US Jobless Claims Fall to 201,000, Lowest Level Since January Continuing claims dropped to the lowest since start of 2023

The BLS Job Openings declined 3.7% between June and July but Indeed’s Job Postings flattened in August and perked up through September 15.

Meanwhile, loan demand is volatile but OK so far.

CB Leading Economic Index Declines, Deepening Recession Fears

With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

“The leading index continued to be negatively impacted in August by weak new orders, deteriorating consumer expectations of business conditions, high interest rates, and tight credit conditions.

All these factors suggest that going forward economic activity probably will decelerate and experience a brief but mild contraction. The Conference Board forecasts real GDP will grow by 2.2 percent in 2023, and then fall to 0.8 percent in 2024.”

The CB LEI is highly goods sensitive. Spending on goods, boosted by helicopter money and the wealth effect, remains strong while services are back on trend.

August Home Sales Declined to Slowest Pace Since January Prices were up from year earlier with a limited number of houses on the market

Existing-home sales, which make up most of the housing market, decreased 0.7% in August from the prior month to a seasonally adjusted annual rate of 4.04 million, the National Association of Realtors said Thursday. August sales fell 15.3% from a year earlier.

Home sales have tumbled by about 36% from January 2022, and activity could slow further in the months ahead. August sales reflected contracts signed earlier in the summer when borrowing rates were lower than today. (…)

Only 1.1 million homes were for sale or under contract in August, the lowest level for that month in data going back to 1999. (…)

The national median existing-home price rose 3.9% in August from a year earlier to $407,100, the fourth-highest level on record in data going back to 1999, NAR said. (…)

The share of first-time buyers in the market was 29% in August, unchanged from a year earlier. About 27% of August existing-home sales were purchased in cash, up from 24% in the same month a year ago, NAR said.

  

(CalculatedRisk)

House Republicans Are Charging Toward a Government Shutdown Republicans struggle to unite around a plan to avert shutdown.

FLASH PMIs

Eurozone companies see sharpest drop in new orders for almost three years

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses, posted 47.1 in September, up marginally from 46.7 in August but still signalling a solid monthly decline in business activity as the third quarter drew to a close. Output has now fallen in four consecutive months.

For the second successive survey period, declines in output were seen across both monitored sectors as services activity decreased again. That said, the rate of contraction in services eased slightly from August and was still much softer than that seen in manufacturing.

The reduction in manufacturing production was unchanged from the rapid pace seen in the previous month. Barring a brief period of growth during the opening quarter of the year, euro area manufacturing output has decreased continuously since the middle of 2022.

Central to the latest reduction in business activity was a further deterioration in customer demand, as highlighted by a fourth successive monthly decrease in new orders. Moreover, the fall in September was marked and the most pronounced since November 2020.

Manufacturing new orders contracted rapidly again, but the acceleration in the overall rate of decline was centred on the service sector, where the drop in new business was the sharpest since the pandemic. In fact, excluding months affected by COVID-19 restrictions, the fall in services new orders was the largest since May 2013. New export orders declined even more quickly than total new business in September.

Sharp falls in new orders meant that companies often turned to work on outstanding business in order to maintain activity levels. As such, backlogs of work decreased markedly again during September, with the latest depletion the most pronounced since June 2020.

Eurozone businesses also signalled a waning of confidence in the year-ahead outlook at the end of the third quarter. Although on balance firms continued to predict a rise in activity over the coming 12 months, sentiment dipped to the lowest since November last year. Optimism waned across both monitored sectors, with manufacturing sentiment only just in positive territory.

The combination of spare capacity and reduced confidence in the outlook meant that companies were again cautious in their approach to hiring. Although employment rose marginally in September, the rate of job creation was the joint-second slowest in the current 32-month sequence of growth. A fourth successive monthly reduction in manufacturing workforce numbers compared with a slight increase in services employment.

As well as scaling back staffing levels, manufacturers in the eurozone also cut their purchasing activity sharply and reduced their holdings of both purchases and finished goods. The fall in stocks of finished goods was the most marked in two years. Reduced demand for inputs meant that suppliers were able to speed up deliveries, with vendor lead times shortening for the eighth consecutive month. The rate at which deliveries quickened was marked, albeit the least pronounced since February.

There were differing trends in terms of inflation in September as a sharper rise in input costs contrasted with a softer pace of output price inflation.

Input costs increased at the fastest pace in four months, albeit at a pace that remained well below the average seen over the past three years. Inflation was driven by the service sector, where prices were up sharply amid higher wages and rising fuel costs. Manufacturing, on the other hand, posted a seventh successive monthly drop in input costs.

Despite the steeper pace of input cost inflation, a weakening demand environment meant that companies increased their selling prices to a lesser extent than in August. In fact, the latest rise in charges was only modest and the softest since February 2021. Manufacturing output prices fell at a marked and accelerated pace, while services charge inflation eased to a 25-month low.

Japan: Slowest rise in private sector activity since February

The Japanese private sector economy signalled a further loss of growth momentum at the end of the third quarter of 2023, as signalled by a softer expansion in output during September. The rate of growth was only modest and the slowest recorded since February.

Service providers continued to lead the way with a sustained increase in business activity, though the rate of growth slowed to an eight-month low. Manufacturers meanwhile signalled a fourth consecutive deterioration in operating conditions that was the steepest seen for seven months.

Forward-looking indicators from the survey suggest the potential for softening demand and activity over the coming months. Composite new order growth came close to stalling, as private sector firms noted the weakest expansion since February. While there was a further rise among services firms, Japanese manufacturers indicated that new orders fell at the strongest pace in seven months.

Firms took the opportunity provided by slower expansions in orders to work through outstanding business to the greatest extent since February 2022

As pressure on capacity eased, there was a renewed reduction in employment levels that was the first since the start of the year and the quickest since August 2020. Private sector companies often noted the non-replacement of voluntary leavers, partly as part of cost-saving efforts amid elevated cost burdens.

• Japanese car imports surge

Japanese automobile exports to the U.S. have surged this year, Axios Markets’ Matt Phillips reports. They were 50% higher, in yen terms, this past August compared with the same month last year — and they posted the seventh straight month of double-digit gains.

The yen has weakened by nearly 13% against the dollar this year, as the Fed’s interest rate hikes helped strengthen the greenback. A weaker yen makes Japanese exports cheaper for American buyers.

With workers now striking at American carmakers, Japanese auto giants may see an opportunity to make deeper inroads in the U.S.

How China Could Veto $100 Oil Strong Chinese demand looks unlikely as oil prices soar

(…) First, China has moved aggressively into discounted Russian oil in recent months. Second, Chinese crude oil imports still appear to be running well ahead of fundamental demand—and its exports of refined products, particularly diesel, are rising sharply.

China has, from the beginning of Ukraine war, made it clear it considers Western sanctions on Russia to be illegitimate—and continues to import large quantities of Russian oil. But since December 2022, when the U.S. and Europe agreed to enforce a cap on Russian oil prices by leveraging their control of the global shipping insurance business, Chinese purchases have skyrocketed.

Total Chinese crude imports were the second highest on record in August, according to figures from data provider CEIC. But excluding imports from Russia, they were only up about 2% from December 2022 levels. Imports from Russia were up about 60% over that same period, and are now over 30% larger than those from Saudi Arabia, China’s number two supplier. (…)

China is importing Russian oil at a discount of $28 per metric ton to its average crude import price overall, according to data from CEIC—far down from its $61 discount in May, but still substantial. And as long as that gap persists, it will keep acting as something of a shock absorber for Brent and other global price benchmarks.

Moreover, there is no guarantee that Chinese imports will keep rising rapidly in any case. For most of 2023, China appears to have been aggressively filling its oil reserves, taking advantage of lower prices. China doesn’t release regular data on its crude reserves like the U.S., but in the second quarter the nation produced and imported about 14 million more metric tons of crude than it refined, according to CEIC data.

And production of refined products such as diesel has also been suspiciously fast in 2023 relative to traditional drivers of demand like the property sector and heavy industry. With global fuel prices back up again, those products are leaking back out into world markets with a vengeance: China’s net petroleum product exports nearly tripled in August to 2.4 million metric tons, CEIC data shows. In June, when prices were much lower, China only exported 109,000 tons of product on net. (…)

• Russia puts squeeze on oil market with diesel export ban

Two of China’s Strongest Developers Face Ratings Cuts by Moody’s Vanke, Jinmao on watch for downgrade after sector view lowered

The downgrade reviews “reflect high uncertainties” about their ability to recover weakened credit metrics and financials “amid uncertain recovery prospects for China’s property market,” according to the ratings firm. (…)

Moody’s lowered its sector outlook to negative on Sept. 14 “amid weaker economic growth prospects and homebuyers’ concerns over timely project completion and delivery, which dampen property sales despite government support measures.”

In addition to the Vanke and Jinmao downgrade reviews, the ratings firm on Thursday lowered its outlook to negative on seven other builders. (…)

Bank of England Holds Rates for First Time in Nearly Two Years The central bank left its key interest rate unchanged after 14 consecutive increases, as U.K. inflation shows signs of cooling.

Ed Yardeni: Bond Yield Climbs to 4.50% As Yield Curve Is Disinverting.

The Fed’s hawkish pause, announced on Wednesday afternoon, has lifted the 10-year US Treasury yield to 4.50% this evening. We think it might consolidate here for a while consistent with our view that the yield has normalized back to where it was from 2003-2007, i.e., before the Great Financial Crisis (GFC). Back then, the 10-year TIPS yield and the expected inflation spread hovered around 2.00% and 2.50%, respectively.  Currently, the TIPS yield is 2.11% and the expected inflation spread is 2.38%. (…)

(BTW: It’s interesting to observe that the expected inflation spread is very highly correlated with the price of copper, which remains under $4.00 per pound despite recent attempts by the Chinese government to stimulate growth.)

The S&P 500 is down 5.6% from its July 31 bull market peak. That’s mostly because the bond yield has been climbing above 4.00% since then. The forward P/E is inversely correlated with the 10-year TIPS yield, suggesting that there is still more downside for the S&P 500.

Now that the S&P 500 is back below its 50-day moving average, it should find support at its 200-day moving average, which also happens to coincide with the lower end of the bull market’s channel. For that to happen (perhaps in October), the market will need evidence that the economy is slowing and inflation is still moderating. A drop in oil prices would help too. A yearend rally is still likely back to 4600, in our opinion.

The S&P 500 closed through its 100dma (4375).

The conventional forward P/E is at 18.6. Ex-IT: 16.9 (red line).

Taking inflation into account, the Rule of 20 P/E is 24.3 on trailing EPS and 22.9 on forward EPS. Ex-IT: 20.3x forward EPS.

Fed Signals Higher-for-Longer Rates With Hikes Almost Finished Powell stresses ‘careful’ approach in Wednesday press briefing

Federal Reserve Chair Jerome Powell made clear Wednesday the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy.

After a series of rapid rate hikes over the past 18 months, the Fed can now “proceed carefully,” Powell said — a sentiment he repeated at least a dozen times Wednesday during a press conference that followed the central bank’s decision to leave rates unchanged.

In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.

The projections also showed they expect inflation to fall below 3% next year, and return to their 2% target by 2026. In other words, the “soft landing” for the US economy that looked more remote three months ago now seems within reach.

“They’re basically saying that a soft landing scenario is going to be met with tighter policy,” said Brett Ryan, a senior US economist at Deutsche Bank AG. “That was the main takeaway.” (…)

Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.

During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally. (…)

Futures show roughly even odds of more tightening in 2023. (…)

The FOMC meets Oct. 31-Nov. 1 and again in December.

The WSJ’s Nick Timiraos:

“Really, what people are saying is, ‘Let’s see how the data come in,’” [Powell] said at a news conference Wednesday. “They want to be convinced. They want to be careful not to jump to a conclusion.” (…)

“The fact that we’ve come this far lets us really proceed carefully,” said Powell. He used those words—“proceed carefully”—six times during Wednesday’s news conference, a sign of heightened caution about lifting rates. (…)

“They’re worried about taking a victory lap too early, obviously, but these forecasts are soft landing-adjacent,” said Jan Hatzius, chief economist at Goldman Sachs. He doesn’t think the Fed will raise rates again because he thinks inflation is likely to decline more in the coming months than officials projected Wednesday.

Fed officials’ projection for annual core inflation, which excludes volatile food and energy prices, edged down to 3.7% for the fourth quarter. They see it falling to 2.6% next year. The Fed targets 2% inflation on average.

Media and pundits have their own narratives but let’s hear it from the horse’s mouth to better read his mind (my emphasis):

• Clearly, we are just—what we’ve decided to do is maintain the policy rate and await further data. We want to see convincing evidence, really, that we have reached the appropriate level.
• But what it reflects, though, is that economic activity has been stronger than we expected; stronger than I think everyone expected.
• And really, what people are saying is let’s see how the data come in. We want to see that this—these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months, right? We want to see—you know, the labor market report that we received, the last one that we received, was a good example of what we do—what we do want to see. It was a combination of—you know, of across a broad range of indicators continuing rebalancing of the labor market. So those are the two things that—those are our two mandate variables, and that’s the progress that we want to see.
• Now, we’re fairly close, we think, to where we need to get. It’s just a question of reaching the right stance. Nonetheless, you know, we need—we need to get to a place where we’re confident that we have a stance that will bring inflation down to 2 percent over time. That’s where we need to get to.
• But I think broadly, stronger economic activity means rates—we have to do more with rates. And that’s what that that’s what that—that’s what that meeting is telling you.
• It is certainly possible that—you know, that the neutral rate at this moment is higher than that. And that’s part of the explanation for why the economy has been more resilient than expected.
• And I think confidence comes from seeing, you know, enough data that you feel like, yes, OK, this feels like we can—we can, for now, decide that this is the right level and just agree to stay here. And then the question is how long do you stay at that level, and that’s a whole nother set of questions. For now the question is trying to find that level where we think we can stay there. And we haven’t—we haven’t gotten to a point of confidence about that yet. That’s what we’re—that’s the stage we’re at, though.
• So I think the question will be—GDP is not a mandate, right. Maximum employment and price stability are the mandates. The question will be is the—is GDP—is the heat that we see in GDP, is it really a threat to our ability to get back to 2 percent inflation? That’s going to be the question. It’s not a question about GDP on its own. It’s, you know, you’re expecting to see this improvement—you know, continued rebalancing in the labor market and inflation moving back down to 2 percent in a sustainable way. We have to have confidence in that. And, you know, we’d be looking at GDP just to the extent that it threatens one or both of those.
• The real point, though, is the worst thing we can do is to fail to restore price stability, because the record is clear on that. If you don’t restore price stability, inflation comes back and you go through—you can have a long period where the economy is just very uncertain. And it’ll affect growth. It’ll affect all kinds of things. It can be a miserable period to have inflation constantly coming back, and the Fed coming in and having to tighten again and again.
• what’s happened is growth has come in stronger, right—stronger than expected and that’s required higher rates.
• In terms of inflation, you are seeing—the last three readings are very good readings. It’s only three readings. You know, we were well aware that we need to see more than three readings. But if you look at June, July, and August you’re looking at, you know, really significant declines in core inflation, largely in the goods sector, also to some extent in housing services and just a little in non-housing services. Those are the three buckets.
• If the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2 percent, because we will get back to 2 percent.
• So what—I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that. The savings rate for consumers has come down a lot. The question is whether that’s sustainable. That could be—it could just mean that the data effect is later. It could also be that for other reasons the neutral rate of interest is higher, for various reasons. We don’t know that. It could also just be that policy hasn’t been restrictive enough for long enough. And there are many candidate explanations. We have to, in all this uncertainty, make policy. And, you know, I feel like what we have right now is what’s still a very strong labor market but that’s coming back into balance. We’re making progress on inflation. Growth, by many forecasts—many, many forecasts call for growth to moderate over the course of the next year. So that’s where we are. And, you know, we have to—we have to deal with what comes.

So:

• Powell and co., certainly Powell, remain totally focused on inflation and wages.
• Inflation came in better than expected but they need more than 3 months of good data.
• The economy is not part of their mandate…but, recently, “growth came in stronger than expected and that’s required higher rates.
• And, looking ahead, “if the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy.”
• Why stronger than expected? “We don’t know that.”

With a government shutdown looming, no new data to convince them one way or the other, poor man!

John Authers:

The Fed has doubled its estimate for economic growth this year, while upgrading 2024 to 1.5% from 1.1%. That would explain why its projections for the fed funds rate have risen by 50 basis points for both 2024 and 2025.

What’s strange is that the FOMC has also grown far more optimistic about unemployment, cutting its estimate for the jobless rate in both the next two years to 4.1% from 4.5%. On the face of it, that sounds contradictory; TS Lombard’s Steven Blitz dubbed it a belief in “immaculate disinflation.”

UAW Negotiator Says New Stellantis Offer Doesn’t Look Good UAW workers at a Mercedes parts plant declared their own strike.

Stellantis NV’s new contract offer to the United Auto Workers lacks the job security guarantees the union wants, a negotiator said, suggesting workers will reject it days before a deadline to expand their historic strike.

UAW President Shawn Fain has yet to announce whether he’ll green light the latest Stellantis offer, but the proposal had a similar pay increase to the 19.5% already offered. Additionally, it doesn’t give workers the clear vision of the future they’re seeking, said Scott Moldenhauer, a negotiator for the union. (…)

General Motors Co. isn’t having an easy time finding a deal, either. GM Chief Executive Officer Mary Barra told the automaker’s salaried staff Wednesday morning that the union’s salary demands were too costly. The company’s current offer would raise average yearly compensation to $150,000 a year with benefits, according to people familiar with the matter. And while GM continued bargaining, the people said the two sides were far apart.

The labor actions spread beyond Detroit for the first time as 190 UAW workers struck a ZF plant in Tuscaloosa, Alabama, that supplies front axles for Mercedes-Benz Group AG vehicles. While the UAW represents part supplier plants, these locals make their own decisions about job actions and have contracts that differ from the ones governing Detroit’s autoworkers. But the local is striking over some of the same issues, such as equal pay for all workers in the same plant. (…)

But on Tuesday, Stellantis’ North American Chief Operating Officer Mark Stewart told CNBC that his company has inventory on hand to offset the strike’s impact. Cox Automotive reported that the auto companies turned out cars at a fast clip ahead of the strike, leaving them with the highest inventory level since April 2021. (…)

Memo for Mr. Powell’s better understanding: during the last 5 months, monthly production of Motor Vehicles and Parts was 7.8% higher, on average, than during the first 3 months of the year. Related employment was up 4.6% YoY in August.

• Bank of America to raise minimum wage to $23 an hour in October

Bank of America (BAC.N) will boost its minimum hourly wage to $23 in October as it heads toward a goal of raising hourly pay to $25 by 2025, the company said in a statement Wednesday.

The pay bump translates to a minimum salary of almost $48,000 a year for full-time employees, according to the second largest U.S. lender.

BofA has increased pay several times in recent years, starting with a move to $15 an hour in 2017.

Xi’s Purge of Handpicked Ministers Shatters Stability Image Chinese leader has ousted top officials with no explanation

After President Xi Jinping tore up the Communist Party rulebook to promote key loyalists last year, some observers expected his new team to operate more smoothly in tackling China’s biggest challenges.

Instead, his government looks like it’s in disarray. Xi’s mysterious purge of his foreign minister in July, followed by the reported ouster of his defense chief less than two months later, is making China appear unstable to the outside world. The Chinese leader also overhauled the generals overseeing China’s Rocket Force, which manages the nation’s nuclear arsenal, without giving an explanation.

And those are just the firings that have been made public. (…)

China hasn’t seen such an intense period of high-profile purges since the reform era of the 1980s, exposing the “opacity and brutality” of Xi’s system, according to Richard McGregor, a senior fellow at the Lowy Institute in Sydney who wrote The Party: The Secret World of China’s Communist Rulers.

“These men were handpicked by Xi himself for promotion,” McGregor said. “So their fall reflects on him.” (…)

As Xi’s mistrust of his officials grows, the system is showing signs of becoming paralyzed as he tries to micromanage domestic operations. One foreign executive in Beijing, who asked not to be identified, said Chinese officials now operate in “silos of fear,” with everyone scared of Xi and also isolated from each other. (…)