US initial jobless claims fell -15k to 227k in the week ending October 19, well below expectation of 245k. Four-week moving average of initial claims rose 2k to 238.5k.
Continuing claims rose 28k to 1897k in the week ending October 12. Four-week moving average of continuing claims rose 18k to 1861k.
UK business activity weakened in October, with both the manufacturing and services sectors showing signs of slowing momentum. PMI Manufacturing index dropped from 51.5 to 50.3, marking a 6-month low, while PMI Services index fell from 52.4 to 51.8, an 11-month low. Consequently, Composite PMI also declined to an 11-month low, slipping from 52.6 to 51.7.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, attributed this slump to “gloomy government rhetoric” and rising uncertainty ahead of the Budget. He added that external risks, such as conflicts in the Middle East, the ongoing war in Ukraine, and the upcoming US elections, have further dampened economic confidence.
The early PMI data suggests that the UK economy grew at a meagre 0.1% quarterly rate in October. However, Williamson noted that further cooling of input cost inflation, now at its lowest level in four years, could allow BoE to take a “more aggressive stance” toward rate cuts if the economic slowdown persists.
Eurozone’s economic activity showed mixed signals in October, with PMI Manufacturing rising slightly from 45.0 to 45.9, while PMI Services fell marginally from 51.4 to 51.2. As a result, Composite PMI ticked up slightly to 49.7 from 49.6, but remained below the 50-point mark, indicating ongoing economic contraction.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, described the Eurozone as “stuck in a bit of a rut,” noting that the economy contracted for the second consecutive month. While the manufacturing sector continues to slump, its negative impact is being balanced out by minor gains in services. De la Rubia added, “For now, it is not clear whether we will see a further deterioration or an improvement in the near future.”
According to de la Rubia, for ECB, the data present an “unwelcome surprise,” particularly in the services sector. Inflationary pressures appear to be lingering, driven by wage growth, which has been pushing up costs and selling prices for service providers.
This persistent inflation suggests that the ECB may lean towards a 25bps rate cut in December, as opposed to the larger 50bps cut some had speculated.
Germany’s economic outlook improved slightly in October, as PMI Manufacturing index rose to 42.6 from 40.6, while PMI Services climbed to 51.4 from 50.6. This led to a rise in Composite PMI to 48.4 from 47.5, offering some hope for the start of Q4.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, highlighted that the start to Q4 is “better than expected.” With manufacturing shrinking at a slower rate and services expanding more quickly, he noted that growth in Q3 is a “distinctive possibility.”
However, despite these improvements, Germany’s GDP is still forecast to remain flat for the year, following a 0.3% contraction in 2023, as projected by the International Monetary Fund.
De la Rubia also pointed to the “structural weaknesses” weighing down the German economy. Key issues such as high energy costs, rising competition from China, and ongoing labor market shortages are continuing to strain the manufacturing sector.
France’s economic woes intensified in October, with PMI data showing further contraction across key sectors. PMI Manufacturing edged down slightly from 44.6 to 44.5. More notably, Services PMI dropped to 48.3 from 49.6, hitting a 7-month low, while Composite PMI fell from 48.6 to 47.3, its lowest point in nine months.
Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, emphasized the gravity of the situation, stating, “France remains trapped in economic decline as Q4 begins.” HCOB’s Nowcast predicts only marginal growth moving forward, placing significant pressure on the French government to implement measures aimed at stabilizing the economy and addressing fiscal imbalances.
The industrial sector remains “mired in a deep crisis,” with no signs of recovery in sight. Meanwhile, the services sector is also struggling under “tough conditions,” further dampening the overall economic outlook.
Austrian ECB Governing Council member Robert Holzmann, one of the more hawkish voices, signaled that a 25bps cut is “probable” at the December meeting. While a larger, half-point cut isn’t “impossible”, it’s unlikely.
Holzmann emphasized caution, saying, “I’m still concerned that inflation might prove stronger than expected,” reflecting his hesitation in moving too quickly toward easing.
Despite acknowledging some downside risks, he remarked, “I don’t see enough of them to conclude that they dominate,” adding that the view of risks being tilted to the downside is still a minority on the ECB Governing Council.
Separately, Slovenia’s ECB Governing Council member Bostjan Vasle echoed the sentiment, expressing support for “going to neutral in measured steps.”
Vasle noted that while data has shown improvement, inflation “has not yet been defeated,” and discussions about undershooting the inflation target are premature. He further commented, “Once we get closer to neutral, it may be appropriate to align our language accordingly.”
Japan’s private sector slipped into contraction territory at the beginning of Q4, with PMI Manufacturing index declining from 49.7 to 49.0 in October. The services sector saw a much sharper fall, with PMI Services tumbling from 53.1 to 49.3, its worst reading since February 2022. As a result, PMI Composite also dropped from 52.0 to 49.4, the weakest figure since November 2022.
According to Usama Bhatti, economist at S&P Global Market Intelligence, Japan’s economic slowdown has become more pronounced, with firms attributing the downturn to a “muted economy and subdued new order inflows.”
Business confidence for the coming year also took a hit, softening to the lowest level since August 2020. Bhatti noted that the “stubbornness of high prices” and ongoing economic weakness are weighing on overall sentiment.
Australia’s manufacturing sector continues to struggle, with PMI Manufacturing index slipping slightly from 46.7 to 46.6 in October, marking its lowest point in 53 months. According to Judo Bank’s Matthew De Pasquale, key indicators such as output and new orders have dropped to levels that signal the sector is “on the verge of recession.”
However, services sector, which accounts for over 80% of the country’s economic output, showed modest improvement. PMI Services ticked up from 50.5 to 50.6, and new business activity rose to its highest level since May, suggesting some resilience. De Pasquale noted that while business growth remains “soft,” the outlook for the services sector is improving with new business activity at the highest level since May
Inflation also appears to be moderating. Input cost pressures fell to their lowest levels since the onset of pandemic-induced inflation in 2021. Final prices, particularly in services, are also trending downward. De Pasquale added that inflation “remains on track” to return to RBA’s target range of 2% to 3%.
At the International Monetary Fund event, BoJ Governor Kazuo Ueda said “It’s still taking time for us to get to 2% in a sustainable way,” Ueda said, justifying the commitment to maintaining its accommodative monetary policy for the time being, even with this year’s rate hikes.
Ueda stressed that raising inflation expectations and supporting underlying inflation are crucial to moving the Japanese economy toward “a new equilibrium with 2% inflation in a sustainable way”.
However, he acknowledged the complexity of determining the pace and magnitude of future rate hikes. “I think about what would be the right size of normalization in total going forward, and how best to allocate that total rate hike across time,” he admitted, adding that this challenge keeps him “awake 24/7.”
A key concern for BoJ is the balance between cautious, gradual rate hikes and the risk of creating market distortions. Ueda warned that moving “very, very gradually” could lead to market participants assuming that rates will remain low for an extended period, resulting in a “huge build-up of speculative positions” in Yen.
Finding the “right balance” between caution and effective action is critical, Ueda emphasized, as BoJ continues to navigate a difficult path toward inflation normalization.
At an event hosted by the Institute of International Finance, BoE Andrew Bailey acknowledged that disinflation in the UK is progressing “faster than we expected”. However, he expressed concerns about potential “structural changes” in the economy that could sustain price pressures.
Specifically, Bailey highlighted uncertainty around the labor market and whether shifts in employment dynamics might keep inflation elevated.
He pointed to services inflation, which remains high at just under 5%, and emphasized that it “has to come further down” to meet the 2% target. Despite some signs of labor market loosening, Bailey noted it remains tight, contributing to ongoing inflationary pressures.
“We’ve got a very unbalanced mix of inflation components and services inflation remains higher than is consistent with the target,” Bailey said.
At an event today, ECB President Christine Lagarde expressed contentment with the current inflation levels, stating that the central bank is “rather satisfied” as inflation has slowed to below the 2% target.
However, she emphasized that the central bank is keeping a close watch on economic growth, as it significantly influences inflationary trends. Lagarde pointed out, “We are attentive to growth because it impacts inflation. It’s different from the Fed,” highlighting a key difference in policy focus compared to Fed.
Separately, Chief Economist Philip Lane acknowledged that while “some of the recent data raised some questions about the recovery,” the overall outlook remains positive.
Lane affirmed that the narrative of a good economic recovery is still “very close to the baseline.” Lane highlighted “fundamental reasons” to expect a rebound in consumption and investment for the remainder of this year and into the next.
A growing debate is emerging among ECB policymakers about whether to accelerate the pace of rate cuts, with some members suggesting a potential 50 bps reduction in December. The possibility arises after inflation data in September came in significantly lower than expected, fueling discussions on the appropriate policy response.
Portuguese ECB Governing Council member Mario Centeno signaled openness to a larger cut, telling CNBC, “Certainly 50 basis points can be on the table because we continue to be data dependent and the data we are getting points in that direction.” He emphasized the surprising nature of the recent inflation figures, stating, “The truth is that the print of inflation in September was very low, way lower than what we were expecting.”
Echoing the possibility of a sizable rate reduction, Dutch ECB Governing Council member Klaas Knot acknowledged that a half-point interest rate cut could not be excluded at the December meeting. However, he cautioned that such a move would require further economic deterioration. “I would also say that I see the risks surrounding that baseline as reasonably contained,” Knot added, suggesting that while the option is on the table, it is not yet the central scenario.
On a more cautious note, Austrian ECB Governing Council member Robert Holzmann expressed skepticism about the need for a 50 bps cut under current conditions. Speaking to CNBC, Holzmann said, “I’m sure some of my colleagues will go for a big cut, others not. In my case, I will say I will look at the data.” He added, “If things really get as bad as some claim, we can have another 25, 50 I would say at the moment with the data, no.”
BoC cut its overnight rate target by 50 bps to 3.75%, as widely expected, with inflation now “back around the 2% target.” The central bank reaffirmed its easing bias, stating that if the economy continues to evolve as expected, “further reductions” in the policy rate can be expected. However, it stressed that rate adjustments will be made on a “one meeting at a time” basis.
BoC adjusted its inflation forecasts slightly lower, reducing the average CPI inflation projection from 2.6% to 2.5% for 2024, and from 2.4% to 2.2% for 2025, while maintaining the 2.0% target for 2026.
Recent data shows that headline inflation has dropped from 2.7% in June to 1.6% in September, aided by lower shelter costs, a decline in global oil prices, and consequently, lower gasoline prices. BoC’s preferred core inflation measures are now below 2.5%, and inflation expectations from businesses and consumers have “largely normalized.”
On the growth front, GDP projections remained mostly unchanged, with forecasts of 1.2% for 2024, 2.1% for 2025, and a slight downgrade from 2.4% to 2.3% in 2026. BoC expects growth to pick up gradually as interest rates decline, with stronger consumer spending, rising residential investment, and resilient export demand, particularly from the US, all contributing to the recovery.
BoC is widely anticipated to lower its policy rate by 50bps to 3.75% today, marking the fourth consecutive rate cut. The central bank is stepping up its monetary easing, as policymakers are increasingly worried that the current high level of interest rates is causing additional economic pain.
Recent economic indicators support the case for the more aggressive adjustment. Unemployment rate surged to a seven-year high (excluding the pandemic period) of 6.6% in August before dipping slightly to 6.5% in September. Even at 6.5%, unemployment remains a full percentage point higher than a year earlier. Additionally, per capita GDP has contracted for five consecutive quarters. With inflation falling more rapidly to 1.6% in September, the BoC has room to act swiftly.
The key question now is the pace of future policy easing. There are firm expectations that the interest rate will fall to a neutral range between 2.25% and 3.25% by the end of next year. Among major financial institutions, Scotiabank is forecasting a more conservative year-end policy rate of 3.00%, while National Bank and RBC anticipate a more aggressive path to 2.00% by the end of 2025. These projections will likely be reassessed based on BoC’s new economic forecasts released today.
Technically, USD/CAD’s near term rally from 1.3418 is in progress for 1.3946/76 resistance zone. However, for now, it’s certain whether the medium term consolidation pattern from 1.3976 (2022 high) has completed as a triangle at 1.3418. So, strong resistance might be seen from 1.3976 to limit upside again. USD/CAD would likely need a more pronounced divergence in monetary policy between Fed and BoC to break decisively above 1.3976.
San Francisco Fed President Mary Daly expressed optimism in a series of Twitter posts, noting that the US economy is in a much “better place” compared to two years ago.
She highlighted that “inflation has fallen substantially” and the labor market has stabilized on a “more sustainable path.” According to Daly, the risks to the Fed’s dual goals of stable prices and full employment are now “balanced.”
However, Daly made it clear that Fed’s work to achieve a soft landing for the economy is not “not fully done”. She emphasized the importance of staying “resolute” to finish the task of stabilizing the economy, stating that the ultimate goal is to create an environment where people “aren’t worried about inflation or the economy.”
ECB Governing Council member Olli Rehn commented that disinflation process in the Eurozone is “well on track.” He acknowledged, however, that the economic growth outlook has “weakened quite clearly” over the past few months, which could “increase disinflationary pressures” moving forward.
Despite these developments, Rehn expressed that he is “not yet so concerned” about an undershoot in inflation, noting that both services inflation and wage inflation are still above the ECB’s 2% target. He added that the “danger of undershooting is not yet verified”.
Rehn also emphasized that the pace and extent of future rate cuts would depend on multiple factors, including “the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission.” This reflects the ECB’s continued data-dependent approach to future monetary policy decisions.
In a lecture delivered overnight, ECB Governing Council member Francois Villeroy de Galhau stressed the importance of maintaining “agile pragmatism” in adjusting the current restrictive monetary policy.
He emphasized that the risk of reducing the ECB’s restrictive stance too late “could indeed become more significant” to the risks of acting prematurely.
Villeroy noted the “risk that inflation undershoots, especially if growth remains subpar”.
He further added, “If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest.”
At a Bloomberg Newsmaker event, ECB President Christine Lagarde expressed that she was “absolutely confident” that inflation would sustainably return to 2% by 2025. When asked if this target could be reached earlier than ECB’s current projection of late 2025, Lagarde replied, “That would be my hope.”
Despite this optimism, Lagarde emphasized the need for caution, signaling that ECB is not yet ready to declare victory over inflation. She made clear that the future path for monetary policy was dependent on incoming data and that while the direction of policy easing was apparent, the pace of further rate cuts would be data-dependent.
On the question of the neutral rate—the level of interest rates that neither stimulates nor restrains the economy—Lagarde was hesitant to provide specifics, noting that while the neutral rate is likely higher than in recent years, it remains below the current 3.25% deposit rate, which she described as still restrictive.
“If you were to ask me today, ‘Where is it?’, the honest answer is, I don’t know,” she admitted.
ECB Governing Council member Joachim Nagel spoke today, firmly opposing the introduction of dot plots for the Eurosystem, a tool used by Fed to project individual policymakers’ rate forecasts.
Nagel argued that such projections could lead to undue pressure on national governors to prioritize their domestic agendas over the broader interests of the 20-nation eurozone.
“This could potentially influence the Governing Council’s independence,” Nagel warned.
Instead of adopting this approach, Nagel suggested that ECB refine its existing communication strategies. “We should enhance the communication of our existing measures of uncertainty,” he said.
Nagel advocated for the development of new tools such as scenario and sensitivity analyses, as well as improved fan charts, to provide clearer guidance without compromising the Governing Council’s autonomy.
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US PMI composite ticks up to 54.3, indicating 2.5% annualized GDP growth
In October, US PMI data showed modest improvement across sectors. Manufacturing PMI rose slightly from 47.3 to 47.8, while Services PMI edged up from 55.2 to 55.3, leading to an increase in Composite PMI from 54.0 to 54.3. These numbers point to a continued expansion of business activity in the US.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that October saw business activity grow at an “encouragingly solid pace,” with PMI data indicating GDP growth at an annualized rate of about 2.5%.
He added that businesses are increasingly optimistic about the year ahead, particularly in the manufacturing sector. Confidence is improving as companies expect a more stable post-election environment, which could help reverse the current slowdown in production and sales.
Full US PMI release here.