The latest data released shows that the U.S. manufacturing industry continued to contract in September, but inflation has picked up, and there is still considerable disagreement within the Federal Reserve about the future path of interest rate cuts.
At the same time, the Eurozone's composite Purchasing Managers' Index (PMI) fell below the 50-point threshold in September, and due to the slowdown in service sector inflation and the accelerated deterioration of the economy, the European Central Bank is very likely to cut interest rates again in October.
The U.S. manufacturing industry has shrunk for the third consecutive month.
On September 23rd, local time, data released by S&P Global showed that the U.S. manufacturing industry contracted for the third consecutive month in September, setting a 15-month low, and the expansion rate of the service industry slowed slightly, with the composite PMI growth rate declining.
Specifically, the U.S. composite PMI in September was 54.4 points, slightly higher than the 54.3 expected by economists, and fell by 0.2 points from the previous value of 54.6 in August.
The U.S. composite PMI in September is still above the 50-point threshold, indicating that the U.S. economy is expected to achieve robust growth in the third quarter, but also shows some signs of slowing growth.
In September, the service industry PMI was 55.4 points, lower than the 55.7 in August.
This is the 22nd consecutive month of expansion in the service industry PMI.
Among them, the service industry price output sub-index rose to 54.5, setting a new high since March 2024.
The input prices of service providers increased at the fastest pace in a year.
Manufacturing activity fell to a 15-month low of 47 points, with expectations and the previous value in August being 48.6 and 47.9, respectively.
The manufacturing PMI in September is still in a contractionary state and has shrunk for the third consecutive month.
The new orders sub-index fell to 42.7, setting a new low since December 2022, and has shrunk for three consecutive months.
The employment sub-index fell to a new low since June 2020.
The order volume contracted sharply, thus dragging the factory employment to shrink rapidly.
Surveys show that more and more manufacturers have indicated that they need to slow down operations due to weak sales.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that the data indicates that the U.S. economy is growing in a "healthy" direction in the third quarter, but the weakness in manufacturing and the increase in political uncertainty pose a "significant obstacle" to the economic outlook.
At the same time, prices are rising at the fastest pace in six months, which may trigger concerns about inflationary pressures, indicating that the Federal Reserve cannot completely shift its focus away from its inflation target.
In addition, the comprehensive PMI data in September indicates that output continues to expand strongly, but there are also some warning lights flashing, especially when manufacturing continues to decline and business confidence falls worryingly, the U.S. economic growth is overly dependent on the service industry.
Furthermore, the sub-index of the index, the Future Output Index (which measures optimism about economic output in the next year), has reached the lowest level since October 2022, indicating that "corporate confidence, demand, hiring, and investment are all restrained by the uncertainty surrounding the U.S. presidential election," casting a shadow over the business outlook for many companies in the coming year.
The path of the Federal Reserve's interest rate cuts is still unclear.
Analysis points out that although the U.S. PMI indicates that the employment trend in September has further deteriorated, the price indicators of the September PMI data issue a warning that the Federal Reserve may need to implement further interest rate cuts cautiously in the future.
Currently, both goods and service prices are rising at the fastest pace in six months, and the input costs of the service industry, mainly including wages and salaries, are rising at the fastest pace in a year.
The financial blog Zerohedge commented that this is stagflation, not the result that the Federal Reserve hoped to see when cutting interest rates by 50 basis points.
From the views expressed by officials in speeches after the interest rate cut last week, there are also inconsistencies within the Federal Reserve on the decision to cut interest rates.
Federal Reserve Governor Bowman believes that the 50 basis point interest rate cut last week may send the wrong signal to the outside world that the Federal Reserve has won the battle against high inflation, and a 25 basis point interest rate cut is more appropriate.
Another governor, Waller, is more concerned about the employment situation.
He believes that if the job market deteriorates further, another 50 basis point interest rate cut can be considered.
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said in a speech on the 23rd that the reason for supporting a substantial interest rate cut of 50 basis points at the September meeting instead of a smaller cut was mainly because inflation and the development of the job market are "much faster than I imagined this summer."
Therefore, the time to normalize monetary policy is earlier than previously expected.
Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said on the 23rd that after the first 50 basis point interest rate cut, the Federal Reserve will slow down the pace of interest rate cuts.
Kashkari said that the substantial interest rate cut reflects an adjustment in the Federal Reserve's policy, shifting from focusing on inflation overheating to focusing on the weakening job market.
Looking forward, unless there are significant changes in the data, the Federal Reserve may adopt a slower pace of interest rate cuts in the next interest rate cut cycle, returning to a more traditional 25 basis point interest rate cut model.
At present, there is also considerable disagreement among the outside world about the path of interest rate cuts in this round of the Federal Reserve's monetary easing cycle.
This week, Federal Reserve Chairman Powell and several local Fed presidents and other officials will attend public events and give speeches, which are expected to provide clues about the pace and strength of future interest rate cuts.
According to a Federal Reserve observation indicator from the Chicago Mercantile Exchange, the market expects that by the end of this year, the target range for the federal funds rate will be between 4% and 4.25%, which means that the Federal Reserve will cut interest rates by a total of 75 basis points in the next two monetary policy meetings.
According to the latest forecast released by the Federal Reserve, members of the Federal Open Market Committee expect the "neutral" interest rate level to be around 2.9%.
Looking forward, concerns about the inflation outlook are a major factor that influences the choices of Federal Reserve officials.
Therefore, in the various economic data to be released this week, the inflation indicator closely followed by the Federal Reserve - the Personal Consumption Expenditure (PCE) price index will attract more attention.
In addition, some Wall Street strategists believe that as the Federal Reserve pays more attention to the downside risks of the job market, investors also need to pay attention to the changes in the number of first-time unemployment benefit applicants last week, and the health of the job market may have a greater impact on the Federal Reserve's decision-making.
The Eurozone's September PMI fell below the threshold line.
The Eurozone's important leading economic indicators deteriorated significantly again in September, and the composite Purchasing Managers' Index (PMI) fell below the 50-point threshold.
Analysts pointed out that the end of the Olympic economic effect has brought the Eurozone back to the original state of stagnant growth.
With the significant improvement in the inflation outlook, the European Central Bank's focus will further shift to reducing the suppression of growth, and the possibility of the Eurozone cutting interest rates again in October has greatly increased.
Survey data released by S&P Global and Hamburg Commercial Bank on the 23rd showed that in September, the preliminary value of the Eurozone's manufacturing Purchasing Managers' Index (PMI) was 44.8, lower than the expected median of 45.6 by market survey economists; the service industry PMI index for the month was 50.5 points, also showing a decline, far below the market expectation of 52.4.
Affected by this, the Eurozone's composite PMI was 48.9 points, continuing to decline, and significantly below the expected 50.6, setting a new low for 8 months.
Looking at the performance of the two major economies in the Eurozone, Germany's leading economic indicators deteriorated significantly again in September, and the degree of weakness in manufacturing and services was far beyond expectations.
Among them, the manufacturing PMI set a new low for a year, pushing the composite PMI to a 7-month low and further falling below the 50-point threshold; France, with the disappearance of the Olympic economic effect, saw a significant decline in the service industry PMI below the 50-line, and the composite PMI also returned below the 50-point threshold.
Cyrus De La Rubia, Chief Economist at Hamburg Commercial Bank, pointed out that the official employment data in the Eurozone will deteriorate in the next few months.
Due to the slowdown in service sector inflation and the accelerated deterioration of the economy, the European Central Bank is very likely to cut interest rates again in October.
Bert Colly, Senior Economist at ING Bank Group, said that with the end of the Olympics, the Eurozone's service industry PMI has resumed its downward trend.
At the same time, the inflation outlook has significantly improved.
Although wage growth and transportation costs are still high, the rise in sales prices has slowed down.
The Eurozone economy currently shows almost no signs of recovery.
As inflation approaches the European Central Bank's 2% target again, its main focus has shifted from inflation to growth.
