US macro data stronger than expected
US data remains resilient with bullish undertones for risk assets, as PCE inflation aligns with expectations. UK and Australia face slowing growth and mixed inflation signals, shaping central bank policy.
Weekly highlights
Largely as expected
Largely as expected
Big jump from July
Stronger than expected
Worse than expected
Weakening
Mixed details
Impact of subsidies
Holding steady
US: Undertones of resilience in US data
Essentially every US data release this week came in stronger than anticipated. A big surge in new home sales in August, an upward revision to the final read on Q2 GDP (from 3.3% to 3.8% seasonally adjusted annualized), a beat on consumer spending and a decline in unemployment claims, all equated to an overall message of macro resilience.
Importantly, the two inflation data points released this week—PCE deflator and the University of Michigan consumer inflation expectations updates—were both in line with or even better than expected. Relative to the preliminary release, both the short- and long-term inflation expectations in the Michigan survey were a little softer (though still higher than the month before). The PCE inflation updates, so closely watched in the context of the Fed’s renewed easing cycle, were also encouraging. Admittedly, overall PCE prices rose 0.3% MoM on sizable increases in both food and energy, but core prices advanced a more modest 0.2% and the prior month was revised a touch lower. Headline PCE inflation stood at 2.7% YoY in August while core PCE inflation was steady at 2.9%. Both were in line with our expectations. We suspect only minimal further increases from here through year-end, which should allow the Fed to deliver on the two remaining rate cuts embedded in the latest dot plot for 2025.
The critical question is whether this momentum continues. We suspect it may be broken at some point over the next several weeks, at least in regard to labor market data. As former government employees who took advantage of the DOGE deferred resignation program come to the end of that arrangement, initial unemployment claims should start to move higher again over the course of October. We look at this as a soft patch with the Fed easing helping to stabilize labor market conditions but worries about a recession will likely revive again.
UK: PMI hits lowest level since May
Private sector output rose for a fifth straight month in September, but growth slowed, demand stayed weak, costs increased, and uncertainty dampened employment and business confidence. Service activity grew slightly while manufacturing, especially in automotive supply, declined. New orders fell but stayed above the yearly average. In particular, export orders dropped to the US and Europe but ticked up in emerging markets. Both sectors reduced backlogs due to excess capacity. Meanwhile, employment remained low and pricing trends indicated reduced inflationary pressure within the services sector, possibly shifting Bank of England (BoE) policy towards a more dovish stance.
Ongoing labor market and growth challenges are key risks. While further rate cuts seem likely, timing is uncertain. We expect forthcoming inflation reports to come in just below the Bank’s projections and anticipate one more rate cut this year.
Australia: Firm CPI data, RBA to hold
Australia’s August CPI was stronger than expectations and at the top of the official target range at 3.0% YoY. The Reserve Bank of Australia (RBA) officials testified in parliament that they would continue monitoring the quarterly CPI data closely, even though the monthly CPI will become the ‘headline’ in two months due to residual seasonality issues. The Bank could comfortably hold its policy rate at 3.60% next week; however, it may place greater emphasis on the Q3 CPI data scheduled for release on October 29. We recently revised our cash rate forecast to 3.35% by December, up from 3.10%.
Looking at the August CPI, there were notable increases in housing (4.5%), food and non-alcoholic beverages (3.0%), and alcohol & tobacco (6.0%). Electricity subsidies continue to distort the picture, with prices rising annually (24.6% YoY), but falling sequentially (6.3% MoM). The annual rise was primarily driven by the expiration of state subsidies in Queensland (A$1,000 rebate), Western Australia (A$400), and Tasmania (A$250), while the sequential decline was due to households in New South Wales and the Australian Capital Territory receiving their first payments from the extended Commonwealth rebates this year. The impact was more pronounced in Western Australia, which had the Commonwealth rebate in place last August and will reintroduce it in October.
The more telling measure—trimmed mean CPI—eased a tenth to 2.6% YoY, indicating that underlying price pressures, excluding electricity and other volatile components, remain well-contained. We maintain our view that inflation will remain within the RBA’s target range over the coming year. That said, the labor market warrants close attention, as momentum has clearly faded, as noted last week. If the labor market recovers in the coming months, the RBA may opt for a single rate cut in November. However, if conditions deteriorate further, there is a strong possibility of an additional cut in December..
As such, job vacancies declined 2.7% QoQ in the three months to August, led by a 3.4% drop in private sector vacancies. Most notably, there are now 2.0 unemployed individuals for every job vacancy, the most since February 2021.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.