Unadorned Notes: September 27-30, 2024
Powell Signals Gradual Rate Cuts; Consumer Spending Rises, Inflation Eases; Potential Port Strike Threatens Trade; China’s Factory Slump Persists; Israel Escalates Strikes on Lebanon
Economics and Finance
Powell Signals Gradual Rate Cuts: Federal Reserve Chair Jerome Powell indicated that the central bank is likely to proceed with quarter-point interest rate cuts, not rushing further reductions. He emphasized confidence in continued economic growth, citing recent revisions to gross domestic income data that support healthy consumer spending. Powell noted that two more quarter-point cuts by year-end are likely if the economy evolves as expected. Despite progress on reducing inflation, he cautioned that risks remain two-sided and the Fed will assess conditions meeting by meeting. The current policy rate is set at 4.75%-5.00%, with projections showing a gradual decline to the longer-term neutral level of 2.9% by 2026.1
Consumer Spending Rises, Inflation Eases: U.S. consumer spending increased 0.2% in August 2024, slightly below expectations, but strong growth in the third quarter remains likely. The goods trade deficit narrowed by 8.3% to $94.3 billion, while inventories rose, suggesting a limited drag on GDP. Inflation continued to slow, with the personal consumption expenditures (PCE) price index rising 2.2% year-over-year, the smallest increase since February 2021. Core inflation rose 0.1% for the month, with an annual rate of 2.7%.2
U.S. Consumer Sentiment Rises: The University of Michigan Consumer Sentiment Index rose to 70.1 in September 2024, the highest since April 2024, surpassing economists’ expectations of 69.3. Inflation expectations fell for the fourth consecutive month, dropping to 2.7%, as consumers noticed easing price pressures. The index showed improvement in all five categories, including year-ahead business expectations, suggesting growing optimism. This positive outlook contrasts with the Conference Board’s Consumer Confidence Index, which declined due to labor market concerns.3
Potential Port Strike Threatens Trade: A possible strike by 45,000 East and Gulf Coast port workers could disrupt trade, costing the U.S. economy an estimated $5 billion per day. The strike would impact 36 ports, affecting the supply of goods like cars, apparel, and agricultural products. Nearly half of U.S. waterborne agricultural exports and over half of agricultural imports are at risk. Retailers have rushed to import holiday goods to mitigate potential disruptions. A one-week shutdown could result in up to six weeks of recovery time, according to Maersk.4
Investors Flee U.S. Equity Funds: Investors withdrew $22.43 billion from U.S. equity funds in the week ending September 25, 2024, marking the largest outflows since December 2022. Large-cap funds saw the most significant selling, with $15.23 billion in outflows, followed by small-cap, multi-cap, and mid-cap funds. Sectoral funds, including consumer staples, real estate, industrials, and financials, also experienced withdrawals. In contrast, U.S. bond funds attracted $6 billion, continuing their 17-week inflow streak, while money market funds saw a record net purchase of $112.57 billion. Concerns over economic health and the upcoming presidential election drove the cautious sentiment.5
China’s Factory Slump Persists: China’s factory activity contracted for the fifth consecutive month in September 2024, with the official PMI rising to 49.8, still below the 50 threshold indicating growth. Despite recent stimulus measures, including relaxed property curbs and lowered mortgage rates, the economy faces challenges from weak consumer demand and a slow services sector. Economists believe more aggressive fiscal policy may be needed to meet the 2024 growth target of around 5%. Additional stimulus measures, including a 2 trillion yuan bond package, are expected to aid growth but may not fully offset global trade headwinds. Focus now shifts to property sales and consumer spending during the upcoming Golden Week holiday.6
China’s Growth Model Faces Overhaul: China’s new stimulus plan to boost consumer spending marks a significant shift from its decades-old investment-driven growth model. The government plans to issue 2 trillion yuan in sovereign bonds to subsidize household purchases, addressing calls for more consumption-focused policies. Despite this change, economists argue that sustainable rebalancing requires deeper structural reforms, including improving labor rights, adjusting taxes, and reducing subsidies for manufacturers. China’s household consumption remains far below global averages, and rebalancing the economy could take many years, similar to Japan’s lengthy adjustment in the 1990s. Analysts caution that without transforming the growth model, China may face recurring economic challenges in the future.7
U.S. Politics and Geopolitics
Harris, Trump Face Crisis Test: Vice President Kamala Harris and former President Donald Trump are adjusting their strategies in response to a hurricane, a war, and a potential dockworker strike. Harris canceled campaign events to manage federal disaster response, while Trump traveled to Georgia, criticizing her efforts. Both candidates’ reactions to these crises could influence voters in key battleground states like North Carolina and Georgia. The storm, alongside rising international tensions and economic concerns, underscores the stakes for the upcoming presidential election. Analysts suggest public perception of crisis management may affect their campaigns’ success.8
Blinken Criticizes China’s Ukraine Stance: U.S. Secretary of State Antony Blinken expressed concerns over China’s support for Russia’s defense industry, stating Beijing’s peace claims on Ukraine conflict “don’t add up”. During talks with Chinese Foreign Minister Wang Yi, Blinken criticized China’s “dangerous actions” in the South China Sea and discussed improving U.S.-China military communication. He highlighted that China supplies 70% of machine tools and 90% of microelectronics Russia uses for weapon production. Blinken also urged China, Iran, and North Korea to halt support for Russia, stressing its importance for lasting peace in Ukraine. Wang denied U.S. accusations, condemning U.S. actions as divisive.9
Israel Escalates Strikes on Lebanon: Israel continued airstrikes in Lebanon, claiming the death of another senior Hezbollah figure following the killing of leader Hassan Nasrallah. Iran vowed retaliation, escalating regional tensions, while the Pentagon considers increasing U.S. military presence in the Middle East. President Joe Biden called for a cease-fire as the conflict threatens diplomatic efforts.10 Moody’s warned that the current Middle East crisis could negatively impact Israel’s creditworthiness, with estimated war costs possibly reaching $66 billion, over 12% of Israel’s GDP.11
UNRWA Criticized Over Hamas Ties: The UN agency for Palestinian refugees (UNRWA) confirmed that Fatah Sharif, a Hamas commander killed in Lebanon, was one of its employees but had been suspended since March 2024 due to allegations of ties to the militant group. Critics argue UNRWA has failed to adequately address infiltration by Hamas, and Israel’s diplomatic mission called Sharif's employment proof of a “deep problem” in the agency’s hiring practices. UNRWA has faced ongoing criticism for not effectively investigating a list of staff allegedly linked to Hamas, citing insufficient information from Israeli authorities.12
Ishiba to Lead Japan Amid Challenges: Japan’s Prime Minister Fumio Kishida resigned with his Cabinet to make way for Shigeru Ishiba, who is expected to call a snap parliamentary election for October 27, 2024. Ishiba, seen as a more centrist figure, was chosen by the ruling Liberal Democratic Party to rebuild unity after Kishida’s government faced multiple scandals. Critics note Ishiba’s lack of stable support within the party, which may lead to a fragile administration. Ishiba aims to bolster Japan’s security through proposals for an Asian version of NATO, increased discussion of U.S. nuclear deterrence, and reinforced defenses. Despite his stance, he inherits economic challenges, including deflation and a declining population.13