HIGHLIGHTS OF THE WEEK
- CPI report – the only key data release this week – confirmed that inflation remained tame in September. Both headline and core inflation registered a muted 0.1% increase on the month, leaving the readings flat on a year-over-year basis.
- Meanwhile, the JOLTs survey showed that worker demand had softened over summer. The number of job openings fell in August on a year-on-year basis – a third drop in as many months.
- Unless a breakthrough in the U.S.- China trade impasse is reached later today, benign inflation and further signs of the domestic economy cooling off should lead to an even broader agreement for further monetary easing among the FOMC members when they meet later this month.
Fed Leaves the Door Open for Another Cut
This was another busy week for markets. Lingering concerns about the health of the global economy continued to weigh on sentiment after a couple of dour speeches from the leaders of the IMF and World Bank early in the week. However, the mood improved as the week progressed, with equities gaining and bonds selling off. Risk-on sentiment was buoyed by trade talk hopes ahead of the much-anticipated meeting between President Trump and Chinese Vice Premier Liu later today. Investors also welcomed signs of progress in the Brexit talks between the UK and Ireland.
The new leaders of the IMF and World Bank warned about the deteriorating global economic backdrop ahead of their annual meetings next week. The new head of the IMF, Kristalina Georgieva, said that the global economy is now in a “synchronized slowdown”, and that the IMF expects slower growth than last year in 90% of the world. The new head of the World Bank, David Malpass, in turn highlighted the long list of looming risks, such as “Brexit, Europe’s recession, and trade uncertainty,” which may lead to a further downgrade to their global growth estimate.
Chair Powell expressed similar concerns in his speech this week, acknowledging that the U.S. economy has slowed. He also reaffirmed that while the 50 basis point reduction in the fed funds rate so far is providing support, the FOMC committee will continue to assess incoming data signals on a meeting-by-meeting basis. The next meeting will take place at the end of October, and markets are expecting another quarter-point rate cut. Powell’s speech this week did not dispel those expectations, with the chairman reiterating that “policy is not on a preset course”.
While data was sparse, with CPI being the only main release, the FOMC meeting minutes, were noteworthy. The September minutes revealed that most participants were in favor of a 25 basis point cut last month to cushion the domestic economy from external headwinds. It appears that the argument for further monetary accommodation has only strengthened since then. The ISM Manufacturing index has moved deeper into contractionary territory, service sector activity has moderated, and wage and job growth have slowed. Echoing those trends, the JOLTs survey this week showed that worker demand had softened over the summer. The number of job openings in August declined 4% from a year ago, falling for the third consecutive month and mirroring the decline in average weekly hours (Chart 1).
Separately, the NFIB small business confidence index showed that businesses may be stuck between a rock-and-a-hard place, as they face rising costs (especially for labor), but are unable (or unwilling) to increase selling prices (Chart 2). Indeed, despite new tariffs coming into effect in September on many consumer goods, inflation remained tame. Both headline and core inflation registered a muted 0.1% increase on the month, leaving the readings flat on a year-over-year basis at 1.7% and 2.4%, respectively. Unless a breakthrough in the trade impasse is reached later today, benign inflation and further signs of the domestic economy cooling off should lead to even more agreement at the FOMC table for the need of at least another rate cut this year.
Ksenia Bushmeneva, Economist | 416-308-7392
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