Will there really be an explosion?

July 28 – August 2, 2024

Big news. Against the backdrop of political news, economic news is again lost. The world is frozen in anticipation of a retaliatory strike against Israel from Iran (although it is quite possible that other forces are to blame for the murder of Ismail Haniyeh). But talking only about economic events, then, of course, the main thing was the decision of the US Federal Reserve System on the rate.

The US Federal Reserve left the rate unchanged at 5.50%. And this is despite the fact that the economic data for the week (see the next section of the Review) turned out to be extremely negative for the US. Some of this news was already noted in the Fed’s cover letter, and some of this was mentioned by Powell in his press conference (see the last section of the Review).

Fed Cover Letter:

“▪️ Economic activity continues to expand at a solid pace.

▪️ Job growth has slowed and the unemployment rate has risen but remains low.

▪️ Inflation has declined over the past year but remains high.

▪️ Progress has been made toward the 2% inflation target in recent months.

▪️ The risks to the Fed’s dual mandate are balanced.

▪️ Further Fed monetary policy decisions depend on incoming macro data.

▪️ More confidence in inflation decline is needed to cut rates.”

Macroeconomics. Sweden’s GDP -0.8% per quarter. Not counting Covid, this is the worst dynamics in 6 years:

Sweden GDP Growth Rate
Pic. 1

Germany’s GDP -0.1% per year, 4th consecutive monthly decline:

Germany GDP Annual Growth Rate
Pic. 2

Industrial production in Italy -2.6% per year, 17th negative in a row:

Italy Industrial Production
Pic. 3

Foreign direct investment in China is -29.1% per year. In the entire history of the review, it has only been worse once, in January 2009 (-32.6%):

China Foreign Direct Investment YoY
Pic. 4

The official PMI (an expert index of the state of the industry; its value below 50 means stagnation and decline) for all sectors of the PRC economy is 50.2 – not counting Covid, the worst value in the history of the review:

China NBS General PMI
Pic. 5

In industry, 5-month bottom and recession zone (49.4):

China NBS Manufacturing PMI
Pic. 6

And outside of industry, there is stagnation (50.2) and the worst value in 17 years of data collection (not counting Covid):

China Non Manufacturing PMI
Pic. 7

The independent assessment of the manufacturing PMI is almost identical to the official one (49.8):

China Caixin Manufacturing PMI
Pic. 8

Eurozone manufacturing PMI has been in contraction for 25 months in a row, the longest period on record:

Euro Area Manufacturing PMI
Pic. 9

Italy industrial sales -4.8% y/y, 14th straight negative:

Italy Industrial Sales YoY
Pic. 10

Eurozone industrial confidence index weakest in 11 years (excluding Covid dip):

Euro Area Industrial Sentiment
Pic. 11

In the US 46.6, 8-month bottom:

United States ISM Manufacturing PMI
Pic. 12

Moreover, the employment component (43.4), excluding Covid, is at its lowest level in more than 15 years:

United States ISM Manufacturing Employment
Pic. 13

Industrial production in Japan -7.3% per year, the weakest dynamics in 4 years (without Covid – in 5 years):

Japan Industrial Production
Pic. 14

Construction orders in Japan -19.7% per year, minimum for 2.5 years:

Japan Construction Orders
Pic. 15

The Texas Fed manufacturing index has been in the red for 27 straight months, repeating the 2007/09 low:

United States Dallas Fed Manufacturing Index
Pic. 16

The services sector in the same region has been falling for 26 months in a row, a historical anti-record:

United States Dallas Fed Services Index
Pic. 17

Australia’s building permits at 12-year low, with non-residential sector particularly weak:

Building Approvals, Australia
Pic. 18

In New Zealand -13.8% per month. Excluding the Covid dips, this is the worst performance in 13 years:

New Zealand New Dwellings Building Consents MoM
Pic. 19

Japan’s job openings-to-applicants ratio is at its lowest in 9 years (not counting Covid):

Japan Jobs To Applications Ratio
Pic. 20

The number of unemployed in Germany has been growing monthly for 19 months in a row:

Germany Unemployment Change
Pic. 21

It has renewed a 9-year peak (not counting Covid, although its peak is already close):

Germany Unemployed Persons
Pic. 22

US Private Sector Hiring (ADP Survey) At Six-Month Low:

United States ADP Employment Change
Pic. 23

US initial jobless claims at one-year peak:

United States Initial Jobless Claims
Pic. 24

And the repeated ones are already at 3 years old:

United States Continuing Jobless Claims
Pic. 25

US unemployment rate at 7-year high (excluding Covid):

United States Unemployment Rate
Pic. 26

And the average length of the working week is at its lowest in 14 years (with the same adjustment):

United States Average Weekly Hours
Pic. 27

Note that this last indicator is extremely conservative and is not very distorted by official statistics (since few people look at it). Its fall means a sharp deterioration in the situation on the labor market and in the economy as a whole.

The balance of retail sales in Britain is -43%, one of the worst indicators in the history of the review:

United Kingdom CBI Distributive Trades
Pic. 28

The Bank of England cut the rate by 0.25% to 5.00%, but made it clear that there will be no further cuts for now; moreover, even this act was approved by a minimal majority (5 votes to 4).

The Bank of Japan raised the rate by 0.15% to 0.15-0.25% (the highest since 2008), will halve the size of its government bond purchases.

The move strengthened the yen and sent the stock market reeling: Tokyo’s stock market fell the most since the Covid peak on Friday (and the two-day drop on Thursday and Friday was the biggest since the tsunami crash in 2011). Overall, the Nikkei225 index has already fallen 17% from its peak:

Pic. 29

The main blow fell on the banking sector:

Pic. 30

Key findings. There is a sharp deterioration in the situation in the global economy, both in industry and in the services sector, and in terms of employment. It is quite possible that this happens due to objective political problems. But it is also possible that the political authorities of different countries are simply legalizing the real situation, which they have been hiding for many months, under political upheavals.

At his press conference, Powell practically promised to start cutting the rate in September. Although, according to objective prerequisites, this could have been done this week:

“▪️ We have made significant progress in achieving the Fed’s dual mandate goals over the past two years: labor market and inflation

▪️ The labor market has become more balanced

▪️ Inflation has fallen from 7% to 2.5%

▪️ The economy continues to grow at a solid pace

▪️ Inflation is still above the 2% target

▪️ The labor market is strong, but not overheated

▪️ The inflation data for the second quarter of 2024 has added to our confidence

▪️ We will carefully evaluate incoming macro data to make future Fed monetary policy decisions

▪️ A rate cut too late could unduly weaken the economy

▪️ The Fed has not yet made any decisions regarding future meetings, including the September one

❗️Reduction rates may be discussed at the September meeting

▪️ BUT there was a real discussion about cutting the rate.

▪️ We are not thinking about cutting the rate by 50 bps right now.

▪️ The Fed will not adjust monetary policy based on the plans of the next US president.

▪️ There is a widespread belief among Fed chairmen that we are close to easing the monetary policy

▪️ If inflation declines in line with expectations, economic growth remains strong enough, the labor market remains unchanged, a rate cut in September will be on the agenda

▪️ I can imagine a scenario from zero to several rate cuts this year – it all depends on the economy

▪️ I do not see the labor market as a likely source of inflationary pressure. So I don’t want to see excessive cooling

▪️ If the Fed sees something like a significant downturn in the labor market, we will react

▪️ We are in a good position, the risks to the Fed’s dual mandate are balanced

▪️ US macro data is moving in the direction the Fed needs

❗️ It’s time to adjust the interest rate

❗️ The Fed does NOT need to be 100% focused on inflation

The fight against inflation is not over yet, but we can afford to start easing the monetary policy

▪️ In the base case, one would think – from now on the rate will start to decline

▪️ Now we are seeing more widespread deflation

▪️ The risks of rising inflation have decreased as the labor market cools. There are now risks of a worsening employment situation

▪️ All Fed chairmen supported today’s interest rate decision.”

Whether the Fed’s leadership will hold out until September is a question; if the situation deteriorates at this rate, it may be necessary to lower the rate earlier. But for now, we can safely say that August (and not November) will be the main month of this year. If the downward trend continues, all the plans of all politicians, both American and in other countries, will go to waste.

Well, we wish our readers to have the most productive rest on the weekend or already on vacation and effectively use the information received in the reviews in their work activities!

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