This morning’s weak Purchasing Managers’ Index (PMI) data reflecting slower economic growth in the United States and recessionary conditions in the Eurozone are subduing bond yields with investors buying the dips in securities following three consecutive down days for stocks alongside violent volatility in bond markets. Amidst the buying, however, a widening auto union strike, a possible government shutdown and constant reminders from Fed members concerning higher-for-longer rates lurk in the background.
This month’s Flash PMI for the United States came in at 50.2 for services and 48.9 for manufacturing, with the former missing expectations of 50.6 while the latter exceeded projections for 48. Services slowed down from August’s 50.5 figure while manufacturing activity, which has declined for five consecutive months, contracted at a slower pace than the previous month’s 47.9. Weighing most on both figures were contractions in ordering, as consumers balked at higher prices. Loftier prices were driven mainly by increases in compensation outlays, interest costs, materials expenses and fuel charges. Although firms were unable to pass increased input costs to consumers, margin compression didn’t result in slower hiring. In fact, firms took advantage of the sharp increase in labor force participation to hire and sustain quality workers.
European Recessionary Forces Persist
European PMI data was far worse with both services and manufacturing remaining deep in contraction territory. Services came in at 48.4 while manufacturing read 43.4, near consensus estimates of 47.7 and 44 and August’s figures of 47.9 and 43.5. Weighing most on the indices were reduced customer ordering as firms faced reduced pricing power in an environment of accelerating input prices. Price increases were derived from higher wages and elevated fuel costs. Firms continued to hire in the face of subdued demand, however, as businesses maintained an appetite to earn returns. From a national perspective, France experienced sharp declines in activity while Germany saw output decline for the third-consecutive month as the region’s two largest economies drive the continent into a likely recession this quarter.
Japan Remains Dovish
Across the Pacific, Tokyo is experiencing inflationary pressures as well, but the Bank of Japan (BOJ) decided last night to maintain its highly accommodative policies as the central bank waits for more evidence that inflation won’t drop below its 2% target. Japan policymakers last night kept the country’s short-term interest rate at -10 basis points (bps). The country’s core inflation rate has exceeded the BOJ’s 2% target for 17 months, but bank Governor Kazuo Ueda says more evidence of stable inflation, such as wage inflation and increased demand, is needed before the organization will back away from its accommodative monetary policy. As of August, consumer prices excluding energy and fresh food increased 4.3% year over year. On a broader basis, policymakers are concerned that recent inflation has resulted from volatile energy prices, but corporations have been raising their prices, which could imply that the BOJ is achieving its goal of creating enough demand to support stable inflation near its target rate. The bank’s long period of accommodative policy may be running out of time, with the country’s yen having declined 11% relative to the U.S. dollar year to date.
U.S. Economy Faces UAW Strike and Possible Government Shutdown
While Japan focuses on creating demand within its economy, the U.S. economy and capital markets face the considerable risks of an expanding auto workers strike and a government shutdown. The UAW strike escalated today after union President Shawn Fain said parts manufacturing facilities across the country will strike at GM and Stellantis and that more actions might occur depending on the outcomes of negotiations with a noon deadline. The GM and Stellantis actions impact 38 facilities in 20 states. While the companies are exploring using white-collar workers to manufacture parts, the Teamsters Union has said it won’t cross picket lines, which will either limit or completely block parts distribution. The union action, while potentially creating a shortage of parts for automobiles, will greatly limit manufacturing at car plants. Fain also listed a series of benefits that the union has secured with Ford, which likely explains why strike actions haven’t been expanded against that company. While consumers may feel the crunch of declining automobile and parts inventory, the actions are being closely watched by the Federal Reserve. Chicago Fed President Austan Goolsbee has recently explained that the Covid-19 pandemic demonstrated how the impact of manufacturing shutdowns and supply chain issues can ripple through the economy.
Congress Struggles to Reach Budget Agreement
While UAW workers strike, employment of thousands of federal employees is on the line because the lower chamber of Congress has made no progress in developing a proposed budget just days before a September 30 deadline for avoiding a government shutdown. The conservative arm of the House Republicans blocked a procedural vote yesterday that would have paved the way for further budget negotiations and votes on spending provisions. Congress has since recessed but leadership has the ability to call members back to Washington in the event negotiators reach a compromise. While members of the House are struggling to form a proposal, the Senate and the lower chamber are also far apart in their views on a potential budget, making it increasingly unlikely that an agreement will be reached shortly. A shutdown would furlough thousands of non-essential employees and delay paying essential workers who would still be required to report to work. Services such as providing government data, operating national parks and enforcing certain regulations, would be shutdown.
Markets Bounce Back
Markets are recovering some of the losses of a brutal week with equities higher and bond yields lower. Technology is leading as investor sentiment improves with the Nasdaq Composite Index up 0.8%. The S&P 500, Russel 2000 and Dow Jones Industrial indices are up 0.4%, 0.1% and 0.1%. All sectors are higher except for consumer staples, industrials and financials. Treasuries are getting bid up, as the 2- and 10-year maturities are 4 and 6 basis points (bps) lower to 5.11% and 4.44%. The dollar is slightly higher, as it appreciates relative to the yen, pound sterling, franc and euro while it depreciates against the yuan and Aussie and Canadian dollars. The greenback’s index is up 9 bps to 105.47. Oil prices are firmer today on the back of bans on gas and diesel exports announced by Moscow. WTI crude oil is up 34 cents to $89.87 per barrel on the news.
Another Step in the Right Direction
Fed Chairman Jerome Powell has repeatedly emphasized that the central bank needs additional evidence that inflation is declining rather than just dipping temporarily before its eases its monetary policy tightening. Just how much evidence will be needed, of course, is a matter of debate which could be complicated by mixed results from other sectors of the economy, including the labor market. With Powell explaining that the central bank is taking a patient approach in its inflation battle, it’s likely that today’s PMI is a step in the right direction, especially with the services category slowing down markedly. Meanwhile, a potential government shutdown and the expanding UAW strike adds an additional level of complexity to assessing when the Fed will back off from its hawkish policies.
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