Weekly Update 10/11/2024: US Economy Remains Resilient as Earnings Season Kicks Off
- JP Morgan releases earnings beating profit and revenue expectations
- Wells Fargo releases earnings beating profit expectations on strong investment banking revenues
- Pfizer activist investment firm Starboard Value takes $1 billion stake in the company
- RTX wins $736 million US Navy contract
Domestic Economic News
Underlying US inflation rose more than forecast in September, representing a pause in the recent progress toward moderating price pressures. The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a second month, disrupting a string of lower readings, Bureau of Labor Statistics figures showed Thursday. The three-month annualized rate advanced 3.1%, the most since May, according to Bloomberg calculations. Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure rose 0.2% from the prior month, boosted by housing and food, which accounted for over 75% of the advance. Goods prices rose as well after reliably falling over the past year. The higher-than-expected inflation figures, along with last week’s blowout US jobs report, will likely amplify the debate as to whether the Federal Reserve will opt for a small interest-rate cut next month or pause after a large September reduction. Officials penciled in another half-point of cuts by year-end, and many have said they’re watching developments in the labor market. “Inflation is dying, but not dead,” said Olu Sonola, head of US economic research at Fitch Ratings. “Coming on the heels of the surprisingly strong September employment data, this report encourages the Fed to maintain a cautious stance with the pace of the easing cycle. The likely path is still a quarter point rate cut in November, but a December cut should not be taken for granted.” The S&P 500 opened lower, two-year Treasury yields declined and the dollar weakened. Traders saw higher odds of a 25-basis-point Fed rate cut next month after the release of the inflation data as well as another report that showed applications for unemployment benefits rose last week to the highest in over a year. The Fed started lowering borrowing costs in September with an outsize 50-basis-point reduction given what had been continued inflation progress as well as a string of weak labor-market data. Minutes of the meeting released Wednesday indicate there was a robust debate over the size of the cut, and officials who have spoken since then say they favor a gradual approach.
Applications for US unemployment benefits rose last week to the highest in over a year, reflecting large increases in Michigan, as well as states affected by Hurricane Helene. Initial claims increased by 33,000 to 258,000 in the week ended Oct. 5, the highest since August 2023. That figure was above all estimates in a Bloomberg survey of economists. Continuing claims, a proxy for the number of people receiving benefits, rose to 1.86 million in the previous week, according to Labor Department data released Thursday. The jobless claims data are likely in for a stretch of volatility in the wake of hurricanes Helene and Milton, complicating efforts by the Federal Reserve to accurately gauge underlying developments in the US labor market. While many people in the southeastern US are unable to work because of the storms’ destruction, some may also have difficulty or delay applying for unemployment benefits. The four-week moving average of new applications, a metric that helps smooth out volatility, rose to 231,000. Before adjusting for seasonal factors, initial claims also rose last week. Besides North Carolina, other Southeastern states affected by Helene saw jumps in applications, including Florida, South Carolina and Tennessee. Michigan has now seen large jumps back-to-back in weekly filings, rising by 10,667 in total over the last two periods. The increase in the week ended Sept. 28 was due to layoffs in manufacturing and management of companies, according to the release.
A measure of prices paid to US producers was unchanged in September, restrained by declines in gasoline, suggesting further progress toward tamer inflation. The producer price index for final demand was flat from August after rising 0.2% in the prior month, according to a Bureau of Labor Statistics report out Friday. From a year ago, it rose 1.8% — the smallest advance since February. A less-volatile measure favored by many economists for stripping out food, energy and trade edged up 0.1%, matching the smallest advance since no change in May 2023. The wholesale inflation data follow the more closely watched consumer price index, which showed Thursday that inflation rose a touch more than forecast in September, on the back of higher costs for shelter, food and apparel. Federal Reserve officials will take both reports into account as they plot out their path for lowering interest rates. Economists parse the PPI data for categories that feed into the Fed’s preferred inflation measure — the personal consumption expenditures price index. Those categories were mixed. Physician care and hospital outpatient care costs were little changed, while airfares rebounded sharply. A measure of portfolio-management fees accelerated slightly. The September PCE price data is due later this month. Treasury yields remained higher and stock-index futures fluctuated after the wholesale figures. Traders continue to expect the Fed to lower interest rates a quarter of a percentage point next month. The Fed kicked off its easing campaign last month with a 50 basis-point reduction after months of cooler inflation and a stretch of moderating payrolls growth. Since then, reports have pointed to stronger job gains and stubborn price pressures, prompting economists to dial back expectations for a November rate reduction to a quarter point.
US consumer sentiment unexpectedly fell for the first time in three months as lingering frustration with a high cost of living offset more sanguine views of the job market. The preliminary October sentiment index declined to 68.9 from 70.1 in September, according to the University of Michigan. The median estimate in a Bloomberg survey of economists called for a reading of 71. Consumers expect prices will climb 2.9% over the next year, up from the 2.7% expected in September and the first increase in five months, the report issued Friday showed. At the same time, they see costs rising 3% over the next five to 10 years, down from 3.1% in the prior month. While the rate of inflation has cooled over the past year, households remain troubled by high prices that they also see outpacing their income gains in the year ahead. A measure of consumers’ perception of their current financial situation dropped to the lowest level since the end of 2022. The share of consumers who expect unemployment to rise in the coming year fell to 31%, the lowest reading in 10 months. “Despite strong labor markets, high prices and inflation remain at the top of consumers’ minds,’’ Joanne Hsu, director of the survey, said in a statement. Still, respondents welcomed the Federal Reserve’s decision last month to start lowering borrowing costs. Their views of buying conditions for durable goods such as cars and major appliances edged up to a four-month high. Looking at homebuying conditions, concerns about high interest rates fell to the lowest in 15 months. But a majority still sees borrowing costs as too high, suggesting further easing is necessary to bolster sales, the report said. The current conditions gauge slipped to 62.7 from 63.3. A measure of expectations fell to 72.9 this month from 74.4 in September.
Interest Rate Insight and the Fed
Federal Reserve Bank of Chicago President Austan Goolsbee said he wasn’t overly concerned with a higher-than-forecast September inflation report and stuck by his view that the US central bank has moved past its singular focus on price pressures. “The overall trend over 12 to 18 months is clearly that inflation has come down a lot and the job market has cooled to a level which is around where we think full employment is,” Goolsbee said Thursday in an interview on CNBC. As we noted above, underlying inflation rose more than forecast in September, data released earlier Thursday showed. The so-called core consumer price index — which excludes food and energy costs — increased 0.3% for a second month, disrupting a string of lower readings. The three-month annualized rate advanced 3.1%, the most since May, according to Bloomberg calculations. The new report, along with a strong September employment report, is likely to support calls for the Fed to move more gradually in the coming months after lowering borrowing costs by a larger-than-expected half percentage point on Sept. 18. Goolsbee, who is considered more willing to cut rates than many of his colleagues said there had been a series of “close-call-type” meetings by the Federal Open Market Committee in recent months. “There will probably be more close call-type meetings,” he said.
Impactful International News
Factory orders in Germany plummeted in August, marking yet another setback for industry in a year when Europe’s biggest economy has failed to deliver a much-awaited recovery. Demand declined 5.8% from July after two consecutive months of increases, data released on Monday showed. That’s the biggest drop since January and far worse than anticipated by any of the 17 economists in Bloomberg survey. The bleak report kicks off a pivotal week for Germany, which will also feature industrial production data on Tuesday followed the next day by the latest economic forecasts from Chancellor Olaf Scholz’s government. With the economy still struggling to shake off fallout from the gas-supply shock in the wake of Russia’s invasion of Ukraine, and Volkswagen AG warning of factory closures, officials are about to abandon hope of achieving any full-year growth in 2024, according to people familiar with the matter. Declining orders point to further weakness at a time when the economy might even have been in recession. The Bundesbank observed last month that gross domestic product may have stagnated or fallen in the third quarter, following a slight drop in the prior three months. The pace of decline was accentuated by large increases the previous month for large-scale transport-equipment orders, according to Destatis, the federal statistics agency. July’s increase was revised higher. Sentiment indicators point to further woes ahead. The Ifo institute’s expectations gauge, drawn from a survey of businesses, dipped in September to 86.3, the lowest since February. Separately, indexes compiled with responses from purchasing managers signaled continuing overall private-sector contraction during the month. With the wider euro-zone economy suffering weakness and inflation pressures showing increasing signs of having dissipated, European Central Bank policymakers are gearing up to deliver another quarter-point cut in interest rates next week.
Company Events
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