generator’ at this point, while neither the initial or continuing jobless claims prints coincide with the survey week for the August jobs report. Unit labour costs, in contrast, might attract some attention, though as a final revision of Q2 data, shouldn’t move the needle too much.

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

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RBA

Remarks of Officials

Central Bank

On September 5, RBA Governor Michele Bullock delivered a speech at the Anika Foundation fundraising luncheon, the main contents of which are as follows:

At its meeting in early August, the Board decided to leave the cash rate unchanged at 4.35%. While inflation has fallen substantially since its peak, it is still some way above the midpoint of the 2%–3% target range, with underlying inflation – as measured by the trimmed mean – at 3.9% in June.

In our central August forecast, underlying inflation is expected to be back in the target range by the end of next year, and to approach the midpoint in 2026. However, there is substantial uncertainty around this central outlook. The Board needs to be alert to these possibilities in thinking about the future path of interest rates.

Over the past 18 months, goods price inflation has declined substantially as supply disruptions associated with the COVID-19 pandemic and war in Ukraine have subsided and global demand for goods has eased. The key drivers of elevated inflation at the moment are housing costs and market services inflation. CPI rent inflation is likely to be high for some time, but labor cost growth is strong, reflecting both wage increases and weak productivity growth. Despite a gradual easing over the past 18 months, the labor market remains relatively tight, which is expected to slow down in coming years.

Restrictive monetary policy has been working to bring demand and supply more into balance and this has contributed to the easing in aggregate CPI inflation. But at an aggregate level, there is further to go. The core forecast for inflation is based on a downward cut in the cash rate starting early next year. It's too early to consider a rate cut currently. If the economic conditions don't evolve as expected, the Board will respond accordingly. But if the economy evolves broadly as anticipated, the Board does not expect that it will be in a position to cut rates in the near term.

Bullock's Speech

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Economic

Following Fed Chairman Powell’s appearance at the Jackson Hole Symposium and this indirect announcement of the much-discussed Fed rate cut, the market is counting down to the September 18 meeting. This week’s labour market data could play a role in the size of this rate move with a negative set of prints potentially keeping the door open to a 50bps decrease.

This rate cut will be the first interest rate reduction since the 150bps of easing announced during March 2020 amidst the COVID pandemic outbreak. One must go back to 2019 for the first “normal” monetary policy easing with three consecutive 25bps cuts announced back then. Powell called these rate cuts “mid-cycle adjustment”.

Six initial rate cuts since 2000

Scrolling through the Fed’s actions since 2000, six easing cycles can be identified. Table 1 below shows the details of the initial interest rate cuts with both the 2002 and 2008 reductions featuring in the list. Both moves came after extensive Fed pauses and are hence each treated as the start of a new easing cycle.

Stocks Could Suffer After the September Fed Rate Cut_1

The market is currently pricing in a 39% possibility of a 50bps rate move in two weeks’ time. This looks low considering that on five out of the six occasions examined, the Fed commenced its rate cut cycle with a 50bps move. However, such a move might be more difficult this time around since the US data on the whole are satisfactory, and the US presidential election is just around the corner.

Additionally, the market is currently expecting around 103bps of easing until year-end. As there are just three meetings left in 2024, the Fed is expected to announce rate cuts at every gathering, including the November 7 one. Historically, the Fed announced back-to-back cuts on four of the six periods examined.

How did the market perform one week after the initial Fed rate cut?

Chart 1 below presents the performance of key market assets one week after the initial Fed rate cut. Digging through the data, some interesting trends can be identified. Specifically, the S&P 500 stock index dropped by an average of 3.7% in the six periods examined, reflecting the market’s concerns about the overall economic outlook.

Interestingly, the US dollar tends to suffer in the aftermath of the initial Fed rate cut with euro/dollar rallying in five out of the six periods examined. Additionally, with the exception of 2001, WTI oil futures usually fall by 2.3%-27.2%, potentially reflecting the market’s concerns about a significant economic slowdown, and even recession.

Stocks Could Suffer After the September Fed Rate Cut_2

Asset performances two months after the first rate cut

The picture becomes less clear when analyzing the market’s performance two months after the first Fed rate cut. However, this timeframe is rather important as it encompasses the November 5 US presidential election and the subsequent Fed meeting (November 7).

As seen in Chart 2 below, WTI oil futures suffered in 2008, 2019 and 2020, while the US dollar had a more mixed performance in the two months after the initial rate cut. On the flip side, based on the analysis’ findings, the 10-year US treasury yield tends to fall by an average of 38bps in the examined timeframe.

Additionally, the S&P 500 index was under pressure in five of the six periods examined as market participants were quite anxious about the state of the US economy. Interestingly, this equities’ weakness was one of the key findings in an earlier special report analyzing the performance of key assets two months ahead of the US presidential election.

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

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