Trade concerns seemed to fizzle out over the summer.  A political framework deal was reached with the EU before the 90-day suspension drew to a close.  We also had higher tariffs on India (linked to Russian oil purchases), more meetings and offers, and another 90-day reprieve for China.  It feels like everyone is quite bored with it now. Businesses and economies simply go on, but lumpy and difficult to decipher economic data will continue to make the job of policy makers more difficult.

The trends we have talked about for some time remain very clear.  The US economy continues to expand, driven by investment spending and the AI capex boom, with little or no evidence of inflationary pressures.  Rate sensitive sectors of the economy such as housing are feeling the strain of rates that are still in restrictive territory. Employment growth appears to have stalled over the summer, but none of the indicators suggest it is going into reverse – it has simply slowed.  But the indicators do suggest that some insurance action from the Federal Reserve is warranted.  Labour force growth has also slowed, which is keeping the unemployment rate remains at low levels, but a stalled labour market sits poorly with an economy that is growing at ~3% p.a.

US

The most (only?) interesting economic data over the summer were the monthly payroll reports in the US.  Published on the first Friday of every month, the payroll data is the first indicator of the month that gives investors a steer on how the US economy is progressing.  Markets react, sometimes wildly, to what might seem like large misses or beats in this one data print.  Embedded within this are two reports, the larger Establishment Survey (which gives us the number of jobs created) and the Household Survey (which gives the unemployment rate), and there is a lot of information therein.  Let’s leave aside the fact that 200,000 jobs vs 100,000 jobs in an economy of 160mln workers is little more than statistical noise, and numbers will be revised for years to come.  The July report (released in early August) was not only on the weak side (+73,000 jobs vs +104,000 exp), but the apparent strength of the prior two months was revised significantly downwards, by 258,000 jobs.  This was the largest revision in history, outside of the pandemic, and the data now shows that the employment market pretty much stalled in May and June.  Furthermore, the August report (released in early September) showed further small downward revisions and a weak headline number of just +22,000. Add to that the preliminary benchmark revisions which will reduce headline employment by more than 900,000, and the employment element of the Fed’s dual mandate is flashing warning signals for a central bank that has kept interest rates at 4.5% since late last year.  Coupled with yet another month of non-existent tariff-induced inflation, a series of insurance cuts to support the rate-sensitive sectors of the economy are clearly needed, and this process has begun with this month’s rate cut.

Europe

The ECB has cut rates quite aggressively by ECB standards, and markets have taken on board the hawkish commentary that began with June’s rate cut (to 2%), with only a 40% probability of one more rate cut over the next year being priced.  While the policy rate is approaching neutral, there is a distinct lack of any material growth in the European economy.  There is clear evidence that inflation is returning to the ECB’s effective target, the trade deal with the US makes retaliatory tariffs by the EU less likely than ever, and the strength of the euro and the exposure of the economy to global trade trends means the ECB can easily afford to move to an accommodative stance.  The German stimulus is a positive, but not enough to spark a large rebound in the economy, particularly as there appears to be no progress on delivering this spending, it has become apparent over the summer that the new infrastructure fund will partly finance investment projects that previously belonged in the core budget, and will therefore do little to improve Germany’s potential growth rate.

China

Trade concerns mean the economic picture remains clouded, there has clearly been persistent front-loading of trade, but there has been a moderate improvement in sentiment of late with a recovery in PMI indicators.  The outlook for the Chinese economy however remains heavily dependent on where the tariff levels finally settle, and despite ongoing talks and de-escalation we have seen, these remain very high and will likely constrain growth until more reasonable levels are agreed on.