The Federal Reserve, or US central bank, cut back its key rate for
the third time this year at its October meeting, after previous moves in July
and September. The federal funds rate now stands at 1.5-1.75%, which equates to
the range in the dot plot after correction. The Fed also indicated that it does
not plan to continue cutting interest rates in the near future.
interesting aspect of the Fed’s decisions is that they are not dictated by US domestic trends. GDP grew 1.9% in the
third quarter on an annualized basis, and 90% of this robust figure is driven
by private domestic demand. So we are still seeing the paradoxical situation
where the Fed’s decisions are not driven by the US domestic outlook, and we
will need to keep an eye on this over the months ahead.
interesting aspect of Jay Powell’s press
conference is that he only briefly touched on the situation and the glitches on
the US money market, yetthis is a very worrying factor as the
Fed has injected more than $200bn into its balance sheet to manage this crisis
since mid-September. The Fed’s message is that it is not
that important, but yet it has added $200bn to its balance sheet, given no
explanations and pledged to continue hefty purchases until mid-2020 to ensure
that the market remains liquid. This “move along, there’s nothing to see here”
approach is disquieting, and we will really need to closely monitor this situation.
Christine Lagarde took over from Mario Draghi as ECB President on November 1, and
there are two points worth noting on this change. Firstly, Christine Lagarde seems
to be “Draghi-compatible”, and just like the former Italian ECB President, she
has also made clear her aim of pursuing the development of the euro area by
getting governments more involved and looking more to fiscal policy. She has
taken a much more political stance than Draghi could right from this start, and
this aspect will be both important and very interesting. The euro area lacks a
political dimension, and Christine Lagarde could bring this to the table.
growth figures were
issued for several euro area countries over the week. The non-annualized growth
trend came out at 0.2% for the euro area as a whole, with 0.4% for Spain and 0.1%
for Italy. The French growth figure came to 0.3%, in line with the two previous
lead to 1.2% growth for the euro area as a whole for the full year 2019,
with a projected 1.3% for France, 0.2% in Italy and 2% in Spain, which has now
made up its lag and is posting less vigorous growth.
the breakdown of figures for France,
domestic demand plays a key role. Economic policy is designed to shore up
domestic demand and offset any potential external shocks. It does not drive
growth but it does rein in the risk of break points.
the US, growth we mentioned above for the country came to 1.9% in
the third quarter and 0.5% on a non-annualized basis, which should lead to
overall 2.3% growth for the full year.
ISM index in the US
came out at 48.3 for October vs. 47.8 in September, marking the third month in
a row below the 50 mark. Economic momentum is weaker, and out of the 18 manufacturing
sectors assessed in the survey, only five stated that they are growing.
Domestic demand is also weaker and less robust than a few months ago, so we are
seeing the US economy change pace slightly.
US job market figures were also released, but stats for October were fairly solid with the economy creating 128,000 new jobs, plus the 42,100 that could have been created without the General Motors strike. Average private sector monthly job creation figures YTD come to 154,000, which is a solid but not excessive figure, and fairly close to stats in 2017. The White House’s very aggressive fiscal policy in 2018 had driven figures up.
numbers came to 3.6%, which is very low and the employment rate has increased.
The job market is dynamic, and the yoy wage rate increase is only 3%. Wage
gains are decreasing each month following on from the high of 3.4% in February.
Inflation in the euro area came out
at 0.7% in October vs. 0.8%
in September, with this slowdown mainly triggered by energy’s negative -0.3% contribution
in October. However, this tendency is set to turn around over the last two
months of the year as oil prices collapsed at the end of 2018, so inflation is poised
to increase slightly in November and December.
Looking to the week ahead, we note the global ISM index,
which is the weighted average of composite indices for the manufacturing and
non-manufacturing sectors in the US, and which usually fairly closely tracks GDP
growth trends. September’s figure was particularly low and slightly above the 50
mark, which fits with sluggish growth of 1.5%, so October’s stats will be
particularly important in judging the pace of US growth: if it is excessively
weak, the Fed could well change its strategy to keep rates on hold that it set
out at its latest meeting.
survey global manufacturing sector figure will also be announced on Monday,
and this indicator has pointed to a contraction in world manufacturing since
May. Chinese external trade balance figures for October will also be released on
November 8, and the decline in imports points to weaker Chinese demand, while
stagnating exports reflect lackluster world trade, particularly as it is
dictated by US trade policy.
September’s German industrial orders will be issued
on November 6, and the pace is very much in line with OECD corporate investment
figures. The slowdown trend witnessed since the start of the year is worrying
for future global economic performances.
Have a good week
The post is available in pdf format
- *Posted on my French blog on Monday the 4th (here)