US Consumer Confidence Sours on Labour Market Jitters

Economic

Summary:

The plunge in consumer confidence underscores the growing pressure on many households as the labour market weakens,' said Ben Ayers, a senior economist at Nationwide.

US consumer confidence dropped by the most in three years in September amid mounting fears over the labour market, though more households planned to buy a home over the next six months.

The Conference Board survey on Tuesday also showed consumers expected inflation to increase in the coming year, clouding their views of the economy ahead of the Nov. 5 presidential election. The economy could determine the outcome of the vote.

Still, consumers remained interested in traveling and dining out as well as going out to movies. That could help to underpin consumer spending and the economic expansion.

The Federal Reserve last week cut interest rates by 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020, which Fed Chair Jerome Powell said was meant to demonstrate policymakers' commitment to sustaining a low unemployment rate. The jobless rate is currently at 4.2%.

"The plunge in consumer confidence underscores the growing pressure on many households as the labour market weakens," said Ben Ayers, senior economist at Nationwide. "If the Fed follows through with a relatively aggressive easing cycle over the next year, that could shore up consumers' optimism in the state of the economy and keep the economy from a hard landing."

The Conference Board's consumer confidence index dropped to 98.7 this month from an upwardly revised 105.6 in August. The decline was the largest since August 2021. Economists polled by Reuters had forecast the index rising to 104.0 from the previously reported 103.3.

The cut-off date for the survey was Sept. 17, before the U.S. central bank kicked off its easing cycle.

The biggest drop in confidence was among the 35 to 54 years age group. Confidence fell across most income groups, with consumers earning less than $50,000 a year experiencing the biggest decrease. The Conference Board said write-in responses about politics, including the November elections, remained below both 2020 and 2016 levels.

"The deterioration across the index's main components likely reflected consumers' concerns about the labour market and reactions to fewer hours, slower payroll increases, fewer job openings, even if the labour market remains quite healthy, with low unemployment, few layoffs and elevated wages," said Dana Peterson, chief economist at the Conference Board.

Stocks on Wall Street inched higher. The dollar fell against a basket of currencies. U.S. Treasury yields rose.

Buying plans mixed

The share of consumers who viewed jobs as being "plentiful" dropped to 30.9%, the lowest since March 2021, from 32.7% in August. Some 18.3% of consumers said jobs were "hard to get," up from 16.8% last month.

The survey's so-called labour market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, fell to 12.6. That was the narrowest since March 2021 and was down from 15.9 in August.

This measure correlates to the unemployment rate in the Labor Department's monthly employment report.

Economists said at first blush the shrinking labour market differential would imply the jobless rate rising to 5%, but noted that monthly moves can be noisy.

"The persistent drop in this measure is a clear sign that the labour market is not nearly as tight as it once was," said Shannon Grein, an economist at Well Fargo. "That said, we're hesitant to put too much weight on this data given broader confidence measures have remained depressed this cycle despite resilient spending habits of households."

The unemployment rate slipped in August after rising for four straight months. It has increased from 3.4% in April 2023.

The rise in the unemployment rate has been driven by an increase in labour supply, mostly from immigration. Layoffs remain at historically low levels.

Consumers' assessments of their financial situation, both now and over the next six months weakened. Plans to buy big-ticket appliances were mixed, with a slight increase in the share of consumers intending to purchase motor vehicles, refrigerators and clothes dryers over the next six months.

But the share of those planning to buy television sets and washing machines declined. A new question about services in this month's survey showed strong intentions to spend on healthcare and utilities over the next six months.

Consumers' 12-month inflation expectations increased to 5.2% from 5.0% in August, though more mentioned lower inflation in their write-in responses.

"If inflation expectations continue to rise and the labour market continues to soften, the Fed is going to have a difficult time appropriately recalibrating monetary policy," said Conrad DeQuadros, a senior economic advisor at Brean Capital.

The Fed raised the policy rate by 525 basis points in 2022 and 2023. It is expected to lower borrowing costs again in November and December.

The share of consumers planning to buy a house over the next six months jumped to 5.7%, the highest level since August 2023, from 4.8% in August. That coincides with a decline in mortgage rates to more than 1-1/2-year lows as well as a moderation in house price inflation. Home price appreciation has cooled as a surge in mortgage rates during the spring pushed buyers to the sidelines, resulting in a rise in housing supply.

A separate report from the Federal Housing Finance Agency on Tuesday showed single family house prices gained 0.1% on a month-on-month basis after being unchanged in June. They increased 4.5% in the 12 months through July, the smallest rise since June 2023, after advancing 5.3% in June.

"Lower mortgage rates should boost demand, however, preventing a significant softening in prices," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

Source: The edge markets

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Justin

Economic

The Malaysian Communications and Multimedia Commission (MCMC) and the Malaysian Investment Development Authority (MIDA) organised a workshop on the Implementation of the Industry Readiness Assessment Framework for 5G Services in Malaysia.

The one-day workshop, held here on Tuesday, aimed to develop a framework to assess the readiness of key economic sectors, including manufacturing, services, construction and agriculture, in adopting 5G technology.

The workshop is a follow-up to the Memorandum of Understanding (MOU) exchanged between MCMC and MIDA on July 4, aimed at implementing various initiatives leveraging 5G networks in vertical sectors and small and medium enterprises (SMEs), MCMC said in a statement on Wednesday.

"The parameters to be used in assessing the readiness of key sectors will cover aspects such as location, investment, skills or talent, digital infrastructure and services.

"The feedback gathered will then be used to develop a comprehensive assessment framework for the adoption of 5G technology across various industries in Malaysia, including SMEs," said MCMC.

Among the agencies participating in the workshop, attended by more than 100 participants, were the Land Public Transport Agency (APAD), the Malaysian Palm Oil Board (MPOB), the Malaysia Productivity Corporation (MPC), SIRIM Berhad, SME Corporation Malaysia (SME Corp), Digital Nasional Berhad (DNB), telecommunications companies and relevant industry associations.

MCMC described the workshop as a significant step toward ensuring industry readiness in adopting 5G technology.

"It has the potential to increase productivity and efficiency in the manufacturing, services, construction, agriculture and mining sectors," said the commission.

Meanwhile, MIDA, in the same statement, emphasised its commitment to creating a conducive environment for the adoption of advanced technologies.

"The adoption of 5G technology will not only enhance productivity in key industries but also position Malaysia as a digital innovation leader in the region, driving economic growth and improving the country's competitiveness on the global stage," said MIDA.

Source: Theedgemarkets

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SAXO

Economic

Central Bank

Global Market Quick Take: Asia – September 25, 2024_1

Macro:

China’s central bank, the People’s Bank of China, unleashed an unprecedented stimulus blitz of policy support for the economy. In a rare press conference, Governor Pan Gongsheng announced a flood of support measures, including cutting the amount of cash banks need to have on hand, known as the reserve requirement ratio (RRR), by 50 basis points in the near term, and the 7-day repo rate by 0.2%. A 0.2–0.25% cut in the loan prime rate could follow. In addition, the PBOC lowered borrowing costs on up to USD 5.3 trillion in mortgages while easing rules for second-home purchases. China also announced at least 800 billion yuan ($114 billion) of liquidity support for stocks and will allow brokerages and funds to tap the central bank’s funding to buy equities after the benchmark CSI 300 Index fell to more than a five-year low earlier this month.

US consumer confidence sent some worries especially about the labour market which is the key Fed focus now. The headline saw its largest drop since August 2021 as it fell to 98.7 from 105.6 (revised up from 103.3) in September, below the anticipated 104. The surprising downturn primarily stemmed from the 10.3 drop in the Present Situation Index to 124.3, although the fall in the Expectations Index weighed on Confidence (fell by 4.6 points to 81.7). 30.9% of consumers said jobs were “plentiful,” (prev. 32.7%) whereas 18.3% of consumers said jobs were “hard to get,” up from 16.8% seen in August. The labour market differential between consumers saying jobs are plentiful versus hard to get fell to 12.6 (prev. 15.9).

Fed Governor Bowman (hawk, dissented to the FOMC's 50bp rate cut) echoed a lot of the arguments she made in her speech explaining her dissent on Friday, where she said she did not want a 50bps cut to send a message the Fed has declared victory on inflation. She repeated core inflation is still uncomfortably above the 2% target with upside risks, taking an opposite view to Governor Waller who voted for a 50bps rate cut noting inflation has fallen faster than anticipated and on a four-month annualized basis, Core PCE is tracking beneath the Fed's target at 1.8%.

The Reserve Bank of Australia kept its cash rate unchanged as expected and the statement offered some pushback to market expectations of a rate cut this year. However, Governor Bullock’s comments at the press conference were less hawkish as she said that a hike was not considered and the central bank cannot guarantee economy will avoid recession.

Macro events: Riksbank Policy Announcement; Australia CPI (Aug), US Building Permits Revision (Aug), New Home Sales (Aug),

Earnings: Micron, Cintas and Jefferies

Equities: On Tuesday, the S&P 500 gained 0.2%, reaching a new record high, while the Nasdaq 100 rose by 0.5%, largely driven by a 4% surge in Nvidia shares. The Dow Jones also climbed, finishing 83 points higher. This uptick in the market followed disappointing consumer confidence data, which fell to a three-year low, prompting traders to bet on additional interest-rate cuts this year. Fed officials, including Austan Goolsbee, suggested that further rate cuts might be necessary, particularly with a focus on the labor market. Nvidia's share price jumped about 4% due to reports that its CEO had ceased selling shares. Estee Lauder saw a 6.11% rise, and Chinese stocks such as Alibaba (up 7.9%) and JD.com (up 13.9%) rallied following China's announcement of aggressive growth-stimulating measures, with Hang Seng Index closing higher by 4.1%. Conversely, Visa shares dropped by 5.5% amid rumors of a potential DOJ lawsuit over its debit card practices. Despite the positive market movements, concerns about geopolitical risks persisted, with JPMorgan CEO Jamie Dimon issuing cautionary warnings about the global economy.

Fixed income: Treasuries surged in a bull steepening move following the release of consumer confidence data. Fed swaps for the November meeting turned more dovish, now indicating a 50% chance of a half-point rate cut compared to a quarter-point cut. Yields closed near their daily lows, with the front end of the curve outperforming the long end, supported by a strong 2-year note auction. This has heightened expectations for the upcoming 5- and 7-year note auctions on Wednesday and Thursday. The Treasury's $69 billion auction of 2-year notes was awarded at a yield of 3.520%, the lowest since August 2022, bringing the 2-year yield close to its 2024 lows. Treasury yields improved by up to 5 basis points on the front end of the curve and showed slight gains across the long end. Both the 2s10s and 5s30s spreads ended near their session highs, steepening by 3.2 basis points and 3 basis points respectively. The 10-year yield was approximately 2 basis points lower compared to Monday's close, trading around 3.73%.

Commodities: WTI crude oil futures increased by 1.69% to $71.56, and Brent Crude futures rose by 1.72% to $75.17, driven by China's extensive economic stimulus measures and rising geopolitical tensions in the Middle East. China's central bank announced its largest stimulus package since the pandemic, including increased funding and significant rate cuts, to counter fears of a prolonged economic slowdown. Gold reached new record highs, climbing 1.08% to $2,657, as commodities benefited from China's stimulus efforts. Silver surged 4.6% to $32.1 on Tuesday, its highest level since late May, as Middle East tensions led investors to seek safe-haven assets.

FX: The risk-on environment got another leg of support after Fed’s 50bps rate cut last week as China authorities announced a slew of stimulus measures to support the ailing economy and markets. The US dollar, as a result, traded lower across the board and Chinese yuan led the gains. Offshore yuan broke past the 7 per dollar level for the first time in 16 months. The Australian dollar was choppy following a hawkish statement from the Reserve Bank of Australia but a less hawkish speech from the Governor, but eventually the Chinese bazooka stimulus helped pushed the commodity currency higher. The Japanese yen was the underperformer in the risk-on environment, also as BOJ’s Ueda continued to sound caution on the pace of further rate hikes.

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RBA

Economic

Data Interpretation

On September 25, the ABS released the CPI report for August:

The monthly CPI indicator rose 2.7% in the 12 months to August, compared to the expected 2.7% and the previous 3.5%.

The data reveals that Australia's CPI inflation decelerated to its lowest point in three years during August, and core inflation reached its lowest level since the beginning of 2022. This suggests that costs are moderating, potentially bolstering the RBA's confidence that inflation is steadily moving toward its target.

The most significant price rises at the Group level were Housing (+2.6 %), Food and non-alcoholic beverages (+3.4 %), and Alcohol and tobacco (+6.6 %). New dwelling prices, which capture new builds and major renovations, rose 5.1% in the 12 months to August and have remained around 5% since August 2023, with builders passing on higher costs for labour and materials. Rental prices increased 6.8% in the 12 months to August, down from the 6.9% increase in July. Rental price growth remains high due to a continued tight rental market reflected by low vacancy rates in most capital cities.

Food and non-alcoholic beverage prices rose 3.4% in the 12 months to August, down from a rise of 3.8% in July. It was the lowest since February, 2022. The main drivers were Fruit and vegetables (+9.6%), Meals out and take away foods (+2.9%), and Food products n.e.c. (+4.2%).

Holiday travel and accommodation prices rose 2.8% in the 12 months to August, but fell 1.4% in August in monthly terms. The main contributor to the fall was Domestic holiday travel and accommodation (-2.6%) as demand was softer due to no school holidays.

Thanks to the government's tax refund, Electricity prices fell 17.9% in the 12 months to August, down from a 5.1% annual fall in July. This is the largest annual fall for Electricity on record. Automotive fuel prices were 7.6% lower compared to August 2023. Similarly, the falling trend also showed up in Transport, by 1.1% annually.

Australia's August CPI

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Cohen

Economic

Prospect Capital Corp., an $8 billion publicly-traded private credit fund, had the outlook on its Baa3 credit grade cut to negative by Moody’s Ratings, the second such revision by a ratings firm in as many weeks.

Prospect is now on the cusp of junk at three out of the five firms that rate its debt, following S&P Global Ratings’ outlook revision last week and a similar action from Kroll Bond Rating Agency earlier this year. Prospect has seen a “deterioration in asset quality over the last 12 months,” Moody’s said in a report Tuesday.

The rating company specifically cited the share of borrowers paying Prospect by accumulating more debt with the fund, an arrangement known on Wall Street as payment-in-kind, or PIK. About 16% of Prospect’s total income was from payment-in-kind as of June 30, according to Moody’s, up from 10% the year prior.

That figure is “one of the highest levels among peers,” Moody’s said in the report.

Prospect has faced increased scrutiny in recent months over its PIK income, its relationship with a real estate investment trust it fully controls and its reliance on retail investors for funding.

Last month, Wells Fargo & Co. cut its price target on the fund to $4.50 from $5.00 over the risk of dilution for existing shareholders. The revision followed a heated earnings call during which Prospect CEO John F. Barry III lashed out at the Wells Fargo analyst, blasting some of his questions as “absurd.” On earnings calls and in documents, Prospect has defended PIK arrangements, seeing them as appropriate for some borrowers.

Representatives for Prospect did not immediately respond to a request for comment.

Moody’s also pointed to the fund’s subordinated structured investments and real estate holdings, which expose the fund to the volatility of equity returns. It also cited a lower debt-to-equity ratio relative to peers, as well as a deteriorating asset coverage ratio, for the outlook cut.

Moody’s, which kept Prospect’s rating steady at Baa3, said it could downgrade the fund if it sees meaningful asset deterioration, lowered profitability or a further decrease to the asset coverage ratio cushion.

The ratings firm said it could upgrade Prospect if the fund effectively manages portfolio asset quality and reduces its higher-risk exposures, strengthens its asset coverage ratio cushion, or generates profitability that compared with peers.

Source: Theedgemarkets

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Economic

Some investors expect a back-to-back 50bps cut

The Fed decided to begin this easing cycle with a double 50bps rate cut at last week’s decision, with the new dot plot pointing to another 50bps worth of reductions by the end of 2024. At the press conference following the decision, Fed Chair Powell noted that the economy is in good shape and that that the decision was designed to keep it there.

Combined with the Committee’s dovish take on interest rates, Powell’s view that there is no imminent risk of recession allowed investors to increase their exposure in stocks, while the dollar suffered some more losses.

Investors went as far as to pencil in another 75bps worth of reductions by December, despite the Fed’s dot plot pointing to 50, and despite a Reuters poll revealing that a strong majority of economists agree with the Fed. Economists believe that policymakers will cut interest rates by 25bps in both November and December, but according to the Fed funds futures, investors are assigning a strong 55% chance for a back-to-back double cut in November.

Dovish bets pose upside risks

This implies that there may be upside risks moving ahead should data heading into the November decision continue to suggest that the economy is faring well and/or that inflation is not slowing as fast as initially believed.

Indeed, both the Atlanda Fed GDPNow and the New York Fed Nowcast models are pointing to solid growth rates for Q3, while the composite S&P Global PMI for September came in slightly better than expected, holding well above 50, despite the further weakness in the manufacturing sector. This corroborates the notion that the world’s largest economy is doing well.

PCE inflation enters the limelight

Now, investors are likely to turn their attention to Friday’s PCE inflation metrics for August, which are accompanied by the personal income and spending data. As is usually the case, the spotlight is likely to fall on the core PCE price index as it is the Fed’s favorite inflation gauge.

Considering that the core CPI for the month held steady at 3.2% y/y, there is the likelihood for the core PCE to have also held steady at 2.6% y/y. This view is corroborated by the Fed’s own projections, which suggest that inflation will end 2024 at 2.6%. Reuter’s poll is even pointing to an uptick to 2.7%.

Thus, should such an outcome be accompanied by strong income and spending numbers, investors will have fewer reasons to believe that a back-to-back double rate cut will be warranted, something that could help Treasury yields move higher and the US dollar to recover some ground.

Nevertheless, that doesn’t mean Wall Street will pull back. Even at a slower pace, interest rates are destined to continue decreasing. Thus, as long as data keep pointing to decent economic performance, equity traders may be willing to add to their risk exposure.

Euro/dollar may extend latest setback

Euro/dollar pulled back on Monday, after the Euro area PMI revealed that business activity fell into contraction in August, prompting traders to increase their bets about another 25bps cut at the October ECB decision.

The setback occurred after the pair hit resistance last week near the 1.1180 and should Friday’s US data prove supportive for the dollar, the pair may continue sliding, perhaps until it tests the 1.1025 zone, marked by the low of September 3, or the round figure of 1.1000, which stopped the price from moving lower on September 11.

Now, in case the data encourages investors to increase their Fed rate cut bets, euro/dollar may climb back to the 1.1180 zone, or the 1.1200 area, marked by the highs of August 23 and 26, the break of which could pave the way towards the high of July 18, 2023, at around 1.1275.

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Alex

Economic

US Federal Reserve governor Michelle Bowman said on Tuesday key measures of inflation remain "uncomfortably above" the Fed's 2% target, warranting caution as the Fed proceeds with cutting interest rates.

Bowman said she agreed that progress on lowering inflation since it peaked in 2022 means it is time for the Fed to reset monetary policy.

But she dissented to last week's half-point rate reduction in favor of a more "measured" quarter-point cut because "the upside risks to inflation remain prominent," including global supply chains at risk of strikes and other disruption, aggressive fiscal policy, and a chronic mismatch between housing supply and demand.

"The US economy remains strong and core inflation remains uncomfortably above our 2% target," Bowman said in comments prepared for delivery at a Kentucky Bankers Association convention in Virginia.

"Core" inflation refers to the Personal Consumption Expenditures price index stripped of food and energy costs, which Fed officials consider a good guide to overall inflation trends and which Bowman said she expects was running still at around 2.6% through August.

Inflation data for August will be released on Friday.

"I preferred a smaller initial cut in the policy rate while the US economy remains strong and inflation remains a concern," Bowman said. "I cannot rule out the risk that progress on inflation could continue to stall."

After holding the benchmark rate of interest steady for 14 months in a range between 5.25% and 5.5%, the Fed last week in an 11 to one vote cut it to the 4.75% to 5% range.

Bowman's dissent was the first by a member of the Fed's Board of Governors since 2005.

While she said she was prepared to support further cuts if incoming data showed the job market weakening, she argued that wage growth and the fact that there were still more open jobs than available workers suggested the labour market remained strong overall.

"I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment," with the unemployment rate at 4.2%, she said.

She said she worried that fast rate cuts might also unleash "a considerable amount of pent-up demand and cash on the sidelines," possibly fueling inflation again, while monetary policy may also not be as restrictive as some Fed officials believe.