U.S. data is running contrary to warning signals from the yield curve
Momentum in the U.S. labor market may actually be building. Favorable declines in jobless claims, down a better-than-expected 8,000 to 209,000 in the August 3 week hints at strong demand for labor. Reinforcing this view, the four-week average of 212,250 is close to 5,000 lower than early July. The results point to resilience in the U.S. economy.
A firming in U.S. inflation in July also confirmed underlying strength in the domestic economy. The Consumer Price Index (CPI) rose 0.3% in July for both the overall and core measures. On a year-over-year basis, the CPI rose to 1.8%, while the core index (excluding food and energy) increased to 2.2%.
Within the CPI, medical care services in July rose 0.5% and 3.3% from a year earlier. Shelter costs in July rose 0.3% for a second straight month and 3.0% on the year. Together, these two components make up about half of all consumer prices and are well above the Fed's general 2% inflation target.
The higher CPI readings are unlikely to deter the Fed from cutting rates in September, but if inflation continues to firm, it would reduce the odds of a cut in December. Fed Chairman Jerome Powell recently offered two main rationales for lowering interest rates. First, a reduction is intended to provide insurance against downside risks from weak global growth and trade policy uncertainty. Second, a cut is intended to accelerate the return of overall inflation to the 2% target.
Business confidence took a step higher in July with improvement in the National Federation of Independent Businesses (NFIB) small business optimism index. The index increased from 103.3 in June to 104.7 in July. The net percent of respondents planning on raising capital expenditures over the next six months increased from 24% to 26%. The net percent of firms expecting the economy to get better over the next six months increased from 16% in each of the past two months to 20%.
The share of respondents with at least one job hard to fill was 39% in July, compared with the 36% in June and matches its high since March. Finding qualified workers remains one of the most significant problems for small businesses.
NFIB Small Business Survey (1986 = 100)
Economic weakness is coming from overseasThe German economy shrank by 0.1% in the second quarter. It is the first contraction in German GDP since the third quarter of 2018. Activity has been hurt by ongoing weakness in manufacturing, with trade tensions and Brexit uncertainty relevant factors weighing on output.
Industrial production fell at a 5.1% annual rate in June. Goods producing industries are in a technical recession and had a meaningful impact to Germany’s second quarter GDP.
China’s activity data was much weaker in July than expected with Industrial Production growth slowing to 4.8% in July from a year ago. Mining and manufacturing sectors led the decline. Retail sales growth also weakened in July, slowing to 7.6% from a year earlier, compared with 9.8% in June. Auto sales were a significant drag. In addition, China’s unemployment rate ticked higher to 5.3% from 5.1%.
Bilateral trade between China and the U.S. contracted in July. The merchandise trade report from China showed that exports to the U.S. fell 6.5% compared to last July for the fourth consecutive year-over-year decrease and the seventh contraction in eight months. Chinese imports of U.S. goods showed a much steeper decline, down 19.1% for the eleventh consecutive monthly contraction. Lack of a meaningful resolution to the trade conflict and China's decision to boycott U.S. food products point to continued weakness in bilateral trade.
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