Japanese industrial production was unchanged in August while shipments edged up 0.1% MoM. Inventories, however, saw a sharp decline of -1.7% MoM. On an annual basis, production is down -3.8% YoY, and shipments have fallen -2.4% YoY. Slower activity has caused a build up in inventory over the past year, especially compared to shipments. The inventory ratio is up 8.4% YoY. The forecast for September and October, which estimates 5.8% MoM and 3.8% MoM respectively, indicates that production is expected to rebound slightly as we enter Q4.

Japan’s industry has more or less come to a halt as a build up in inventories over the last year suggests there is some excess capacity utilization in the economy. Despite that, forecasts are very optimistic on growth going forward, especially with the 5%+ growth expected in September. Looking at that estimate, it seems like there will be a downside surprise in the next report.

Japan’s unemployment rate rate unchanged in August at 2.7%. The labor force composition was largely unchanged with 50,000 jobs added and 10,000 individuals becoming unemployed. About 90,000 left the labor force. Despite that, labor force participation of 15 to 64 year olds is up 0.5 ppts over the last year to 81.5%, and the employment rate of that population is up 0.4 ppts to 79.2%. The unemployment rate is only up 0.1 ppts from last year which suggests the Japanese labor market remains strong despite momentum fading from growth.

The Japanese economy continues to be held together by a strong labor market which is supporting consumers’ incomes. There continues to be little pressure on firms to release workers despite some softness in manufacturing becoming apparent. The increase in the prime working age labor force over the last year will likely keep wage growth contained so that it is not really a force pushing inflation higher.

Japanese retail sales grew just 0.1% MoM and 7.0% YoY in August. Wholesale sales were up 0.9% MoM but still down -0.3% MoM. As a result, total commercial sales grew 0.5% MoM and were up 1.7% YoY. The 7.0% YoY increase in retail sales is (tied) for the 2nd highest this year with July. The highest was 7.3% YoY in February. Large-scale wholesale sales continue to trend weak, down -4.7% YoY, a sharper fall from the -3.1% YoY in July. This continues the weakness seen in Q2 2023 where sales were down -2.5% over Q2 2022.

Sales growth was slow in August after a strong showing in July. On an annual basis, the value of sales is up by a lot, but this is likely because of the recent rise in inflation. Wholesale sales, on the other hand, have struggled to grow in the last 12 months which suggests that there is some softness further up the supply chain as a result of a build in inventories. Will that weakness flow forward to retail? Probably in Q4 2023 and Q1 2024. Momentum is falling out of Japanese growth, and higher inflation will eventually get to the consumer.

In September 2023, the Economic Sentiment Indicator (ESI) for the EU slightly increased, dropping by -0.4 points to 92.8. On the other hand, the Employment Expectations Indicator (EEI) showed a positive trend, rising in both the EU and the euro area. The decline in the ESI was largely attributed to a significant drop in consumer confidence, especially in Spain and Italy, while France saw an improvement. Industry confidence remained stable, but consumer confidence saw a notable decline, down -1.6 pts to -18.7, due to increased pessimism about financial futures and the broader economic situation. There was also an increase in consumers’ selling expectations over the next 12 months, bring that index to the highest since April. The EU Economic Uncertainty Indicator rose in September, up 1.6 pts to 21.1, indicating heightened uncertainty among managers in various sectors and consumers regarding their future financial situations.

It is fully expected for economic sentiment to continue to decline in the EU through the rest of 2023, and the downtrend should be gradual like the the September move. The ESI is now back toward the October 2022 near-term low of 92.9 and with good reason. High interest rates are making their impact across both consumers and businesses. With a slight increase in selling price expectations, likely caused by energy prices, the ECB will make sure the full force of the impact of rates is felt.

Australian retail turnover increased by 0.2% in August, following a 0.5% rise in July and a -0.8% decrease in June. This modest growth in August reflects a continued restraint in consumer retail spending. Year-over-year, retail turnover grew by only 1.3% compared to August 2022, marking the smallest 12-month trend growth in the series' history. This low growth rate underscores the impact of cost-of-living pressures on consumer behavior, despite inflation and population growth. Among retail categories, clothing, footwear, and personal accessory retailing saw the most significant rise at 1.3%, boosted by warmer weather, promotional activities, and the 2023 FIFA Women’s World Cup. In contrast, household goods and food retailing experienced declines. Retail turnover results varied across states and territories.

Australia’s retail sales gains benefited slightly from the 2023 Women’s World Cup, so excluding that, consumers did not spend much at all in August. In fact, because the tournament spanned July as well, it’s likely that some of the gain in that money was also attributed to the World Cup. The reality is that Australian consumers are starting to retract on their spending amidst higher interest rates and a worsening financial situation. The only thing propping up consumption right now is strong incomes, and once those start to diminish, sales will see significant declines.

In August, US durable goods activity stabilized with a 0.2% MoM increase, marking the fifth rise in six months and a cumulative 5.1% growth in new orders, indicating resilience in the US manufacturing sector. While headline figures showed volatility, especially in transportation, most segments, including machinery, electronics, and electrical equipment, saw gains in September, with the core segment of durable goods orders witnessing a 0.9% MoM growth, supporting positive GDP growth projections.

The US manufacturing sector once again refuses to capitulate and will go into the final quarter of the year with positive momentum. This is positive momentum that analysts continue to be surprised by. Today’s release of the core segment topped the consensus estimate of no growth by a considerable margin. The unexpected expansion is a sign that manufacturers can operate under tighter financial conditions which give credence to the Fed’s insistence on “higher for longer.” It also means that the US remains on track to avoid a recession and glide into a soft landing.

UK retail sales grew 0.4% MoM in August but was down -1.4% YoY. Food sales jumped 1.2% MoM, and non-food sales grew 0.6% MoM. Non-store sales (-1.3% MoM) and auto fuel sales (-1.2% MoM) both fell to offset food and non-food sales gains.

The Bank of Japan held its policy rate unchanged in the most recent September meeting after it made a slight change to its yield curve control policy in the previous meeting. The maintenance of ultra-loose policy is justified by the Bank of Japan’s insistence that “Japan's economy is projected to continue growing at a pace above its potential growth rate” while at the same time projecting that “the year-on-year rate of increase in the CPI (all items less fresh food) is likely to decelerate.”

Based on the current trend in growth and inflation, it seems likely that we will see the Bank of Japan hike within the next year, possibly by the end of 2023. The BoJ’s current expected path of inflation feels too optimistic, and inflation prints continue to top previous forecasts. There will have to be major shifts in wage and employment data to support the Bank of Japan’s inflation narrative as both point to a labor market supporting Japanese purchasing power. For now, the BoJ stands apart from the rest of the developed world with its insistence in keeping ultra-loose policy.

The Bank of Japan’s reading of core inflation, CPI (ex-fresh food), was up marginally by 0.2% MoM, and the annual rate remained the same at 3.1% YoY. This is down from a peak of 4.2% YoY in January and the same rate reported in February, March, and July of this year. Similarly, core CPI (ex-food, energy) increased by just 0.3% MoM and 2.7% YoY. This annual pace is still at its peak, however, as the depressing effects of energy prices are not evident. There has been some progress on inflation in 2023, but so far it seems that progress has only been made through falling energy prices which are now back on the rise.

The Philadelphia Fed September Manufacturing Business Outlook Survey indicates a downturn in the region's manufacturing sector. The current general activity index fell into negative territory, dropping from 12.0 in August to -13.5 in September, marking its 14th negative reading in the past 16 months. While firms reported overall price increases, most indicated no change in prices, with price indexes staying close to their long-term averages. Employment saw a decline, with the employment index remaining at -5.7. Special questions revealed that 37% of firms reported an increase in production for Q3 2023, matching the percentage that reported a decrease. Despite the current downturn, future indicators suggest a more optimistic outlook, with the diffusion index for future general activity rising from 3.9 in August to 11.1 in September.

The Philadelphia Fed index dropped back from a recent bounce in August to return to contractionary territory. The positive reading last month was the first since September 2022. There was a major shift back down in the New Orders index which points to a continued decline in manufacturing demand. Despite there being a decline in demand and activity, price pressures increased. The rise in the Prices Paid index likely came from the recent rise in energy prices, and that caused firms to keep their prices charged on a slight rise. Most firms’ employment was unchanged (67.3%) but there was a slight edge in the percentage who saw a decline in employment compared to the percentage who saw an increase. A slight moderation in the index was what was expected, but this sharp 25 point decline was a downside surprise.

The Bank of England (BoE) has held its Bank Rate at 5.25%, halting a series of rate hikes initiated in December 2021. The decision, which passed with a narrow 5-4 vote, also included a reduction in the rate of quantitative easing, decreasing UK government bond purchases by £100 billion to £658 billion over the next year. This move follows a surprising dip in UK CPI inflation rates, particularly in services inflation. While the Monetary Policy Committee (MPC) acknowledged the unexpected decline in inflation, it also highlighted the volatility of certain segments like airfares during the summer. The MPC is closely monitoring the labor market, wages, and inflationary pressures, emphasizing the significance of labor market conditions, wage growth, and services price inflation in guiding future BoE decisions. The asset purchase reduction was anticipated, aligning with market expectations.

The minutes of the MPC describe the situation best: “For most members within this group, the latest developments meant that the judgement to keep Bank Rate unchanged at this meeting rather than increase it was finely balanced.” While the pause feels decisive, it was not by any means, and because of that, it really does feel like this week’s inflation release made a huge difference in the voting today. Since the BoE has adopted this hyper-data-dependent mode, it should be no surprise that a reversal in the disinflation trend as demonstrated by future data would likely cause a reversal on the sentiment of the MPC. For now, however, the members can rest on the fact that the lagging nature of monetary policy suggests that much of that tightening has yet to make a major impact yet. The hope is that inflationary pressures will respond to these restrictive conditions and continue to trend the right direction.

The FOMC decided to keep the federal funds rate steady between 5.25% and 5.50% while continuing its balance sheet runoff. Recognizing recent economic vigor, the Fed noted that while job gains have decelerated, they remain robust with a persistently low unemployment rate. Updated economic projections reveal a median GDP growth of 2.1% for 2023, a strong upgrade from the 1.0% estimated in June. The unemployment rate forecast was downgraded slightly to 3.8% (previously 4.1%), and the core PCE inflation estimate was also downgraded slightly to 3.7% (previous 3.9%). A major update to the projections was a shift in how the Fed sees the Fed funds rate developing in 2024. Instead of next year ending with a rate around 4.6%, the FOMC now sees that rate being around 5.1% at the end of 2024 which reduces the expectation of rate cuts next year down from 100 bps to just 50 bps.

With the Fed pause being almost entirely priced in, that move surprised no one. The big news was in the adjustment to the projections which suggested that FOMC members shifted their view of the economy and inflation in the few months between June and September. The message is that rates will have to be “higher for longer” to help rein in the strong US economy to restrict and inflationary pressures that may crop up. Additionally, it does appear that we should be looking out for another quarter point hike this year as the FOMC maintained its forecast for a 5.6% Fed funds rate at the end of 2023.

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Ahead of a crucial Bank of England announcement, the UK's August inflation data revealed a CPI increase of 0.3% MoM and 6.7% YoY, the lowest since February 2022. While energy was the main inflation driver, with a 1.7% MoM surge, it's down by 3.2% YoY. Food inflation moderated to 12.6% YoY, influenced by a rise in alcohol and beverage prices. The core CPI's unexpected 0.2% MoM rise led to a YoY rate of 6.2%, with the services sector's unchanged prices and deflation in several segments contributing to this slowdown. Goods inflation, impacted by energy and food, stood at 6.3% YoY, with some segments showing disinflation.

The Bank of England, which has been a bit more hawkish than its other developed market central bank peers, has been closely monitoring wage and core CPI pressures, which have been more persistent in the UK than elsewhere. This latest report provides one of the first pieces of tangible evidence of inflation easing, primarily driven by a slowdown in service price growth and the largest deceleration in core CPI since the pandemic ended. However, most of disinflation was seen in recreation and travel categories and in just this one month, so it might be risky to change the perspective on inflation based on such a short-term, limited trend. On the other hand, there are signals from the labor market that the demand for hiring is cooling with vacancies falling and the unemployment rate starting to tick up. With that in mind, the Bank of England should be able to get away with a pause, and a clear guidance that it will raise rates in the future if progress on inflation is reversed.

Japan’s trade balance fell to -¥930 billion in August from -¥66 billion in August. Exports dropped -8.4% MoM, and imports increased 1.5% MoM to cause the sharp widening of the trade deficit. Exports to Asia, including China, fell by -5.3% MoM to cause the Asian trade surplus to fall to virtually even. Over the past year, exports have fallen -8.8% YoY and imports were down -12.9% MoM. A decline in exports to North America, Oceania, and Europe was also seen in August and contributed to the overall trade deficit. The slowdown in external shipments was evident across just about ever commodity segment. The largest areas of Japan exports all saw significant drops: manufactured goods down -6.0% MoM, machinery down -13.5% MoM, electrical machinery down -2.6% MoM, and transport equipment down -6.4% MoM.

The weakness in Japan’s exports is understandable in the context of a weakening global economic environment, but this month-to-month move was particularly sharp. Chinese weakness has clearly had an outsized impact on the Japanese economy as trade between the two has slowed substantially over the past year (exports to China down -11.0% YoY and imports from China down -12.1% YoY). In the period of Chinese weakness, exports to the US and Europe improved to replace its neighbor’s lost demand (exports to the US up 5.1% YoY and to Europe up 18.9% YoY). However, central bank tightening is going to cause the US and Europe to lose demand for foreign goods, and the effect of that tightening was seen in the contraction in Japanese exports in August.

In August, housing starts in the U.S. plummeted to their lowest post-pandemic rate at 1.28 million, marking an -11.3% MoM and -14.3% YoY decline, largely driven by a significant drop in multi-unit starts. This decline contrasts with the previously elevated levels of multi-unit starts, which had surged due to rising housing prices and rents. However, despite this downturn, the report highlighted some positive signs: building permits rose by 6.9% MoM, and housing completions, crucial in addressing the low inventory issue from the pandemic boom, remained above pre-pandemic averages, with multi-unit completions seeing a significant 45.8% YoY increase.

The main reason for the sudden plunge in housing starts in August was the recent move upward in mortgage rates. The average 30-year fixed mortgage rate in August was 7.07% which is the highest since December 2021 and just above the previous peak seen about a year ago at 6.90% in October 2022. As a result, we’re about to see the resilience of the housing market be tested over the next two quarters. The market has pushed off its expectations of rate cuts, and the Fed has adopted a clearer guidance on “higher for longer” interest rates. Builder confidence has already started to decline again with the September reading of the NAHB Housing Market Index at 45, a drop of-11 pts in the past two months. Finally, potential homebuyers will be feeling even more constrained than the previous mortgage rate peak as they have less in excess savings, student loan payments no longer in a moratorium, and a weaker labor market. All of these dynamics should lead to a renewed decline in housing demand and thus, residential construction.

The NAHB Housing Market Index fell -5 pts to 45 in September, the lowest reading since April of this year. The index had experienced a slight come back over the summer, peaking at 56 in July, before giving way to an eleven point decline over the past two months. Both present and expected sales (over the next six month) saw similar declines to 51 and 49 respectively. In September, 32% of builders reported cutting home prices, compared to 25% in August. That’s the largest share of builders cutting prices since December 2022 (35%). In a special question, it was revealed that 42% of new single-family home buyers were first-time buyers on a year-to-date basis in 2023. This is significantly higher than the 27% reading from a more normalized market in 2018.

The renewed decline in the HMI is a result of mortgage rates jumping back over 7% in the last few weeks. The initial rise in interest rates had a significant impact on housing market sentiment but that was countered by the misguided view that rates would not stay elevated in the long-term. Now, it seems that there is more of a consensus that the Fed will keep borrowing costs “higher for longer” and rate cuts are not coming any time soon. The September reading at 45 is still 14 pts off of the near-term low set in December 2022 at 31, but it does seem like we could return back to that territory in the coming months, especially if the Fed hikes again. For context, that is the lowest since April 2020 and before that since June 2012. The all-time low for the HMI was set in January 2009 at 8.

In August, industrial production saw a growth of 0.4% MoM, with manufacturing output marginally increasing by 0.1% MoM. This subdued growth in manufacturing was primarily due to a significant -4.8% MoM decline in the production of motor vehicles and parts. However, other sectors witnessed positive momentum: mining output grew by 1.4%, utilities by 0.9%, and the production of defense and space equipment surged by 3.5%. Within the manufacturing domain, durable manufacturing saw a slight increase, nondurable manufacturing grew by 0.2%. Notably, mining's growth was driven by a 3% rise in oil and gas extraction. Overall, capacity utilization in August reached 79.7%, aligning with its long-term average from 1972-2022.

Industrial production churned higher for the second straight month in the third quarter to help keep the annual increase positive. It’s worth noting that outside of the volatile movements in auto manufacturing over the last two months, industrial production has been in a consistent short-term uptrend. Industrial production (ex-auto) and manufacturing production (ex-auto) are up 1.2% and 0.6% from June to August. This means that industry is so far maintaining a positive contribution to growth in the current quarter despite the full force of rate hikes causing credit conditions to tighten. Suddenly, the industrial sector of the US economy is not looking so bad.

The Empire State Manufacturing Survey Business Conditions index jumped 20.9 pts to 1.9 in September as the measure of New York’s manufacturing activity continues the volatility seen since 2022. The New Orders and Shipments indexes both surged as well by about 25 pts each to 5.1 and 12.4 respectively. As activity has improved, manufacturing firms continue to draw down unfilled orders. The index has been negative for about a year and a half now, -5.2 in September, as new demand has been sluggish as rates have risen. A more troubling movement was noticed in the Prices Received index which bounced 7.0 pts to 19.6 which is around where it ended in the latter part of 2022. Not great news for inflation. Labor demand has definitely started to weaken. The Number of Employees index fell slightly further into the negative, down -1.3 pts to -2.7, reasserting the negative trend after the slight recovery in Q2. The forward-looking indicators suggest that firms are feeling more confident about conditions… but also expecting higher prices.

Better than expected activity and demand is good for growth but bad for inflation. The September edition of the Empire State Manufacturing Survey suggests that firms are maintaining their pricing power when it feels that demand is stable enough to support it. On the other hand, the volatility in activity and demand is keeping managers from feeling they can comfortable expand their workforces, and undoubtedly, they are looking to cut labor costs where they can now. However, if optimism is maintained for a substantial period, hiring demand can reverse.

The euro area trade surplus fell by -€18.1 bil to just €6.5 bil in July. Exports crashed on the month, down -9.7% MoM, which caused the annual change in exports to turn negative, from 0.3% YoY in June to -2.7% YoY in July. Imports also fell but to a lesser extent, down -3.5% MoM. Imports from outside the euro area continued to trend sharply lower for the year, down -18.2% YoY. Trade within the euro area was also very weak, falling 4.8% MoM and -7.9% YoY. Weaker imports and exports of energy primary goods are the main reason for the slowdown in trade, down -28.1% and -22.6% in the current YTD period vs the previous YTD period. The trade balance is also suffering from a slowdown in the increase of exports of manufactured goods, up 5.2% YTD in July vs up 5.8% YoY in June.

The sharp decline in exports is a bad sign for growth in the euro area in Q3. The trade balance has been bouncing from a deep deficit ever since August 2022. This has mostly been a result of lower energy import more than anything. The recently recovered euro area trade surplus is now potentially in danger.

Chinese retail sales grew 0.3% MoM which lead to the annual gain in sales accelerating to 4.6% YoY in August, up from 2.5% YoY in July. This is the highest since March, April, and May where there was a significant base effect pushing the YoY numbers higher. Indeed, for the year-to-date period, sales are up 7.0% YoY versus the previous year-to-date period which includes months of the economy in restriction. Food sales are the strongest sales category, up 12.4% YoY in August. Some categories are starting to show signs of improvement after a dismal Q2. Clothing sales are up 4.5% YoY, furniture signs are up 4.8% YoY, and communication equipment up 8.5% YoY. On the other hand, there are several categories that are still negative. Building materials (-11.4% YoY), household appliances (-2.9% YoY), and office supplies (-8.4% YoY) all refuse to bounce back in the post-COVID rally.

The improving growth rate of retail sales is generally a good sign that the Chinese economy is trying to get back on track, but the bad news is that growth is strongly affected by the surge in food and beverage revenue (partly affected by food inflation). Nevertheless, the category of sales doesn’t matter in the discussion of economic growth, and the continued improvement in sales will help to stabilize weak GDP in Q3 if it can continue. Overall, it seems that the negative categories are related to weakness in sentiment caused by the struggling real estate sector, household appliances and building materials specifically. The Chinese government has continually sought to address credit availability in order to restore confidence, but the struggles persist. However, sales data in August can, in general, by considered a positive development.

Chinese fixed asset investment in the year-to-date period through August was up 3.2% YoY, down from 3.4% YoY in July and from 5.8% YoY in the same year-to-date period in August 2022. Once again, we continue to see private sector investment struggle. At this point, private investment is down -0.7% YoY despite the fact that there should be some sort of post-COVID restriction boom. Propping up investment is public investment that has improved 7.4% YoY in the same period. Manufacturing investment beats out the investment in commodity and services sectors, up 8.8% YoY. Investment has boomed in electrical machinery and equipment manufacturing (up 38.6% YoY) along with booms in electricity, heat, gas, and water production (26.5% YoY), auto manufacturing (19.1% YoY), and transportation services (11.3% YoY). Other categories of investment have seen slight to no growth in investment.

Investment data demonstrates how the Chinese government wants to guide forward China’s economy in the post-COVID period since the growth in fixed asset investment is entirely a result of public efforts to provide liquidity. Beijing remains committed to competing with the US in high tech manufacturing and green energy technology. The investment in auto manufacturing is almost certainly all funneled towards electric cars as indicated by the sharp 13.8% YoY increase in EVs. Electrical machinery and equipment investment has gone towards growing computer chip manufacturing as evidenced by the 21.1% YoY increase in integrated circuits. Despite the strong intervention from the government, the struggles of the private sector are more impactful in the growth discuss. And at this point, weak liquidity will continue to hamper China’s ability to post strong GDP results in 2023.

Chinese industrial production has improved 4.5% YoY in August, up from 3.7% YoY in July. This is the highest since April and the second highest since October 2022. Manufacturing production barely leads with a 5.4% YoY increase as oppose to a 2.3% YoY increase in mining and a 0.2% YoY increase in electricity, heat, gas, and water production. Production is being pushed forward by expansions in electrical machinery and equipment manufacturing (10.2% YoY), ferrous metal smelting (14.5% YoY), chemical manufacturing (14.8% YoY), and auto manufacturing (9.9% YoY). Additionally, jumps in the production of electric vehicles, solar panels, solar and hydroelectric generators, and integrated circuits are key areas of growth.

As we’ve seen in China’s own PMI and the S&P Global PMIs, the Chinese manufacturing sector has struggled to be a significant source of expansion in 2023. Part of that has been a result of its foreign trade partners seeing sharper slowdowns in growth, especially in their own manufacturing sectors. Indeed, China reports that its export delivery value is lower by -4.6% YoY in the current year-to-date period through August, and this comparison is against a year where China was still experiencing COVID restrictions. Thus, the gains in production that are being reported show domestic priorities and reflect the goals of the Chinese government to expand into high tech manufacturing. In the growth discussion, exports have been crucial to a strong Chinese expansion, and therefore, weak foreign demand will cause the Asian giant to struggle to post good numbers in 2023. The good news is that August’s data shows the economy is trending in the right direction, and it avoided disappointing estimates like it has done in the recent past.

US retail sales expanded once again in August, extending a streak of gains to five months. In August, the headline growth of retail sales was 0.6% MoM which is the fastest since January 2023. The annual rate of growth only slowed by -0.1 ppts to 2.5% YoY last month. The more core measure of total retail and food services sales was up just 0.2% MoM since gasoline sales played a significant impact in the headline number. No matter where the spending is going, one thing seems to be true, the US consumer is still spending and proving to be resilient in the face of increasingly murky economic waters.

As evidenced by the difference between the headline and core figures in August, there was a significant increase in gasoline sales of 5.2% MoM. The increase in gas sales was almost entirely the result of rising energy prices. In the CPI report yesterday, we saw that the gasoline index increased a sharp 10.6% MoM which meant that drivers in August were paying a hefty premium. Despite the jump to end the summer, the YoY growth in gas sales is still sharply negative at -10.3% YoY (though this is much higher than the -20.9% YoY in the month before).

Growth rates in other categories were mixed. There was growth in clothing sales (0.9% MoM), electronics (0.7% MoM), and health & personal care sales (0.5% MoM). On the other hand, there were some categories that saw significant moves down like sporting goods sales(-1.6% MoM), miscellaneous store sales (-1.3% MoM), and furniture sales (-1.0% MoM). It is worth pointing out that the furniture and building materials store segments have the worst YoY growth rates (excluding gas sales) at -7.8% YoY and -4.9% YoY respectively because they are related to more expensive purchases that may require consumers to need access to credit to purchase. Additionally, both have some relation to the real estate industry which is currently the most struggling area of the economy. The fact that both of these categories saw their YoY declines intensify suggests that there is some underlying consumer weakness that is being hidden by rosier headline results.

US PPI was a bit hot in August, growing at the fastest rate since June 2022. Final demand PPI increased 0.7% MoM and 1.6% YoY, up from 0.8% YoY in July, and core PPI grew 0.3% MoM and 3.0% YoY, up from 2.9% YoY. The monthly growth of core PPI was the same as last month and both were the highest since February of this year. Energy PPI surged on the month, up 10.5% MoM with processed energy goods up 12.1% MoM and unprocessed energy goods up 5.4% MoM. Outside of energy, there are still signs of disinflation. Core goods PPI edged up only 0.1% MoM and core services PPI was up 0.3% MoM. Intermediate demand services PPI MoM growth was also low at 0.1% MoM and the annual rate slowed from 4.5% YoY to 4.3% YoY.

Just like the hot CPI monthly move in August, PPI surprised a bit on the headline number. Both boiled over thanks to jumps in energy commodity prices at the end of the summer. The PPI report is not like the ones we saw earlier this year where deflation was the theme across the board. Instead, in August there was a bit of stagnation in that those trends. Specifically core PPI growth ticked back up to 3.0% YoY, up 0.1 ppt, with a reversal in the trend of core commodity prices. The PPI for nonfood, non-energy unprocessed goods increased 0.8% MoM after three straight months of sharp deflation. At first glance, this looks like some upward price pressures coming down the pipeline. Of course, this is just one report, so we (and the Fed) would like to see this new short-term trend reversed in the next few updates.

The ECB has increased its key interest rates by 25 bps. The rate on refinancing operations is now 4.5%. Alternatively, the PEPP portfolio will continue to be reinvested until at least the end of 2024. The ECB staff has also revised down the path of core inflation to an average of 5.1% in 2023, 2.9% in 2024, and 2.2% in 2025 while the path of overall inflation was upgraded which reflects the expected rise in energy prices. Additionally, growth estimates for the euro area were also lowered. Now at 0.7% for 2023. The ECB seems to suggest that this will be the last hike, “the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

The ECB opts for the hawkish move of raising rates again despite emerging growth concerns. However, it decided to remain reinvesting the PEPP portfolio through the end of the year in a bit of a give and take move. This is undoubtedly a very hawkish move against inflation. However, there were some dovish details to note. The downgrade to the inflation outlook suggests that the ECB likely expects that it will not have to move much more in its fight against elevated inflation. This is also seen in the following statement that suggests that this rate hike could be the last: “The Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” In the end, a very hawkish move.

Australian employment expanded 0.5% MoM or 64,900, to 14.11 million in August as the total number of unemployed individuals fell at the same rate, down -0.5% MoM. The unemployment rate remained unchanged at 3.7%, but the underemployment rate did tick up to 6.6%. The participation rate improved a slight 0.1 ppt to 67.0%. While employment did improve, the total number of hours worked fell -9 million (-0.5% MoM) which explains the increase in the underemployment rate. The YoY gain in the total number of hours worked has slowly decelerated from a peak of 10.3% YoY in January to just 3.7% YoY in August, the lowest since May 2022. It is also worth noting that despite the marginal decline in the total number of unemployed, that number is still up 8.5% YoY.

In general, Australia’s labor market is still healthy and has so far survived the sharp increase in interest rates. However, there are signs that businesses are starting to lower their demand for workers, whether it be through decreased hours or less hiring. At the moment, it doesn’t appear that there is a trend of layoffs, and most of the softening in the labor force is through underemployment (up 0.6 ppts over the last year) or through new workers entering the labor force and becoming unemployed instead of immediately finding a job (participation rate up 0.3 ppts over the past year, unemployment rate up 0.2 ppts over the last year). These dynamics should be favorable to the Reserve Bank of Australia in that wage growth should decelerate but not at the cost of mass layoffs.

Japanese machinery orders surged 9.8% MoM in July with private sector machinery orders up 26.6% MoM. However, excluding volatile orders, there was actually a -1.1% MoM decline. The manufacturing sector saw machinery orders decline -5.3% MoM while the non-manufacturing sector saw orders up 1.3% MoM. Non-manufacturing orders have been volatile over the course of Q2 but ultimately settled at a decline of -8.8% QoQ which suggests a sharp turn in demand in that sector. Overseas orders improved 1.6% MoM which did little to reverse the -6.9% MoM decline in June.

The forecasts for Q3 are not rosy. In total, machinery orders are expected to fall -2.8% QoQ with similar estimates for the private sector and the total excluding volatile orders. Manufacturing orders are expected to decline -2.3% QoQ, and non-manufacturing orders are expecting to fall -1.4% QoQ. The Japanese Cabinet Office is specifically expecting a huge decline in government orders of -22.5% QoQ; although, this would just be a reversal of strong Q1 and Q2 order growth of 19.9% QoQ and 12.2% QoQ. Assuming this month’s report was an anomaly, we should expect the August report to be deeply in the red (on the headline figure, not necessarily the non-volatile total). When looking at the bigger picture, the trend is not supportive of GDP growth in Q3.

In August, the US witnessed a significant uptick in consumer prices, marking the fastest monthly growth since June 2022. The Consumer Price Index (CPI) rose by 0.6% MoM and 3.7% YoY, a noticeable acceleration from the 3.2% YoY recorded in July.

A primary driver behind this surge was the energy index, which reversed its declining trend observed in Q2 2023. Energy prices soared by 5.6% MoM. Breaking it down, the gas index witnessed a substantial jump of 10.6% MoM. In contrast, electricity and natural gas indexes saw marginal increases, with rates of 0.2% MoM and 0.1% MoM, respectively. Fuel oil prices also experienced a significant rise, increasing by 9.1% MoM. On the food front, inflation continued its trend of modest gains, registering a growth of just 0.2% MoM. Both grocery prices and food away from home prices reflected this slow pace, with increments of 0.2% MoM and 0.3% MoM, respectively.

While the headline CPI showed a robust growth, the core CPI (ex-food and energy) recorded a more subdued monthly gain of 0.3% MoM. Goods inflation, excluding energy, remained particularly low, with prices declining by -0.1% MoM. This marked the third consecutive month of decline. A significant contributor to this drop was the used car and vehicle index, which decreased by -1.2% MoM. Other indexes in this segment presented a mix of muted gains or slight declines. Services CPI saw an increase of 0.4% MoM, but its annual pace decelerated by 0.2 percentage points, settling at 5.9% YoY. The shelter index, a consistent contributor to the core CPI's monthly gain, rose by only 0.3% MoM, marking its smallest gain this year.

UK GDP is estimated to have fallen -0.5% MoM in July, reversing growth of 0.5% MoM in June. All three segments made negative contributions with the services sector weighing the most on GDP growth. Specifically, services output was down -0.5% MoM. The industry that made the largest impact in July was the human health and social work industry which contracted by -2.1% MoM as strikes from medical doctors caused thousands of appointments to be cancelled. Consumer-facing services showed no growth on the month. Industrial production fell -0.7% MoM after strong growth of 1.8% MoM was recorded in June. Manufacturing production specifically fell -0.8% MoM. Nine of the thirteen subsectors saw a contraction during the month. The expansion of crude oil and natural gas production offset some of this decline causing mining and quarrying production to increase 1.9% MoM. Adding to the decline of the industrial sector was a -0.5% MoM decline in the construction sector.

The GDP decline in July was likely a result of some mean reversion after a strong June. Unfortunately, that sets the UK up for a weak start to Q3 with little reason to believe that growth can regain momentum in August and September. In the three months to July, GDP growth is still up 0.2% with a strong 0.6% increase if production. This figure is boosted by the June expansion which will fall off when results for Q3 2023 growth are reported.

Euro area industrial production fell -1.1% MoM and -2.2% YoY in July, a sharp decline compared to the 0.4% MoM increase in June. Sharp declines in capital goods (-2.7% MoM) and durable goods (-2.2% MoM) production offset slight gains in intermediate goods production (0.2% MoM) and non-durable goods production (0.4% MoM). Interestingly, the big decliners on the month have starkly different annual declines with capital goods production still up 0.4% YoY and durable goods production down -6.7% YoY.

Industry is now heavily running against growth in Europe. For about a year now, production was volatile as inflationary pressures, especially energy costs, created a complicated environment for manufacturing. Though those pressures have eased to an extent, rising interest rates is now having a clear impact on manufacturing firms and their expectations of demand. This is especially the case for durable goods producers which are likely anticipating a deterioration in demand for expensive goods as credit becomes more expensive. This reaction will put downward pressure on Q3 growth.

Japan’s PPI grew 0.3% MoM and 3.2% YoY in August, down from 3.4% YoY. The monthly increase was the largest since April. Export prices jumped 1.9% MoM, the largest monthly increase since September 2022, and pushed the annual change to the highest since March 2023 at 3.7% YoY. The Import Price Index also increased, up 0.9% MoM, but the annual decline was still a sharp -11.8% YoY.

Petroleum and coal product prices are the main cause of the rise of the PPI, contributing 0.35 ppts to the MoM headline figure and growing 5.2% MoM and 7.5% YoY. Just two months ago, this segment was negative at -2.6% YoY which means that rising energy costs are set to become a near-term force for inflation in Japan in Q3. The other product segments made small contributions as many saw little change on the month. Notable changes include a -22.1% YoY decline in lumber and wood products, and nonferrous metals and metals products increasing 6.7% YoY and 8.0% YoY respectively.

There were some important movements reported in the latest UK labor market update. While the total number of employees was mostly unchanged in August, there was a sizeable shift downward in the employment rate in the three months to July, specifically down -0.5 ppts to 75.5%. The employment rate is down -1.1 ppts from the pre-pandemic period in February 2020. In tandem, the unemployment rate increased 0.5 ppt to 4.3% in that same period, now above the pre-pandemic level. The total number of hours worked fell substantially over the quarter. The decline in employment levels is an overall signal of easing hiring demand. This is also seen in the continued trend of declining job vacancies. In August, vacancies fell -64,000 to 989,000 which is only 188,000 above the pre-pandemic level.

The Bank of England has its eyes on wage growth as major force driving inflation higher. In July, regular pay growth remained at the record high of 7.8% YoY in the three months to July. The month-on-month increase in regular pay was the slowest so far in 2023 at 0.5% MoM in July (very similar to June but just below) and brings the three month average down to about 0.65% which is still substantial but lower than the faster rates above 0.7% seen earlier this year. This is good news for the Bank of England but not good enough to keep it from hiking again.

The ISM Manufacturing PMI for August increased 1.2 pts to 47.6. This is the 10th straight month of decline in the US manufacturing sector, but the rate of decline is easing. The deterioration in production stopped this month with the newest reading at 50, up 1.7 pts from July. That didn’t necessarily mean that demand was improving. In fact, the decline in new orders actually worsened, dropping slightly to 46.8. Firms in general sensed that this weak demand would persist. Some direct comments provided evidence of this: “Fourth quarter orders falling short of projection and indicating a slowdown in customer demand” from a fabricated metal products firm; “General slowdown in business at the end of the third quarter. For capital equipment additions, our customers are buying only what they need” from a machinery firm. In response, the inventory contraction worsened with the index falling -2.1 pts to 44.0.

The Prices index, a subindex that has gotten a lot of attention over the past year, made a substantial move higher in August. It rose 5.8 pts to 48.4 which is the highest since April and well above expectations. The movement in the index came from a large decrease in the percentage of firms that reported lower prices, from 28.7% in July to 19.7% in August. Despite this, most of those respondents reported that prices were the same and not rising. The forces behind this move were the volatile energy markets that have been bouncing from the near-term lows as a result of a more resilient economy supporting higher demand expectations. These movements are also visible in the early CPI releases showing some reversals in the energy component. While the increase suggests some inflationary pressure is returning, it will take a Prices index of 52.9 for it to be consistent with inflationary PPI (specifically the intermediate materials subindex).