Fed View: Some officials still seem unconcerned by weaker data – Macro data in the US took a notably weaker turn last week, with both manufacturing and nonmanufacturing ISM surveys falling to multiyear lows, and forward-looking components suggesting we have yet to find a bottom in the slowdown. While this is consistent with our below consensus growth forecasts for the US (1.3% vs 1.7% in 2020, and 2.2% vs 2.3% in 2019), it has come as a surprise to financial markets, with OIS forwards now 80% priced for 25bp rate cut in October (up from 40% in the aftermath of the 17-18 September FOMC), and 70% priced for an additional December cut (50% after the September FOMC). We have for some time expected a weakening in incoming data to drive the Fed to cut at both meetings. However, it looks as though it will take more to convince hawks on the Committee of the need for further cuts, based on commentary at the weekend from Boston Fed president Rosengren and Kansas Fed president George.
Both are voting members this year, and both dissented against the recent cuts by the Fed. Seemingly drawing a distinction with comments from Chair Powell last Friday, who said ‘we actually want inflation to be a little bit higher’, George downplayed the undershoot of the Fed’s target as ‘by itself, not a compelling justification for providing additional monetary policy accommodation’. Rosengren meanwhile focused on the relative strength of consumption, which is indeed the main driver of economic growth in the US, stating that there was ‘no need to add additional accommodation’ as long as consumption ‘remained vibrant’. However, consumption tends to lag other growth drivers, and in our view it is only a matter of time before consumption slows on the back of weaker jobs growth stemming from the manufacturing slowdown. We expect this to become apparent in the retail sales and personal spending reports over the coming months. (Bill Diviney)
Euro Macro: Germany’s industry has not yet hit the bottom – The volume of orders received by Germany’s industrial sector continued to decline in August. Total orders fell by 0.6% mom after they dropped by 2.1% in July. The weakness was concentrated in domestic orders (-2.6% mom in August), while foreign orders increased (orders from the eurozone rose by 1.5% mom and from non-eurozone countries by 0.4%). The monthly orders data is very volatile and the more stable 3 month-over-3 month growth rate shows that the weakness in orders is actually broadbased, across both geographies (domestic, eurozone and non-eurozone) and main product groups (consumer goods, capital goods and intermediate goods). All in all, the orders data confirm the weak picture already painted by the most recent manufacturing PMI and the Ifo industrial business climate indicator, which each fell in August and September, suggesting that the contraction in Germany’s industrial sector will continue in the second half of the year. (Aline Schuiling)