Monthly Global Economic Outlook | October 2024

Looking at the broader economic landscape, it is evident that risks to global growth are increasing, and the likelihood of facing economic challenges now outweighs the chance of avoiding them. China's economy remains unstable, grappling with multiple headwinds, while recent data suggests that a recovery will take time in the Eurozone. Overall, the data points to heightened downside risks for the global economy in both 2024 and 2025.

USA – Wall Street and USD

After the September surprise, the health of the U.S. labor market has become a key focus for FOMC policymakers, especially with the September and October data due in the first week of October and November. November’s NFP numbers will be published a day after the Fed's November meeting announcement, but we will still have JOLTs and weekly reports to refer to. However, the 50-bps pace is unlikely to be repeated, as doing so would cause economic conflicts between different sectors. Fed policymakers also indicated through the dot plot that only 50 bps of cumulative easing is expected by the end of this year.

On the data front, we saw somewhat positive numbers while inflation eased. Let’s review the most important numbers published in September:

On the inflation front, headline U.S. consumer prices rose by 0.2% on a monthly basis in August, matching July’s rate and bringing the annual CPI to 2.5%. The Core CPI increased by 0.3%, slightly higher than the 0.2% expected. We should also note that Core Personal Consumption Expenditures (PCE) increased by 2.8% quarter-over-quarter (QoQ) in the second quarter. Headline PCE Prices also met the 2.5% QoQ forecast for the same period.

On the labor market front, the U.S. economy added 142,000 jobs in August. The unemployment rate fell to 4.2% from 4.3% in July. Average hourly earnings rose 0.4% month-on-month and 3.8% year-on-year. U.S. JOLTs job openings declined to 7.67 million in July, while hires remained steady at 5.5 million.

Economic growth figures were also fine. The latest data shows that while the U.S. Leading Index fell by 0.2%, it was a much better outcome than the 0.6% drop in August. GDP grew at an annual rate of 3.0% in the second quarter of 2024. During the same period, the GDP Price Index remained steady at 2.5%.

However, not everything is acceptable. U.S. durable goods orders beat estimates but lacked growth. Durable goods orders were flat in August, outperforming expectations of a 2.6% decline but falling short of July’s robust 9.9% growth. Additionally, according to the Conference Board’s (CB) report, the U.S. Consumer Confidence Index dropped to 98.7 in September, down from 103.3 in August.

These numbers generally show that the labor market remains resilient, especially with initial jobless claims falling to 218K in the most recent report. While inflation, particularly the Fed’s preferred measure, Core PCE, slightly increased to 2.7%, it remains under control, and GDP growth is still fine despite Fed policymakers’ downgrade.

Despite the 50-bps rate cut, the disappointing economic outlook reflected in the dot-plot data softened market reactions. Regardless of price behavior on the last trading day of September, the S&P 500 gained only 1.54% for the month, and the USD index lost 1.4% from its opening price at the beginning of September.

Looking ahead to October, based on what we know so far, we do not expect any major surprises in the numbers. CPI will likely remain flat at around 2.5%, and unemployment could stay at 4.2%. However, we anticipate slight weakness in retail sales, factory orders, and overall economic activity, which could maintain pressure on both stock and currency markets, prevent stock prices from rising too quickly, and keep the USD from appreciating despite its increasing safe-haven demand.

However, we should not forget the global geopolitical tensions, which, if they escalate further, could alter market behavior.

Regarding currency markets and the U.S. dollar, we believe that by the end of the month, several factors could drive up DXY prices, creating volatile trading days. However, we expect an overall sideways trend for October, around the 100-101 range. In addition to economic data, the contentious election could increase market uncertainty and keep the USD stable until we have a clearer picture of what to expect from the U.S. economy.

On Wall Street, this month could present different conditions as third-quarter earnings reports will be released. Since we do not expect major surprises in economic data or outlooks, earnings reports will likely shape market trends. Broadly speaking, higher rates could support financial companies, while a growing economy reduces the risks of bad loans. Summer holidays may have benefited service-oriented companies, and tech stocks could be boosted by the ongoing AI trends. However, energy and manufacturing stocks may post disappointing results. In the bigger picture, the main trend could remain slightly positive.

In the economic calendar for the U.S. economy, apart from earnings reports, there are many other key data points to watch, including PMIs and JOLTs (1st), Factory Orders and ISM Surveys (2nd), NFP data (4th), CPI (10th), PPI (11th), Retail Sales (17th), Housing Data (18th), Durable Goods Orders (25th), GDP (29th), and finally, Personal Income and Spending numbers on the last day of September.

Eurozone, what can we expect from the ECB?

The Federal Reserve was not the only active central bank in September's monetary policy meetings. The European Central Bank (ECB) lowered its Deposit Rate by 25 bps, as expected, while ECB policymakers emphasized that future rate adjustments would depend on economic data.

With sluggish economic growth and core inflation nearing the ECB's target, we still expect the ECB to continue cutting rates at the same pace—25 bps at every other meeting. The ECB's rate on the Deposit Facility should remain at the current 3.5%. While this approach could support the weakening economy and inflation control efforts, it will also prevent the interest rate spread between the Eurozone and other economies from widening further.

It’s worth noting that despite the high probability of maintaining current monetary policies, with sentiment surveys softening and downside risks to growth increasing, ECB policymakers might surprise markets with a rate cut, although this remains less likely.

On the inflation front, Eurozone CPI rose by only 0.1% in August, bringing annual inflation down to 2.2% from 2.6% in July. Core inflation increased by 0.3% month-over-month, but year-over-year, Core CPI fell to 2.8%, down from 2.9% in July.

The Eurozone Unemployment Rate was registered at 6.4% in July, below the 6.5% recorded in June. Meanwhile, the Business and Consumer Survey Indicator came in at 96.2 in September, below the previous month's reading of 96.5. Business Climate also dropped to -0.72 from -0.62 in August, though Services Sentiment improved to 6.7.

Eurozone Q2 GDP grew by 0.2% quarter-over-quarter, missing the 0.3% estimate and the previous quarter’s growth. Year-on-year, GDP met forecasts with a 0.6% increase in Q2. These figures suggest the ECB may be inclined to break its current pace and cut rates at upcoming meetings, despite the widely held expectation of policy stability.

In the bigger picture, we expect the ECB to hold its main refinancing operations rate at 3.65% and keep the deposit facility rate at 3.5% at its meeting on October 17.

As for economic data, October will begin with EU inflation figures. We expect CPI to remain at 2.2% and Core CPI at 2.8%. On October 3, PMI numbers will be released, and we expect slight progress after two months of contraction. Retail sales, following a 0.1% decline in July, should post a positive reading for August on October 7. Preliminary PMI numbers for September, due on October 24, are also expected to show slight improvement. The same applies to GDP, economic sentiment, and consumer confidence, which will be released on October 30.

Overall, we anticipate a slightly better October for the Eurozone compared to September. Since the USD is expected to move sideways, EUR/USD could show a modestly bullish trend throughout the month.

England, Can Cable go further?

Unlike the ECB and Fed, the Bank of England (BoE) policymakers (MPC) left rates unchanged in September. However, the 8-1 decision to hold the policy rate steady was less dovish than expected. U.K. policy rates are likely to come down before the end of the year, but the BoE is expected to proceed cautiously to prevent inflation from rising amid a broader economic recovery. As a result, we anticipate one rate cut at the November 7 meeting, with rates likely to remain unchanged at the December 19 policy meeting.

Recently published data show a slight easing in consumer inflation, with monthly growth at 0.2% compared to 0.1% in June. Annually, consumer inflation rose by 2.2%, up from 2.0% in the previous month. Core CPI also increased, in line with estimates of 3.6%. These figures suggest that the UK central bank is meeting its inflation targets. On the producer side, inflation fell by 0.1%, a smaller decline than the anticipated 0.3% decrease, following a 0.4% drop in June.

While these numbers indicate a mild moderation in inflationary pressures, the Unemployment Rate fell to 4.2% from April to June 2024, down from 4.4% in the previous period, and below market expectations of 4.5%.

Economic activity data, however, was less optimistic. The Manufacturing Purchasing Managers' Index (PMI) declined from 52.5 in August to 51.5 in September, missing the market forecast of 52.3. The Services PMI also decreased to 52.8, down from 53.7 in August, falling short of the 53.5 estimate.

For October, we expect to see slight improvements in the data after two months of underperformance. On October 3, we anticipate better numbers in the Services PMI report. On October 11, we expect some progress in both Manufacturing and Industrial Production for August, following July's declines. In labor data, the unemployment rate is expected to dip to 4.1% for July to August, with the data released on October 15. Inflation figures, due on October 16, are expected to edge slightly lower towards 2.0%. Finally, on October 25, retail sales numbers are expected to show a 2.5% increase in September, matching the pace in August.

In summary, these data suggest that the BoE and the UK government have been relatively successful in controlling inflation, with a positive outlook for economic activity. This favorable data supports the likelihood of a 25-bps rate cut in the November policy meeting. However, despite this upbeat data, the rate cut might not benefit the British Pound (Cable). After a long five-month bull run, GBP/USD could see some consolidation in the coming period.

Japan and BoJ

Similar to the BoE, the Bank of Japan (BoJ) also opted to keep interest rates unchanged in its latest meeting, which was in line with market expectations. However, the surprise came from the tone of the announcement. The BoJ suggested it is not seriously considering imminent rate hikes. During the press conference following the meeting, BoJ Governor Ueda acknowledged the recent strength of the yen and noted that policymakers have "some time to confirm certain points before making policy decisions."

Local inflation and wage growth continue to trend upward, which could prompt further tightening in early 2025. According to a report from the Japan Statistics Bureau, Japan’s National Consumer Price Index (CPI) rose by 3.0% year-over-year (YoY) in August, up from the previous reading of 2.8%. On a monthly basis, CPI increased by 0.5%, compared to a 0.2% rise in July. Additionally, the National Core CPI (excluding fresh food) met market expectations at 2.8% YoY in August, up from 2.7% in July. Consumer inflation, excluding food and energy prices, climbed from 1.9% to 2.0% YoY in August.

On the economic growth front, Japan's Gross Domestic Product (GDP) annualized growth rate came in at 2.9% in Q2 2024, below the anticipated 3.2%. On a quarter-on-quarter (QoQ) basis, GDP grew by 0.7%, missing the 0.8% expectation. This slower economic growth is attributed to weaker household spending. Japan's overall household spending rose by 0.1% year-on-year in July, below the expected 1.2%, but still an improvement from a 1.4% decline in June. Monthly consumer spending also fell by 1.7% in July. Meanwhile, the Leading Economic Index slightly exceeded expectations, reaching 109.5 versus the forecasted 109.4.

On the labor market front, data will be released on the first and last days of October. We expect the unemployment rate to fall to 2.6%, reinforcing the likelihood of at least one rate hike before the year ends. We also expect progress in Japanese labor cash earnings, with that data scheduled for release on October 8.

Overall, data from the Japanese economy were mixed, which likely contributed to the BoJ's decision to maintain its policy stance and signal a wait-and-see approach before making further decisions. Policymakers want to see more concrete evidence of economic growth before continuing with tightening policies.

Given the overall positive outlook, we anticipate a slightly stronger Japanese yen, with a continuing downtrend in the USD/JPY pair. However, the rate hike outlook may limit upward movement in Japanese stock markets.

China and continuing concerns!

After multiple expectations from the central bank and the Chinese government, China’s Central Bank has unveiled its most aggressive stimulus since the pandemic. The People's Bank of China (PBoC) introduced significant measures aimed at lifting the economy out of its deflationary slump and steering it back toward the government's growth target. The PBoC reduced the reserve requirement ratio (RRR) by 50 basis points (bps), freeing up approximately 1 trillion yuan ($142 billion) for new lending. There is potential for further reductions in the RRR by another 25 to 50 bps.

Additionally, the PBoC cut the one-year Medium-Term Lending Facility (MLF) rate from 2.30% to 2.0%. This follows a previous reduction in July 2024, when the rate was lowered from 2.50%. During a press conference, PBoC Governor Pan Gongsheng announced that the central bank would also reduce the 7-day repo rate from 1.7% to 1.5%, and down payments for second homes would be cut from 25% to 15%.

With household saving rates hovering around 30% of disposable income—compared to a U.S. household saving rate of closer to 2%—fiscal stimulus may not be the most effective policy tool in China.

The Chinese economy continues to face two significant issues: challenges in the housing market and reduced consumer spending. Although the real estate sector remains in a downturn, lowering down payments for second homes may provide some positive momentum.

These ongoing challenges, along with delays in resolving these issues, have further solidified our lowered growth expectations for China. As I mentioned in the annual economic outlook published earlier in January 2024, the government's 5% growth target for this year is unlikely to be achieved. We are revising our growth estimates for China's economy to around 4.5% for this year.

Looking ahead, with the recent stimulus measures in place, Chinese stock markets could benefit and see improved performance in the coming month.