Month: October 2024

The US Economy Is Roaring!

On August 20, the BLS revised the number of jobs created over the 12 months ended March 2024 down by 818,000, 30% less than initially reported.

On September 18, having previously refocused on the labor market, the FOMC cut its Fed Funds rate 50bps.

On September 26, as Ed Yardeni explains,

the Bureau of Economic Analysis (BEA) released several very significant upward revisions to real GDP, real GDI, personal income, and personal saving. Collectively, they blew away the hard landing scenario. They didn’t leave much if any room for the soft landing scenario either. (…)

Q2’s level of real GDP was raised by 1.3% to a record high. More importantly, the level of real Gross Domestic Income (GDI) was revised up by 3.6%. The significant tightening of monetary policy from March 2022 through August 2024 did not cause a recession. There has been no landing, and certainly no hard landing. (…)

The personal saving rate was revised up from 3.3% to 5.2% (chart). Last week on Wednesday, September 30, Fed Chair Jerome Powell said at the National Association of Business Economics Annual meeting that the revisions reduced the downside risk to the economy. The higher personal saving rate also reduced the downside risk of consumers retrenching. He acknowledged that productivity growth might be stronger.

Powell and many commentators were worried that the Bureau of Labor Statistics’ recent downward revision of 818,000 in payroll employment over the past 12 months through March meant the economy is on a much weaker footing. The latest BEA revisions put a fork in that theory since the upward revision in real GDP combined with a downward revision in labor input mean productivity growth is stronger. This all confirms our thesis that the US is in the midst of the Roaring 2020s propelled by technology-driven productivity growth.

Last week, the August Personal Income and Outlays release revealed that Americans’ capacity to spend is not diminishing. Wages & Salaries income was up 0.5% MoM in August, +4.9% a.r. in the last 2 months. Labor income is the main driver for expenditures, pointing to ~5% growth in total spending with inflation below 2.5% (2.2% in August and +1.2% annualized in the last 4 months).

The Fed is happy seeing inflation near targets. The risk is that sustained real wage growth is fueling demand which could put unwanted pressure on prices.

Later today we get weekly unemployment claims and the U.S. Services PMIs. Tomorrow, September payrolls.

SERVICES PMI: Eurozone economy suffers fresh contraction at end of third quarter

The HCOB Eurozone Services PMI Business Activity Index signalled an eighth consecutive month of growth at the end of the third quarter. Registering above the 50.0 no-change mark, as has been the case since February, the latest figure indicated sustained growth in services output. However, falling to 51.4 in September, from 52.9 in August, the index pointed to an expansion that was only modest and the weakest for seven months.

Higher business activity levels were achieved despite the level of incoming new work decreasing. This was the first time since February that demand for services has fallen, although the contraction was only marginal. Outstanding orders provided services firms with a means to support activity. Backlogs of work fell for the fourteenth time in the past 15 months, and to the quickest extent since February.

Employment levels continued to rise across the eurozone’s service sector in September. While the rate of job creation was fractionally faster than in August, it was weaker than seen on average since data collection began in July 1998.

Services inflation cooled in the euro area at the end of the third quarter. Notably, rates of increase in input costs and output prices were their softest in 42 and 41 months, respectively.

Finally, expectations for growth over the next 12 months strengthened in September. This marked the first month since May that business confidence has improved. That said, the level of optimism was subdued by historical standards.

The seasonally adjusted HCOB Eurozone Composite PMI Output Index fell into contraction territory in September for the first time since February. Down from August’s three-month high of 51.0 to 49.6, the headline index was indicative of a marginal decrease in private sector business activity at the end of the third quarter. Trends at the sector level worsened in September. Euro area factory production recorded an accelerated decline that was the fastest in the year-to-date, while services growth slowed to a seven-month low.

The big-three economies of the currency bloc – Germany, France and Italy – all registered month-on-month contractions in business activity during September. Germany spear-headed the downturn, with private sector output here falling for a third month in a row and at the fastest pace since February. France suffered a renewed contraction, partly reflecting some payback following August’s boost from the Paris Olympic Games. Italy meanwhile saw its first month of decline in the year-to-date, although the pace of contraction was only marginal. Expansions were seen in the two other countries for which Composite PMI data are available – Spain and Ireland – with the former registering a sharp and accelerated upturn.

According to the latest data, the level of new business received by private sector firms in the euro area shrank for a fourth successive month. Additionally, the pace of decrease quickened to the steepest since January. A renewed (albeit marginal) deterioration in demand for services was accompanied by a rapid drop in new factory orders. Export* sales performances worsened, with the fastest fall in new business from non-domestic customers since last December providing a considerable drag on total order book volumes.

Surveyed businesses in the euro area recorded another monthly fall in their volumes of outstanding workloads, extending the current period of backlog depletion to a year-and-a-half. The rate of decrease was also slightly faster than seen on average over this sequence. Completion rates picked up in both the manufacturing and services sectors in September.
Eurozone firms stepped up headcount reductions at the end of the third quarter. Although the rate of job shedding was marginal, it was the joint-fastest since December 2020 (matching January 2021, as well as November and December 2023).

Lower employment levels were entirely a reflection of the manufacturing economy as factory lay-offs were sufficiently strong to more than offset modest job creation within the service sector.

Meanwhile, euro area business confidence continued to weaken in September, marking a fourth month in a row that firms’ sentiment has deteriorated. Albeit still optimistic overall, 12-month expectations for activity were at their lowest in the year-to-date.

Finally, the HCOB PMI data revealed a further marked easing of cost pressures across the eurozone. Overall, the rate of input cost inflation was the second-slowest November 2020, with July 2023 narrowly undershooting that seen in September. The extent to which euro area companies raised their own prices also eased at the end of the third quarter. Overall output charges increased only modestly and to the weakest extent in just over three-and-a-half years.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

“At first glance, the services sector in the eurozone seems to be holding up fairly well. It’s still growing, and the slowdown is not too steep just yet.

But when you dig a little deeper and look at individual countries, the picture is not as rosy – except for Spain. Here, we are rubbing our eyes in amazement. Service providers there are booming, with the index shooting up to 57 points. The situation in the other three leading eurozone economies is quite different.

In France, service providers’ business activity slowed down after the Olympics effect and in Germany and Italy, growth almost hit a wall in September. Even if Spain manages to avoid getting pulled down by the struggles of its neighbours, the eurozone’s services sector as a whole seems to be headed for more sluggish growth.

“On the ground, most service sector employees have not really felt the pinch yet. In fact, the hiring rate picked up in Spain and France, and even in Italy, jobs growth only dipped slightly. It is Germany where things look bleakest, with companies there actually cutting staff. This is where the recession in manufacturing is making itself felt, as in this environment the corresponding companies are placing fewer orders with the service sector.

“The situation in the service sector in the eurozone will continue to deteriorate. This is indicated by the decline in new business. For the first time since February, it has fallen in the eurozone compared to the previous month. The development in Germany and France is similar. Factoring in the ongoing contraction in industry, the eurozone economy is likely to have grown only at a marginal rate in the third quarter. Our GDP nowcast model, which takes into account the PMI indicators, also points to only minimal growth.

“On the plus side, operating costs in the services sector saw their slowest rise since early 2021, and inflation in selling prices is also easing off. Given the overall economic weakness, this is a good case for the ECB to cut interest rates in October. And indeed, only recently, ECB president Christine Lagarde did hint at a rate cut this month.”

A Beautiful Deleveraging with Chinese Characteristics? (Ray Dalio)

Last week, China’s leadership—including President Xi Jinping, the Politburo, the CSRC, and the PBoC—clearly 1) announced a reflationary barrage of fiscal and monetary policies and 2) made statements in support of free markets as a big step to end the deflationary deleveraging and to stimulate creative productivity. That happened at the same time as 3) Chinese assets were (and still are) very cheap, so it was a combustible combination of influences that set the markets on fire. It was a big week.

In fact, I think that it was such a big week that it could go down in the market-economic history books as comparable to the week Mario Draghi said that he and the ECB would “do whatever it takes,” if China’s policymakers, in fact, do what it takes, which will require a lot more than what was announced. (…)

In a nutshell, it all depends on whether Chinese policymakers do or don’t simultaneously a) restructure bad debts (thus eliminating zombie conditions of their institutions) and b) lower interest rates below inflation and nominal growth rates, or, if that proves impossible, monetize debt to get the rates below the inflation and nominal growth rates while weakening the currency to devalue the debt.

More specifically, for China’s policymakers to engineer a “beautiful deleveraging,” they have to lower debt burdens by simultaneously

a) doing debt restructurings that clean the bad debts out of the system (which is deflationary) while also

b) creating money and credit (which is stimulative and inflationary) in a balanced way so that debt service burdens are reduced and there is neither unacceptable deflation nor unacceptable inflation.

This beautiful deleveraging can only be done in countries that have most of their bad debts denominated in their own currencies and have most of the debtors and creditors as their own citizens, which is the case for China. Doing a deleveraging in this way not only reduces debts without triggering either unacceptable deflation or unacceptable inflation, but it also allows viable businesses to get back to business unencumbered by their old debts and it eliminates the “pushing on a string” problem of having scared people, companies, and other entities holding cash in safe banks and government debt assets.

It does this by making cash a poorly performing asset class relative to the major alternative asset classes that are doing well because of the reflation. Doing these things starts to rekindle “bottom fishing” and “animal spirits.” We are clearly seeing that happen now.

Also, pro-market and pro-entrepreneurial policies are stimulative and, in this case, especially good because there is such enormous power in President Xi’s policy-indicating statements. In this case, supportive comments came from the highest levels (from President Xi Jinping, the Politburo, the CSRC, and the PBoC) encouraging officials and people to adopt innovative and bold approaches to support the economy, and included President Xi reassuring officials that they would not be punished for well-intentioned mistakes made in the process of implementing new policies. These statements matter a lot.

While there’s no doubt that all of this is bullish for the markets, as part of the beautiful deleveraging there will have to be difficult and painful changes in the following areas:

The debt restructurings will be especially difficult both because they are complex and because they are politically charged because they will have huge effects on people’s wealth. Debts at the local government levels—especially between local governments which paid for their spending through land sales and by borrowings from companies and people in their provinces—are especially difficult situations to handle.

Imagine the situation of a perfectly good company that lent to the local government and/or is dependent on local government spending facing the current situation. Who should do what in what amounts to deal with this situation? Who will determine such things and how? These things are not clear. Because similar problems have been faced and dealt with throughout history (including the 1990s in China with Zhu Rongji and many people helping him who are still alive and lucid) in ways that are both effective and painful, this can be done if the courage and capabilities are mustered, but it will be very difficult.

The tax system for collecting money to spend on shared expenditures and needed remediations and social programs is deeply in need of reform. As things stand, getting and distributing money is highly ineffective at the national, provincial, and local government levels. More specifically there are not effective income taxes, real estate taxes, inheritance taxes, or most other taxes (other than VATs, especially at the production level). This set of conditions makes the last problem I mentioned – the local government debt
and financial problem – more challenging.

Though there was a recent minor change in policy, the demographic problem—especially the early retirement age (on average 53) and relatively late death age (the average 53-year-old dies at 83)—leaves many people with a long time with little income and one child to take care of them. At the same time, the working population is declining rapidly.

So, while last week we saw great actions and words that I am sure will be followed by highly stimulative policies that will help a lot and will support asset prices, I think that there are several important other things to keep an eye on to see how well China’s domestic debt-money-economy challenges will be handled.

Of course, these observations are about just one of the five big forces (the debt-money-economy force) in one of the big countries (China), and it’s important to remember that the other big forces (the internal political conflict force, the external geopolitics conflict force, the acts of nature force, and the technology force) are also affecting China, other nations, and the entire world.

Last week was filled with comparably important developments pertaining to all of these things, and these developments seem, to me, to be broadly tracking the big cycle that will have big impacts on what the changing world order will look like.

Is China Circumventing U.S. Tariffs?

(…) U.S.-China relations have been tense for some time due to diverging strategic priorities and geopolitical differences; however, we can pinpoint the inflection point—at least for trade—as the implementation of Trump-era tariffs and the broader trade war that originated in 2018.

To that point, China’s trade surplus with the United States saw a meaningful dip when tariff rates ramped up over the course of 2019. Successive years have seen China’s trade surplus slip even further, and as of the end of 2023, China’s trade surplus with the United States was essentially half of what it was relative to before the trade war—both in terms of U.S. and China GDP.

Source: IMF and Wells Fargo Economics

We can point to many other metrics to indicate the U.S.-China trade linkage is not as robust as it once was; however, a deeper dive into global trade flows tells an interesting story. One that suggests the overall U.S.-China trade relationship may not necessarily be weakening as much as data suggest. The same global trade data also suggest that China may be circumventing U.S. tariffs, and still benefiting from U.S. demand and the United States as a final export destination. (…)

As far as tariff revenue, at least for the United States, the U.S. is collecting a sizable amount of revenue derived from the tariffs imposed on China. As of mid-2024, the trade-weighted average tariff rate (i.e. tariff revenue as a percent of the total value of U.S. imports from China) on China is ~9.5%, a notable step up from the tariff rate prior to the trade war [<3%]. (…)

As reflected in the narrowing China trade surplus, the U.S. is importing less from China, the United States’ main source of tariff revenue. Instead, the U.S. is sourcing an increased amount of goods from other nations in Asia as well as across Latin America and Europe.

Relative to 2017, the U.S. is importing significantly more goods from countries such as Vietnam, Mexico, South Korea, Turkey, Thailand and India. Essentially, countries not subject to China-style tariffs. At the same time, global trade data reveal that China has also boosted trade relations with those same nations. As of the end of 2023, and relative to before the trade war started, China is exporting more goods to those very same countries.

Source: IMF and Wells Fargo Economics

Coincidence? Probably not.

Take Mexico for example. Mexico is widely considered to be one of the top nearshoring destinations for U.S. corporations looking to shift critical supply chain links out of China. As U.S. multinational corporation interest in nearshoring picked up after tariffs were imposed and surged again after COVID-19, so has Chinese foreign direct investment (FDI) into Mexico. Without knowing for certain, there is a high likelihood China is actively putting infrastructure on the ground in Mexico as an intermediary to accept Chinese made goods before ultimately sending on to the United States.

Source: IMF, NL Analytics and Wells Fargo Economics

Indeed, given the shifting composition of trade flows and China’s increased foreign direct investment activity, we would argue the evidence strongly suggests that a perceptible portion of China-U.S. trade flows are being re-routed via proxy countries. The Biden administration indeed took notice of these tactics, and recently applied tariffs to certain Chinese goods making their way into the U.S. via Mexico.

China using proxy nations as means to avoid U.S. tariffs will likely retain the attention of the current administration and a potential Democratic administration post-elections, but could also be at the core of former President Trump’s proposed “global tariff.”

Should a tariff on all exports to the United States apply to all nations, the ability for China to completely circumvent export duties would be diminished.

While a U.S. global tariff would place downward pressure on global growth and upward pressure on global inflation, as well as potentially damage relations between the U.S. and most trading partners, the genesis of former President Trump’s global tariff proposal could still be aimed at disrupting China’s rise. Combined with Trump’s proposed 60% tariff on exports to the U.S. directly from China, China’s ability to tap U.S. consumer demand could be at risk should U.S. trade policy turn more protectionist in the near future.

With exports propping up China’s economy for the time being, a global tariff alongside tariffs imposed directly on China could have a more severe impact on China’s economy relative to existing tariffs. (…)

U.S. MANUFACTURING PMIs

• S&P Global: Factory employment falls at sharper pace as manufacturing downturn deepens

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) remained below the 50.0 no-change mark in September, dipping to 47.3 from 47.9 in August. The index signaled a third consecutive monthly worsening in the health of the sector, and one that was the most pronounced since June 2023.

Central to the deterioration in business conditions was a sharply worsening demand environment amid a slowdown in the wider economy and uncertainty around the upcoming Presidential Election.

New orders decreased for the third month running, with the rate of contraction the sharpest in 15 months. New export orders were also down to a larger extent than in August, as geopolitical issues and demand weakness (notably in Europe) led to a fourth consecutive decline.

With new orders continuing to fall, manufacturers scaled back their production for the second month running. The pace of decline was modest, yet the fastest since June 2023.

Firms also reduced employment for the second consecutive month in September. The fall in staffing levels was the steepest since January 2010 if the initial pandemic period in 2020 is excluded.

Manufacturing output decreased less quickly than new orders as firms worked through outstanding business and added to holdings of finished goods. The resulting drop in backlogs of work was the largest since January, while post-production inventories were accumulated for the third month running.

Meanwhile, a sharp and accelerated contraction in purchasing activity was recorded amid lower output requirements, with the latest fall in input buying the most marked in 2024 so far. This fed through to a further reduction in stocks of inputs, albeit one that was only marginal as some firms looked to build inventories ahead of expected improvements in demand heading into next year.

A further decline in demand for inputs meant that suppliers were able to speed up deliveries for the second month running in September, with the rate of improvement in vendor performance broadly in line with that seen in August.

Manufacturers continued to be faced with sharply rising input prices. Higher costs for raw materials such as cardboard and paper were accompanied by reports of higher shipping rates. The pace of inflation eased slightly from the previous month, however.

In contrast to the picture for input costs, the pace of output price inflation quickened, reaching the highest since April.

Firms were generally optimistic that output will increase over the coming year, with confidence often due to expectations that demand will improve following the Presidential Election. Lower interest rates also supported confidence, which ticked up to a four-month high but remained a touch weaker than the series trend.

• The ISM:

The Manufacturing PMI^® registered 47.2 percent in September, matching the figure recorded in August. (…) (A Manufacturing PMI^® above 42.5 percent, over a period of time, generally indicates an expansion of the overall economy.)

The New Orders Index remained in contraction territory, registering 46.1 percent, 1.5 percentage points higher than the 44.6 percent recorded in August.

The September reading of the Production Index (49.8 percent) is 5 percentage points higher than August’s figure of 44.8 percent.

The Prices Index went into contraction (or ‘decreasing’) territory for the first time this year, registering 48.3 percent, down 5.7 percentage points compared to the reading of 54 percent in August.

The Employment Index registered 43.9 percent, down 2.1 percentage points from August’s figure of 46 percent.

The Backlog of Orders Index registered 44.1 percent, up 0.5 percentage point compared to the 43.6 percent recorded in August.

The New Export Orders Index reading of 45.3 percent is 3.3 percentage points lower than the 48.6 percent registered in August.

The Imports Index remained in contraction territory in September, registering 48.3 percent, 1.3 percentage points lower than the 49.6 percent reported in August.”

WHAT RESPONDENTS ARE SAYING

• “North America demand has started to weaken. Asian demand is slightly higher but shows signs of weakness in future months. Comments tied to automotive builds.” [Chemical Products]
• “Global demand continues to remain soft. Fourth-quarter forecasts have been further reduced, with several new programs shifted from 2024 to 2025. Manpower, working capital and supplies are being flexed down in response. The previously anticipated shift from internal combustion engine to electric vehicle (EV) technology has been pushed out due to market response. Long-range plans are being adjusted to incorporate traditional products for longer, while new EV product offerings are being planned for slower rollouts.” [Transportation Equipment]
• “The strategy of customer push-outs last year enabled those customers to adapt to the market. Now, while most companies are seeing a slowdown, we are seeing solid growth. The general slowdown in the economy is allowing for prices to continue to stabilize.” [Computer & Electronic Products]
• “A continuing low order rate is resulting in ongoing manufacturing adjustments to balance output with demand.” [Machinery]
• “The fourth quarter is slower than anticipated. We won’t realize the effect of interest rate adjustments with new project starts until the first quarter of 2025.” [Fabricated Metal Products]
• “Business is flat. Waiting for interest rates to drop and the election outcome in November before we confirm our 2025 plans. Currently planning on a flat 2025.” [Furniture & Related Products]
• “Our sales continue to be flat. Our customers are telling us that although our products perform very well, they are forced to seek lower-cost components to maintain their sales.” [Textile Mills]
• “Sales have slowed this quarter compared to the same time period last year. Adjusting production accordingly.” [Miscellaneous Manufacturing]
• “Still hiring to fill vacant positions in production/management. Not adding new jobs. Automotive original equipment manufacturers (OEMs) are starting to slow or cancel orders. The pace is slowing.” [Primary Metals]

Canada: PMI signals slight growth of manufacturing sector inSeptember

Registering 50.4, up from 49.5 in August, the seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI^®) edged back above the critical 50.0 no-change mark in September to signal a first improvement in operating conditions since April 2023.

The PMI was supported by a slight rise in new orders, the first in nearly a year-and-a-half. Growth was reported to be reflective of an uplift in market demand and the release of new product lines. However, there were still many reports that underlying demand conditions remained subdued, especially from foreign clients. Indeed, new export orders declined again in September, and to a greater extent than in August. Latest data marked the thirteenth successive month in which a fall in new export work has been registered.

Production levels were only fractionally lower in September, with the Output Index rising to a seven-month high and indicating a near-stabilisation. Output was weighed down to some degree by efforts to meet sales directly from stock wherever possible. September’s survey showed that inventories of finished goods declined for the first time in five months.

Manufacturers also remained reticent to buy-in new inputs as evidenced by a drop in purchasing activity for the twenty-sixth successive month. Inventories of inputs were instead utilised, as signalled by a decline in stocks of purchases for the second time in the past three survey periods. (…)

Average input prices meanwhile rose again in September. The rate of inflation picked up, reaching its highest level since April 2023 as a wide range of goods were reported to have increased. However, with market conditions still subdued, manufacturers had limited pricing power to pass on these higher input costs to clients. Overall, output charges rose only modestly and at a noticeably slower degree than in August. (…)

Positive projections for the future helped to explain why firms took on extra staff in September. Employment overall increased for the second time in the past three months, albeit only marginally.

To sum up the global manufacturing industry:

Global Manufacturing PMI signals contraction for third successive month in September

Four of the five PMI components were at levels consistent with contraction in September, as output, new orders, employment and stocks of purchases all fell. Only the (inverted) suppliers’ delivery times index made a positive contribution to the headline PMI.

New orders fell for the third consecutive month, with the pace of contraction the steepest since December 2022. The trend in international trade also remained weak, as the rate of contraction in new export orders hit an 11-month record.

Data broken down by sector pointed to a widespread malaise across global industry. The intermediate and investment goods sectors both saw production contract in September and, although still expanding, the rate of growth in the consumer goods category remained tepid at best. All three sub-industries also saw contractions in both total new orders and new export business.

Staffing levels fell for the second month in a row and to the greatest extent since December 2023.

Confidence dipped to a 22-month low and fell across the three sub-industries covered by the survey. The cyclically sensitive new orders-to-inventory ratio also fell to its lowest level since December 2022.

At the national level, a depressed Euro area output PMI points to a very weak industrial sector while China looks to be stagnating. Even the US output PMI, which stood out with a modest step up in its earlier flash estimate, saw this improvement wiped away in today’s final release.

The U.S. economy is blessed by its large service economy, but a contracting goods sector necessarily also impacts demand for services.

Jobs Market in Stasis

Job openings partially rebounded to 8.04 million in August, but looking through the month-to-month noise, openings are down 13.9% from a year ago and 8.8% from six months ago.

The job opening rate in August rose to 4.8%, somewhat above the 4.5% averaged in 2019. The modest rise in job openings paired with August’s tick down in unemployment resulted in a small increase in job openings per unemployed person to 1.13 from 1.08 in July.

This leaves one of the Fed’s favorite metrics of balance in the labor market cooler than 2018-2019 levels but still above the 1.00 ratio that indicates there are more jobs available in the economy than workers currently seeking employment. On balance, the slight bounce in job openings in August’s JOLTS report offers some comfort that labor demand is not yet deteriorating in a non-linear way.

Still, the job openings-to-unemployed ratio is only informative in the aggregate and does not say anything of potential mismatch between those looking for work and firms looking to hire. In particular, labor demand continues to be concentrated in just a few industries. In August, job openings increased the most in construction (+138K) and in state & local government (+106K), while the largest declines in openings were in financial activities (-52K) and other services (-93K).

Although the total opening rate remains above its pre-pandemic level, a handful of industries have seen the vacancy rate slip below their 2019 marks. (…)

  

Through the month-to-month volatility, the three-month moving average of the hiring rate is now as low as it was in July 2013, when the labor market was considerably weaker than it has been in recent years. The quit rate fell further in August, and its three-month moving average is now sitting below 2% for the first time since the fall of 2015 (excluding the pandemic-low in 2020).

With fewer hires and fewer voluntary separations, the labor market is increasingly in stasis. The slowdown in turnover is to be expected after years of feverish churn, but as analysts search for nascent signs of stabilization in softening labor demand, the continued decline in the hiring and quits rates is not a good sign.

Involuntary separations in the form of layoffs and other discharges remain the bright spot in a largely static labor market. The layoff & discharge rate sank back to 1.0% in August, still noticeably below its pre-pandemic level. Although demand for new workers keeps cooling, employers remain reluctant to let go of existing workers. Yet, this precarious situation for the labor market shows why the FOMC is moving monetary policy back toward a more neutral setting.

On net, the JOLTS data for August continue to wave the caution flag. The bounce in openings and still-low layoff rate are good news and suggest a still-healthy labor market. That said, the continued decline in labor market turnover is consistent with the survey data pointing to deteriorating confidence in labor market prospects. Hiring and quit rates falling to mid-2010s levels do not inspire much confidence about the direction of travel.

For the Fed, the bigger piece of new information will come on Friday with the September jobs report. We are expecting nonfarm payroll growth to have slowed slightly to 135K with an unchanged unemployment rate of 4.2%. Our forecast for a 25 bps rate cut at the November [6-7] FOMC meeting is conditional on a September employment report that does not come in materially weaker than our forecast. As the balance of risks to the Fed’s dual mandate has shifted to maintaining full employment, any unexpected weakness in this Friday’s report could push officials to deliver another outsized rate cut.

Indeed Job Postings (through Sept. 20) continue to suggest a stabilizing labor market.

Saudi Minister Warns of $50 Oil as OPEC+ Members Flout Production Curbs Kingdom called out members for overproducing, in what was seen as a veiled threat of a price war

The Saudi oil minister has said that prices could drop to as low as $50 per barrel if so-called cheaters within OPEC+ don’t stick to agreed-upon production limits, according to delegates in the cartel.

The statements were interpreted by other producers as a veiled threat from the kingdom that it is willing to launch a price war to keep its market share if other countries don’t abide by the group’s agreements, they said. (…)

There are fears in the West that a wider war could choke oil exports from the Gulf that pass through the Strait of Hormuz, which borders Iran, and push prices higher. 

But geopolitical tensions have persisted for months without meaningful effect on oil prices, and the declines have been frustrating for Saudi officials in part because other cartel members have flouted plans to limit production for much of this year.

During a conference call last week, Prince Abdulaziz bin Salman, the oil minister of OPEC kingmaker Saudi Arabia, warned fellow producers prices could drop to $50 a barrel if they don’t comply with agreed production cuts, according to OPEC delegates who attended the call.

They said he singled out Iraq, which overproduced by 400,000 barrels a day in August, according to data provider S&P Global Ratings, and Kazakhstan, whose production is set to rise with the return of the 720,000-barrels-per-day Tengiz field. (…)

The group’s production cuts mean their share of the oil market has shrunk. This year it reached 48%, down from 50% in 2023 and 51% in 2022, data from the IEA showed. Competition is set to heat up further next year.

Planned production increases in the U.S., Guyana and Brazil are expected to add over 1 million barrels a day to global oil supply. Brazil joined the OPEC+ group this year but said it won’t participate in the output cuts.

Some cartel members that signed on to the cuts have pumped more barrels than they promised, rendering the supply curbs less effective. In addition to Iraq and Kazakhstan, Russia also produced more than its quota this year through July, according to Aug. 8 data from S&P Global. (…)

The kingdom has shown in the past it can open up the spigots if it feels other producers are taking advantage of its efforts to defend oil prices. (…)

• The Oil Price That Matters Now Is $50 a Barrel, Not $100 The price of crude is more likely to decline than increase in the foreseeable future.

(…) All things being equal2, the oil market looks oversupplied in 2025, and that means lower rather than higher prices — so given a binary choice between $100 and $50 for next year, I’d take the latter bet despite all the Middle East geopolitical risk. (…)

First, OPEC+ has tacitly recognized that its $100 policy was boosting annual non-OPEC+ supply growth above trend demand. Sticking to its high prices strategy meant accepting an ever-declining market share. Second, the cartel accepts that elevated crude levels hurt demand growth, and sustaining consumption is important in the face of the energy transition. Third, the global economic cycle has turned, and oil, just like every other commodity, is sensitive; lower prices are the natural consequence of weaker growth. Fourth, several OPEC+ members have invested billions of dollars in new production capacity and have pushed to pump more, challenging the strategy. To avoid a schism, the group has had to change its overall reaction function. (…)

Here are the options I see:

1) OPEC+ cheaters stop their over-production and Saudi Arabia and others in the cartel have a change of heart, fearing a price slump. Rather than increasing production, they cut output in early 2025. Wrongfooting most traders, the cartel sends oil prices back into the $80-$100 range. Never say never, but I would be shocked if that scenario materialized as I believe OPEC+’s reaction function has changed.

2) OPEC+ compliance improves dramatically, including via compensation cuts by the cheaters. The group delays the monthly production increases for six months, in turn avoiding a jump in inventories in early 2025. In that scenario, oil finds a floor around $70 and moves back toward $80. I don’t think Riyadh is contemplating delaying the output increases forever, but I see some scope for the kingdom agreeing to wait until the second half of next year. One reason is a bet that US shale growth is moderating; another is the hope that Beijing will successfully refloat its economy, boosting oil demand. This scenario gets a maybe from me.

3) The cartel sticks to its plan to boost output in monthly increases from December onward as compliance improves somewhat. The Saudis cut spending to weather a period of low prices — something already flagged in the preview of the country’s 2025 budget. In that scenario, the oil market would be oversupplied next year, particularly during the second quarter, when seasonally demand is lower. The resulting inventory build-up pushes oil prices toward $60 and perhaps — even if only briefly — even lower toward $50 during the second quarter of next year, before recovering later in the year as US shale production growth slows down due to low prices. To me, this is the most likely scenario.

4) OPEC+ compliance doesn’t improve at all. In response, the cartel not only goes ahead with the monthly output increase from December, but Saudi Arabia pushes the group into accelerating production of those extra barrels. As a result, the market is hugely oversupplied, and oil prices drop to $50 and even lower. The market doesn’t crash, however, because Riyadh stops shorts of launching a full price war. I sense that this outline, whispered by some OPEC+ officials and echoed by oil traders who say they’ve been told about it, is a not-so-quiet Saudi campaign of verbal threats so the cheaters improve compliance. As such, I don’t consider it as likely.

5) A full-scale price war. Compliance doesn’t improve at all and gets even worse. Saudi Arabia raises production to its maximum capacity of 12.5 million barrels a day, up from today’s output of 9 million. Every other OPEC+ country follow suit. The market faces a huge glut similar to what was witnessed in 2020 — and prices crash. If history is any guide, the $50-a-barrel level won’t act as a floor, and prices would likely plunge much, much lower. (…) As things stand, this final scenario looks extremely unlikely to unfold. But Saudi Arabia has fought two price wars in the past decade, so we should at the very least entertain the possibility of it occurring. (…)

John Authers:

How would Israeli retaliation to this play out? One plausible scenario is to inflict economic damage on Iran’s oil industry, which makes up about half of Tehran’s budget, possibly by attacking refineries. That would reduce supply. And as the war expands, Bloomberg Intelligence’s Ziad Daoud argues that there’s a broader risk to supply, via ports and the vessels plying the busy routes.

If Iran were to try to block the Strait of Hormuz, the impact on oil flows would be profound. The current supply abundance can’t replace potential outages from the Gulf Cooperation Council,1 Iran, and Iraq, he says. (…)

Last night:

“Iran made a big mistake tonight, and it will pay for it,” Israel’s Prime Minster Benjamin Netanyahu said. “The regime in Iran does not understand our determination to defend ourselves and our determination to retaliate against our enemies.” What form that retaliation now takes will be critical.

Israel has no choice but to respond, Avi Melamed, a former Israeli intelligence official, told me, as soon as the barrage had ended. This time he expected it to be swift, and on a much larger scale than in April. (…)

The IDF can now force an even more acute dilemma on the Iranian regime. A bigger Israeli missile attack will destroy more assets and be much more publicly visible than April’s. Dismissing Israel’s drones as toys, as regime officials did last time, won’t work. Khamenei and his generals will have to decide whether to do nothing, and lose still more credibility and deterrence power, or risk a potentially disastrous war that could even draw in the US, by striking back. (Bloomberg)

Auto Sales Are Idling as Prices Remain High U.S. car sales are stuck below prepandemic levels despite better vehicle availability, more deals

Industrywide third-quarter U.S. vehicle sales fell 1.9% compared with a year earlier, according to an estimate from research firm Wards Intelligence. Most major automakers reported results for the July-to-September period on Tuesday. (…)

Analysts say the industry’s U.S. sales tally was dented by disruption from Hurricane Helene, which hit the Southeast on the final weekend of September, typically a busy selling period. (…)

The sluggish third-quarter results put automakers on pace to finish the year with U.S. vehicle sales of around 15.7 million—a slight increase from last year, when supply-chain snags were still crimping vehicle output, but still well off historic highs. (…)

Carmakers posted five consecutive years of at least 17 million vehicle sales through 2019. Many analysts and dealers point to affordability as the primary reason why sales haven’t marched back to those levels. [Monthly payments on car loans still average $767, up 17% from four years ago, according to Cox.]

The average new vehicle in the U.S. sold for $44,467 in September, down nearly 3% from last year as automakers and dealers offer more discounts, according to industry tracker J.D. Power.

But that figure is up from about $34,600 at the end of 2019, reflecting years of sharp inflation during the pandemic, when a shortage of computer chips and other car parts crimped vehicle production. (…)

Consumers are also gravitating to more-affordable vehicles. Sales of smaller cars and SUVs are up over the past year, while sales of midsize cars and trucks and larger SUVs have declined, according to Cox. (…)

(CalculatedRisk)