Is the banking system at risk ?
As early as November 2022 we highlighted the risks induced by rising rates and rising bond yields for the global real estate markets and then banking systems in the US and Europe, due to their large accumulation of long dated government and corporate bonds during the heydays of Zero Interst Rate Policies and quantitative easing.
In the third week of March 2023, tremors appeared both in Europe where Credit Suisse was absorbed by UBS on the initiative of the Swiss Government and regulators and in the US where 4 banks inculing then 14th and 20th largest went belly-up, facing a major liquidity crisis.
All the macro trends we were highlighting in November 2022 unfolded since then and seem to be accelerating once again.
Commercial Real Estate has been collapsing in the US with vacancies surging, developers defaults, properties being liquidated at deeply discounted value and the banking system licking its wounds from non-performing loans. At the same time, mortgage rates have been rising to the highest in decades and residential house prices have started falling while home sales volumes have collapsed.
In Europe, Sweden has experienced a major real estate crisis, real estate prices are collapsing in the UK and the more resilient markets of Germany, France or Spain have started a lasting downtrend as mortgage rates have risen from 0.25 % to 4.8 % in France for instance.
Since the March banking crisis, if equity markets have been rallying sharply on the back of the new AI fad, bonds yields have kept rising …
The issue of the potential unrealised losses of the banking system on their massive “hold to Maturity” portfolio has been all but forgotten by the financial markets, thanks to the backstop provided by Central Banks and the new emergency facility, but the reality of the issue os still very much present.
With US bond yields potentially rising towards 4.5 % to 5 %, or even higher, and if, as we expect, inflation starts rising again because of higher energy prices, the issue might come back to the fore sooner than the markets expect.
In Europe, the problem is even more acute as banks have accumulated bond yields with negative nominal yields for almost a decade while long dated bond yields have surged to between 3.5 and 4.5 % today.
It is now estimated that the size of the unrealised and unaccounted losses of the baking systems both in Europe and the US exceeds the net equity of the banking system. Any additional losses from rising bond yields could trigger a massive crisis of confidence in the banking systems.
Moreover, with short term rates now hovering at 5.25 % in the US against bank deposit rates at 2 to 3 % in the best cases, the incentive for depositors to move their liquid cash to treasury bills is getting more appealing every day.
The latest data published by the FED shows that since its peak at 18.2 trillion in April 2023, the US banking system has already lost USD 1 Trillion in deposits from customers.
Moody’s report highlights major risks for the downgraded banks ranging from
1) Rising exposure to subprime borrowers
2) Rising bankruptcies and a surge in Non Performing loans
3) Weak credit quality of the lender in the auto business;
4) A high share of problem loans in the bank’s CRE book;
5) Ongoing repricing of deposits that will lead to a spike in funding costs; and
6) Maturity mismatch risks due to long-duration bonds.
Moody’s study was referring for the past 18 months but it has mostly ignored several other issues that were revealed by the U.S. banks’ 1H23 results.
To us the main structural issues facing the banking systems are :
1. The sharp increase in consumer loans
. Credit card balances rose by 16% YoY in Q2 and surpassed the USD 1 Trillion mark
According to the latest household debt report published by the Federal Reserve Bank of New York, credit card balances in the U.S. rose by 16.2% YoY in 2Q23 and reached USD 1.03 Trillion. Moreover, credit card balances have seen seven quarters of YoY growth.
Another interesting observation from the NY Fed’s report is that there are 70 Million more credit card accounts open now than there were in 2019. Furthermore, about 69% of Americans had a credit card in Q2 23, up from 65% in December 2019 and 59% in December 2013.
The most important thing here is that such a massive increase in credit card portfolios occurred in a rising rate environment. As the table below shows, according to the Fed, the average rate on credit cards surpassed 22% in May, and it was less than 17% before the pandemic.
. Auto loans are at the highest ever and have increased by 22 % since 2019
Despite the recent tightening of lending standards, US Total outstanding auto loas have risen to USD 550 Billion at the end of June 2023, against 450 Billion in June 2019.
. Mortgage Loans increased by 625 Billion in the past twelve months to reach 12 Trillion.
Despite mortgage rates having reached the highest levels since 2007, the amount of total outstanding mortgages have risen to USD 12.01 Trillion at the end of June 2023, a 5.5 <% increase in 12 months.
This is backed by USD 20 Trillion of illiquid real estate, a 50 % increase since 2014.
In a fascinating development reminiscent if the years that led to the 2008 Great Financial Crisis, some mortgage institutions are now offering households to buy properties with only 1 % down payments, the remaining 99 % being financed at mortgage rates north of 7 %….
. USD 1.6 Trillion of outstanding student loans are due to resume repayments in October 23
Another risk, which is being largely ignored for now, is that federal student loans will start accruing interest again on Sept. 1, and payments will be due starting in October.
All in all, over the past twelve months, consumers have added USD 909 Billion of debt in the past 12 months, to a record high of 17 trillion
And as the table below shows, credit cards saw the largest QoQ increase in absolute terms across all the types of retail lending.
2. A sharp increase in the cost of this rising debt
Over the same period of time the cost of financing the debt has risen considerably as well
The average Mortage rate on a 30 year fixed mortgage stands at 7.10 % today. The average rate of a 15-year fixed mortgage is 6.3 % and the average rate on a 5/ 1 ARM, fixed for five years and variable yearly afterwards stands at 5.34 % today.
These rates at 100 % higher than they were at the beginning of the year affecting both affordability and consumer spending power. With higher rates for new mortgages, Demand from first time buyers is dwindling, leaving the market with far less volumes, and forcing second hand home prices lower.
Taken on an average of USD 12 Trillion of outstanding mortgages, and considering the shift in tenure, it is estimated that the increase in Mortage rates has increased the total cost of mortgages by USD 200 Billion since the beginning of the year.
Credit card balances are now being charged at 22%, that is another USD 220 Billion less for consumers to spend per annum.
3. A sharp increase in bankruptcies and Non Performing loans
All taken together, on the 17 Trillion of outstanding consumer debt, the sharp rise in the cost of financing alone may be taking away 1 to 2 % of GDP growth. Adding to that inflation, and the purchasing power of consumers have beens severely eroded in the past 18 months.
This is already translating in a sharp increase in corporate and personal bankruptcies and the latest results published by the large commercial banks show that non performing loans have surged from a median of 1 to 1.5 % in 2020 to 2.5% to 3 % as of June 2023.
This, together with the pressure to raise deposit rates to keep depositors from shifting towards Treasury bills is having a considerable impact on bank net interest margins.
For now, a strong labor market and rising equity prices have kept consumers confidence humming, but any economic downturn and softening of the labor market is likely to push delinquency rates much higher, further straining the banking system’s earnings and balance sheet.
Adding to that, declining real estate prices ahead and further weakening of bond prices could well force the weaker banks to liquidate some of their money-losing bond portfolios, leading to further bankruptcies within the weaker regional and specialised segments of the banking systems.
4. What worries us the most ?:
Consumers have now depleted their savings and are borrowing to maintain their lifestyle.
the statistics form the FED show that the pandemic-related savings are fading, but consumers continue to be spending more than they are earning.
Hence the massive growth rates in credit cards and the overall 909 Billion increase in consumer loan in the past 12 months.
The sharp economic resilience of 2021 and 2022 had a lot to do with the massive savings accumulated by households during the pandemic lockdowns and helicopter money by the Government. This has kept the economy running, the labor market strong and the stock market to go ballistic.
Unfortunately, as the following chart from the San Francisco Fed shows, the situation has now gone into reverse.
Most economists have been puzzled by the absence of economic slowdown in the face of the highest rise in interest rates and monetary tightening in four decades. Some have even gone as far as predicting that the FED is this time achieving what has NEVER been achieved in the past, taming inflation without causing a recession.
The answer may lie precisely in the fact that both the US Government and the US consumers have, for now, been spending far more than they earned, exploding their accumulated debt like never before, in the hopes of better time ahead …
However, there are limits to how far consumers – or even Governments – can borrow to spend.
The banking system will not absorb USD 1 trillion of new debt every year and it is already tightening lending standards.
The following chart from the US Congressional Budget office shows how deeply the US Government is plunging into debt with the longest and largest budget deficits projected in history.
With annual budget deficits at 5 % of GDP, the US pubic debt will increase by 1.25 Trillion every year in the coming 10 years over its already record high of 32 Trillion. This will potentially lead to a massive crisis of confidence in US Government debt that is partly financed by foreign savings, it could lead to a sharp depreciation of the US dollar and consequently to another surge in inflation.
At some point, Congress will rein in the Government, forcing it to cut expenses and raise taxes.
If the banks are also restraining credit, then the US economy may well hit a wall at some point in the coming quarters…
If the US economy falls into recession, with the extreme levels of debt accumulated by both the corporate sector and households, the banking system is the most at risk…
Th situation is not much better in Europe where the economies are already giving signs of contracting and public finances are in dire situations.
As a footnote on the issue of financial crises and debt
The Western press is full of doom and gloom on China’s real estate and shadow banking “collapse” and the likelihood that its economy will fall into the balance sheet deflation-recession that Japan experienced in the 1990s and 2000s.
The WEST LOVES TO HATE CHINA and suffices to read articles on Bloomberg or the usual social media to believe that the Chinese real estate sector will take its entire economy down.
Let’s put things in perspective :
1. By their own admission, and these are verified figures, the entire real estate market and its correlative shadow banking represents an aggregate amount of USD 5 Trillion in China. This represents 27 % of its18 Trillion GDP.
We are very far from the 19 trillion of real estate assets backing the 12 trillion of mortgages in the US, respectively representing 76 % and 48 % of the US GDP.
2. Lending conditions in China ar far stricter than in the US as home buyers are required to fork out 70 to 80 % down payments for secondary homes and no less than 20 % for new home buyers.
3. The Chinese are savers and have the highest savings ratio in the world., Gross savings rate is the ratio of gross savings to gross domestic product (GDP). Gross savings include household, corporate, and government savings. China’s gross savings rate was 45.9% in 2021, the highest in the world, unchanged from the previous year. China’s household savings rate was 23% of GDP in 2021 also amongst the highest in the world
By contrast, and again according to the Fed, the Americans save only 4 % of their earnings while their total debt represents 76 % of the US GDP.
The sensitivity of declines in real estate prices on the global economy is far less important when homeowners are not leveraged and have significant savings. They are less inclined to reduce their spending because real estate prices are coming down.
4. The Chinese economy is running at 4 to 5 % GDP growth per annum with an inflation at 0 %, against barely 2 % in the US with a core inflation running close to 5 %. As a result Mortage rates are at 7 % in the US, more than twice the Chinese mortgage rates that have just been reduced to 3 %. The cost of servicing mortgages is therefore far less and far less sensitive for the economy in China.
5. When looking at public debt or banking loans, China has had for years one of the highest Fixed capital formation in the world at 4 to 5 Trillion US Dollars per annum, or 22 % of GDP, while the US barely registers USD 1 Trillion of fixed capital formation per annum, or less than 4 % of its GDP.
Borrowing money to invest in factories, education, health or infrastructure leads to productivity,
borrowing money to spend on social programs or sustain living standards leads to major financial crises.
6. Finally, with the US stock market riding at record highs and extreme overvaluations while Chinese equities are at rock bottom valuations and at 15 years lows, there are very large risks of negative wealth effects in the US and positive wealth effects in China,
Without having to go deeper in details, and there are so many metrics that could be used objectively, we are far more worried by a major debt, financial and economic crisis in the US than in China.
Commentators should do their homework … But as is the case with the Western stock markets at the moment, narratives – even unsubstantiated – drive sentiment …
Next Week will determine the direction of equity markets for the remainder of the year
With equity markets driven by technicals, sentiment and algorithmic trading, it is paramount to have a clear sense of what can happen, and we are at a crucial juncture.
After the irrational extension that started in April 2023 with the infatuation with AI and the Seven Magnificent, the US SP500 marked an important top at 4607 on July 27th before turning down as we expected on the release of Apple Inc’s Q2 results.
In August the major indexes fell by 4.75 %, their sharpest downdraft since March 2023, and have rebounded to 4515 as of Friday’s close.
The most probable action over the coming weeks is to see a test of major support in the 4270-4350 region and next week should see the start of that down move.
But what is important is the nature of the coming market decline to that support.
This will tell us whether the market is setting up for a crash as we look towards the end of the year or the beginning of 2024, or if the market will be simply pulling back correctively, before testing the upside again towards the January 2022 all time high at 4800.
Although the fundamentals, valuations, participation and flow of funds argue on favour of the former scenario, the current market environment leave both of these potentials very much on the table.
If the drop into the 4300 support region is an impulsive structure, then we shall prepare for what has been our core scenario all along : a potential market crash taking us towards levels well below those struck in October 2022, with the 2800 / 3200 target by year end or the first half of 2024.
However, if the market pulls back in a clearly corrective fashion into that support over the coming weeks, then the likelihood of another attempt to the upside is likely.
In both cases, the moves will be driven by much sharper moves in the technology and magnificent Seven Stocks. Watching Apple, Microsoft and NVIDIA will tell us all about the next stages and any breakdown in NVIDIA will mark the end of the AI Investment Bubble.
MAXIN ADVISORS Weekly Market Review
3rd September 2023
Macro Economic Highlights
US Economy Adds More Jobs Than Expected in August
The US economy added 187,000 jobs in August 2023, compared to the downwardly revised 157,000 in July and more than market expectations of 170,000. Still, it was the third consecutive month with job gains falling below the 200,000 threshold, indicating a gradual easing of labor market conditions, largely attributed to the Federal Reserve’s significant interest rate hikes aimed at cooling down inflation. Employment continued to trend up in health care (+71,000), leisure and hospitality (+40,000), social assistance (+26,000), and construction (+22,000). On the other hand, transportation and warehousing lost 34,000 jobs, as the bankruptcy of Yellow, a major trucking company, left about 30,000 workers without jobs. Information employment changed little (-15,000), with employment in motion picture and sound recording industries decreasing by 17,000, reflecting the absence of striking Hollywood actors, who are not counted as employed.
US Wages Rise Less Than Forecast
Average hourly earnings for all employees on US private nonfarm payrolls rose by 8 cents, or 0.2%, to $33.82 in August 2023, after a 0.4% advance in the prior month and below market estimates of a 0.3% increase. It was the smallest rise in average hourly earnings since February 2022. In August, average hourly earnings of private-sector production and nonsupervisory employees rose by 6 cents, or 0.2 percent, to $29.00. Over the past 12 months, average hourly earnings have increased by 4.3%, following a 4.4% rise in the prior month and slightly below market estimates of a 4.4% advance.
US Manufacturing PMI Revised Lower
The S&P Global US Manufacturing PMI was revised higher to 47.9 in August 2023 from a preliminary of 47, and compared to 49 in July. The manufacturing sector has contracted every month since November 2022 except for a brief stabilisation in April, and the latest PMI reading was in line with the average over this period. A sharper fall in new orders led to a renewed contraction in output, while firms continued to deplete their backlogged work and stocks of finished goods. Nevertheless, manufacturers continued to raise employment to support expected growth of workloads, although at the slowest pace since January. On the price front, average input prices rose for the second month running, and at a slightly faster rate. Higher costs continued to be passed on to customers, as output prices rose at the fastest pace in four months. Looking ahead, output expectations were the weakest in 2023 so far.
Canadian GDP Unexpectedly Stalls
The Canadian GDP stalled in the second quarter of 2023, missing market expectations of a 0.3% expansion and failing to build on the 0.6% growth rate in the previous three-month period. The result underscored that higher interest rates from the Bank of Canada are being transmitted at a greater extent to the Canadian economy, backtracking from robust growth earlier in the year. Investment in inventories fell by CAD 5.03 billion in the period, extending the CAD 8.18 billion drop from the earlier quarter, while housing investment shrank by 2.1% to consolidate the effect of higher borrowing costs and their pressure on mortgage demand. Additionally, imports of goods and services jumped by 0.5%, more than offsetting a 0.1% increase in exports to spark a negative growth contribution from net foreign demand. Meanwhile, final consumption expenditure advanced 0.2%. On an annualized basis, the Canadian GDP contracted by 0.2%, well below market expectations of a 1.2% expansion.
Canadian Manufacturing PMI Falls to Post-Pandemic Low
The S&P Global Canada Manufacturing PMI sank to 48 in August of 2023, the most since the pandemic-drive crash in the second quarter of 2020 and pointing to the fourth consecutive month of contraction in Canadian factory activity. New orders fell at the quickest pace since March, with firms stating that clients are retaining a cautious attitude to spending, especially in the domestic market. Consequently, output sank at the fastest pace since the start of the year, despite the thirteenth consecutive month of cleared outstanding work. Additionally, low demand for goods drove factories to cut purchasing activity and use existing stocks, while staffing levels were lowered for a fourth consecutive month. In the meantime, input costs advanced for a third straight period, translating to higher output charges. Amid the deteriorating backdrop, business confidence slipped to its lowest since January.
UK Manufacturing Downturn Deepens in August
The S&P Global/CIPS UK Manufacturing PMI was revised slightly higher to 43.0 in August 2023, up from the preliminary estimate of 42.5. Nevertheless, this reading remained below July’s 45.3 and represented the lowest point since May 2020, indicating a significant deterioration in operating conditions. The rate of output decline accelerated to its steepest in a year and ranked among the fastest in the survey’s history. Additionally, the contraction rates for both total new orders and new export business were among the steepest observed outside of the 2007-08 global financial crisis and the COVID-19 pandemic. Staffing levels were reduced for the 11th consecutive month and backlogs of work saw their most significant decrease since April 2020. On the pricing front, purchasing costs experienced the most significant drop since January 2016, while selling prices decreased marginally. Lastly, business confidence reached a four-month high, driven by hopes for a market resurgence.
Austria Q2 GDP Contracts More than Initially Thought
The Austrian economy shrank by 0.7% on quarter in the second quarter of 2023, compared to a preliminary estimate of a 0.4% fall and following an upwardly revised 0.4% expansion in the previous period. The downturn was driven by weakening private consumption (-0.4% vs 0.7%), due to lower household consumption (-1.4% vs 2.2%) and fixed investment (-2.1% vs flat reading). Meanwhile, government spending rebounded (1.9% vs -2.6%). Regarding net trade, exports of goods and services picked up (3.7% vs 1.3%) while imports rose modestly (1% vs 0.8%). On a yearly basis, the country’s GDP decreased by 1.1%, more than an earlier reading of 0.3%, contrasting an upwardly revised 1.9% rise in the prior period.
Italian GDP Contraction Revised Higher
The Italian GDP contracted by 0.4% quarter-on-quarter in the three months leading to June 2023, revised higher from the advance estimate of a 0.3% contraction and declining from the 0.6% growth rate in the previous quarter. The result underscored the Italian economy’s sensitivity to higher borrowing costs from the ECB, abruptly backtracking data from earlier in the year that reflected an extent of resilience. Private consumption stalled in the period, loosely holding the 0.7% expansion from the earlier quarter, while government consumption sank 1.6% after rising by 1.7% in the March quarter, in line with government pledges to rein in finances. In the meantime, gross fixed investments contracted by 1.8%, more than erasing the 0.8% drop in the first quarter. Additionally, net foreign demand was neutral to the the Italian GDP growth, with both imports and exports shrinking by 0.4%. Compared to the previous year, the Italian GDP expanded by 0.4% in Q2.
Eurozone Factory Activity Continues to Contract at Sharp Rate
The HCOB Eurozone Manufacturing PMI came in at 43.5 in August 2023, up from July’s 38-month low of 42.7 and compared with the preliminary estimate of 43.7. The reading was still indicative of another sharp worsening in the health of the euro area manufacturing economy, as total new orders and new export business declined at record rates and backlogs of work were sharply reduced. Meanwhile, factory employment levels fell for a third consecutive month in August, and purchasing activity was slashed once again as companies maintained their efforts to run down stocks. On the price front, input costs fell sharply and output prices to dropped for a fourth successive month. Lastly, there was an improvement in optimism during August, despite the rapid and broad deterioration in sector conditions seen on the month.
German Manufacturing Still Facing Contraction Challenges
The HCOB Germany Manufacturing PMI was confirmed at 39.1 in August 2023, marking the second-lowest reading since May 2020 and still firmly within the sub-50 contraction territory. Output declined at the fastest pace since the initial COVID shutdowns in spring 2020, and new orders dropped the most in over three years due to customer uncertainty, weakness in the construction sector, and a general lack of appetite for investment. Additionally, new export orders saw a significant decline, driven by reduced sales to China and across Europe. Factory employment fell modestly as firms were hesitant to implement large-scale reductions in staffing capacity. On the price front, both input costs and factory gate prices decreased. Finally, manufacturers remained pessimistic about production prospects for the forthcoming year, altough business sentiment picked up slightly from July’s eight-month low.
French August Manufacturing PMI Revised Lower
The S&P Global France Manufacturing PMI was revised slightly down to 46 in August 2023, compared to a preliminary estimate of 46.4 but above July’s 45.1. It marked the seventh straight month of contraction in factory activity, led by a sharp and accelerated decline in overall new orders amid sluggish market conditions. Subsequently, output levels fell solidly for the fifteenth month in a row, as well as purchasing activity, which recorded the quickest decline in over three years. Additionally, employment levels recorded the most substantial drop in over three years, as firms tried to align staffing capacity with lower production requirements. On the price front, input prices continued to fall sharply, on lower raw material and energy prices. The decrease in output charges was the fastest since August 2016, as part of efforts to remain competitive. Looking forward, French manufacturers were at their most pessimistic since May 2020 due to concerns surrounding the demand outlook.
Italian Manufacturing Activity Declines for 5th Month
The HCOB Italy Manufacturing PMI rose to 45.4 in August of 2023 from 44.5 in the previous month, missing market estimates of 46 to mark the fifth consecutive contraction in Italian factory activity, and reflecting an increasing impact from the ECB’s tightening cycle. New orders for manufactured goods fell at a slightly slower, albeit historically severe pace, with firms citing reduced client confidence, client destocking, recession worries, and poor weather. Consequently, output also extended its downturn in the period despite the 15th consecutive cut in outstanding work. The poor demand conditions drove manufacturers to cut purchasing activity at a historical pace, as low production limited inventory drawdown. At the same time, firms’ headcount was reduced for the first time in three years. On the price front, improved supply chains and low commodity demand drove input prices to decline for another period, and increased competition resulted in lower output charges as well.
Spain’s Factory Activity Contracts for 5th Month
The HCOB Spain Manufacturing PMI fell to 46.5 in August 2023, the lowest this year and compared to 47.8 in July. The reading missed the market estimates of 48.8 and marked the fifth consecutive period of deteriorating factory activity due to weakened foreign and domestic demand. New orders contracted at one of the sharpest rates since the outbreak of the COVID-19. The reduction in output volumes and purchasing activity also deepened. Amid lack of sales and reluctance to build stocks, manufacturers diverted resources towards the completion of pending workloads. Inflations-wise, both input and output charges continued to decline, albeit at the softer pace. The business sentiment rose to the six-month high, as manufacturing firms hoped for an uplift in demand in the next year. This optimism was supported by the first increase in hiring in three months. Commenting on the PMI data, the economist at Hamburg Commercial Bank, said: “In the short term it will get worse before it gets better.”
French Public Deficit Widens in Jan-Jul
France’s government budget deficit widened to EUR 168.99 billion in January to July 2023, up from 131.22 billion in the same period last year. Total expenditure rose by 5.4 percent to EUR 319.25 billion, while revenues declined by 7.7 percent to EUR 178.05 billion. Moreover, the Treasury special accounts, which track the balance of inflows and outflows of targeted revenues and outlays, for example receipts from local government, recorded a shortfall of 27.79 billion, compared with a gap of EUR 21.11 billion in the same period a year ago.
Brazil Trade Surplus Wider than Expected
Brazil recorded a trade surplus of $9.8 billion in August of 2023, widening by 137.8% from the $4.09 billion in the corresponding month of the prior year and remaining close to the record-high surplus of $11.3 billion in May, and beating estimates of $9.75 billion. Exports grew by 1.4% from August of 2022 to $31.21 billion, led by agriculture growth of 16.2% to $7.75 billion . Meanwhile, sales from extractive industries decreased slightly ( -0.3% to $6.99 billion) and manufacturing industry (-3.9% to $16.24 billion). In the same time, imports plunged by 19.6% to $21.44 billion as purchases from transformation industries (-18.3% to $19.77 billion), extractive industries (-32.3% to $1.15 billion), agropecuary goods (-35.3% to $0.37 billion) dropped sharply.
Mexico Factory Activity Eases in August
The S&P Global Mexico Manufacturing PMI fell to 51.2 in August 2023 from 53.2 in July, remaining in expansionary territory for the seventh straight month but signaling only a slight improvement in the health of the sector. There were further, albeit softer, expansions in total new orders and exports. However, production growth was halted by slower sales growth and sufficient stock levels at some units. Input buying growth eased, while employment was broadly stagnant. On the price front, a sharper increase in input costs contrasted with a third successive reduction in selling charges.
The Week Ahead
US markets will be closed on Monday in celebration of Labor Day. Later in the week, investors will be anticipating the release of ISM Non-manufacturing PMI survey, which is likely to signal a modest deceleration in the country’s service sector. Alongside this, the US is releasing various other important economic indicators, including data on factory orders, foreign trade, IBD/TIPP Economic Optimism, weekly jobless claims, as well as the final readings of the S&P Global Services PMI and second-quarter labor productivity. Elsewhere in America, the Bank of Canada will likely hold interest rates at current levels as policymakers adopt a wait-and-see approach to observe the effects of the latest cumulative policy tightening on price pressures and activity. The country’s employment report, Ivey PMI, and trade balance will also be in the spotlight, as well as Mexico’s inflation and consumer morale and Brazil’s industrial output and S&P Global Services PMI.
In Europe, investors await final figures for the Euro Area’s Q2 GDP and Germany’s August inflation rate, as well as updated S&P PMIs. Meanwhile, industrial production is anticipated to decline for a third consecutive month in Germany and for the second consecutive month in France. Additionally, it is likely that retail sales in the Euro Area also dropped for the second straight month in July. Other data to follow include Germany’s balance of trade; Spain’s unemployment change; Switzerland’s Q2 GDP and unemployment rate; and Turkey’s inflation rate and foreign trade. In the United Kingdom, the economic calendar will be soft, with important releases including the final S&P PMIs and Halifax House price index.
In China, a batch of trade data for August will offer further insights into the country’s recent resource demand after PMI figures for the period reflected a slightly better outlook than expected, tempering perspectives that Beijing is willing to let its economy run cold before more support. In Japan, investors await updated current account figures with July’s transactions. Elsewhere, South Korea and the Philippines will divulge their inflation rates for August, while monetary authorities Malaysia and Israel will decide on their policy rates.
In Australia, a week with major releases will be headlined by second-quarter GDP data, set to show another period of consistent growth. In the meantime, the RBA is expected to hold its cash rate at 4.1% as the latest data consolidated evidence of disinflation and unemployment ticked higher. Other major releases include the trade balance for July and the Ai Group Industry index for August.
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