Inflation in the United States keeps receding stoking hopes of a slowdown in U.S. Fed rate hike. For context, MoM inflation was flattish at 0.2% in July compared to 0.2% in June and the year-high of 0.5% in February. This can be partly explained by the import price index which had slowed down by -0.2% in June and would likely have a repeat in July. The interest rate stance of the Fed is clearly that of a weaker hawkish position. Fed’s balance sheet maintained its contraction from US$8.71tn at the end of March to US$8.21tn in August; suggesting more sale of treasury instruments to mop up liquidity. The fed added another 25bps to interest rate and arriving at 5.50% level. Coincidentally, S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) inched higher to 49.0 points for July from 46.3 points in June, indicating marginal improvement in manufacturing activities, albeit, with an overall contraction. However, a slower expansion was noted in the service sector at 52.3 points in July from 54.4 points in June. This would likely explain the second consecutive slowdown in unemployment rate to 3.5% in July from 3.7% in May. Evidently, there was a marginal bulge in real sector supply activities in the U.S. in July. From the demand side, retail sales growth remains below 1% at 0.2% in June, which implied that Fed’s rate hike has had some effect in taming consumer goods demand. With inflation slowing down and no real macroeconomic shock (as Q2 QoQ growth hit 2.4% compared to 2.2% in the previous quarter), U.S. consumers are upbeat about the economy as consumer confidence index printed higher at 117.0 points in July from 110.1 points in June.
Contrary to the U.S., unemployment rate in Canada garnered momentum for the third consecutive month rising to 5.5% in July from 5.0% in April. Analysts’ reports attributed this to the failure of interest rate to abate. Despite the lack of reprieve, the Bank of Canada raised the interest rate by 25bps to 5.0% in July. On the flip side, while manufacturing activities contracted, the contraction was slower. This is based on S&P Canada Manufacturing Purchasing Managers Index (PMI) which stood at 49.6 points in July against 48.8 points in June.
China witnessed its first deflation for the year as YoY inflation hit -0.3% in July following the steady decline in inflation since January. This is on the back of lower cost of production as Producer Price Index (PPI) maintained its contraction at -4.4% in July from -0.8% at the beginning of the year. Q2-2023 economic growth printed at 6.3% YoY (compared to 4.5%) and 0.8% QoQ (compared to 2.2%). This indicated that the world’s leading manufacturer had a slowdown in production activities. For context, manufacturing PMI stood at 49.3 points in July from 49.0 in June. Of course, slower production levels can coincide with cheaper production costs in the event that there are forced conditions limiting production activities. China’s COVID controls are not completely repealed yet; hence, the economy is clearly yet to return back to pre-pandemic production levels and of course, the base effect continues to explain most (not all) of the big YoY economic growth. The weaker-than-expected QoQ growth would also explain why unemployment stayed flat at 5.2% from April to June.
The outlook from now till end of October is a slow improvement in manufacturing output and economic growth in the U.S. and China. However, the growth path for Canada is slightly bleak. Consumer goods demand will likely continue to shrink as interest rate take on a lagged impact. Inflation in U.S. and China will likely print closer to target levels, but Canada’s inflation gap may not close significantly. At most, there will likely one more 25bps interest rate hike by the Fed. The risks to this outlook include the rate of spread of the EG.5 variant of the coronavirus; reluctance of central bankers to pause rate hike; lingering Russia-Ukraine war and the impact on commodities prices; and excessive fiscal policy accommodation.
Written by Michael Ogunremi
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