Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.
World shares basked in optimism for a detente in the U.S.-China trade war and hopes that Britain is moving closer to a smooth exit from the European Union. The MSCI world equity index, which tracks shares in 47 countries, gained 0.4% to head for its first weekly gains in four weeks. Asian shares had rallied earlier. The improvement in the appetite for risker assets came after U.S. President Donald Trump said on Thursday that the first day of trade talks with China in over two months were “very, very good.” The talks raised hopes the two sides could dial down the trade war that has upset financial markets and supply chains across the globe. Signs of progress in Brexit, the long running political geopolitical saga stressing out the markets also emboldened investors. In a meeting with British Prime Minister for talks, Irish Prime Minister Leo Varadkar said on Thursday that a deal to let Britain leave the European Union in an orderly fashion could be sealed by the end of the month.
U.S. stocks ended more than 1% higher on Friday after the announcement of a partial trade deal between the U.S. and China. Indexes cut their gains late in the session as the deal was announced amid worries over the possibility of further flare-ups before the agreement is finalized. The preliminary, partial trade deal was the biggest step toward resolving a 15-month tariff war between the two world’s largest economies. The emerging deal, covering agriculture, currency and some aspects of intellectual protection, would represent the biggest step by the two countries to end a tit-for-tat tariff war that whipsawed financial markets and slowed global growth. Officials on both sides said that much more work needed to be done before a final accord can be agreed. U.S. stocks ended the day more than 1% higher but well off the day’s highs after the announcement. The S&P was up 1.09% at the market close after being up 1.7% earlier on hopes of an agreement.
Inflation eased in September, but remained firm on a year-ago basis, reducing the risk that inflationary forces could break free and threaten the Fed’s easing bias. The producer price index fell 0.3% in September, with the headline index up just 1.4% y/y. The consumer price index was unchanged in September and rose just 0.1% in August. The core index rose just 0.1% for September. On a year-ago basis, the headline index is up 1.7% and the core index was up 2.4%. Inflation is subdued but is not disappearing either. Optimism among small businesses took another step backwards, with the NFIB index falling to 101.8. Optimism is fading but the index is still stronger than it was at the beginning of the year when stocks were having a massive sell-off. The trade war has not been limited to large multi-national corporations, 30% of small businesses reported tariffs are having a negative effect on their businesses. At the same time, mumblings about a coming recession” were more frequent among respondents, according to the report. Hiring plans fell to a two-year low in September.
Job openings fell for a third straight month and were down 7.5% from January. The pull-back in employment is on par with 2015-16 but at the nadir of that period in October 2016, global growth was starting to firm and both ISM indexes had turned positive. Although the partial agreement with China is good news, a turnaround in the global economy is still likely to be a way off. As such, the pullback in job openings is more troubling today and could mean further slowing in hiring. A slowdown in hiring points to weak wage growth and lower consumer spending. With the consumer, the only driver of growth for the economy, any consumer weakness could have significant negative repercussions.
Next week will be busy on the economic calendar. We get updated on retail sales, business inventories, housing starts, industrial production and leading economic indicators.
The U.S. Economy:
The slowing of the U.S. economy and the recent escalation of trade tensions between the U.S. and China is hurting the U.S. economy. The NFIB small business optimism index declined from 103.1 in August to 101.8 in September. The decline places the index at the lowest level since March. Details were generally weaker than in August. Plans to increase employment fell from 20% to 17%. The net percentage of participants that expect the economy to improve in the next six months fell from 12% to 9%. Plans to increase capital expenditures fell from 28% to 27%. Plans to raise prices fell from 17% to 15%. The index showed that small business owners that largely shrugged off the effects of the trade war over the past year are now becoming more pessi9mistic as the economy downshifts. That is because industries affected by tariffs make up a small percentage of employment. However, as employment growth slows and the consumer side is getting hit with tariffs, we are starting to see some small business owners get more worried. If layoffs accelerate and consumers get spooked, there could be a bigger negative effect on the consumer side.
Producer prices suggest that inflationary pressures are not developing quickly. The producer price index for final demand declined 0.3% in September, following a 0.1% rise in August. The goods index fell 0.4% in September, while services declined 0.2%. Core goods fell 0.1% in September after remaining unchanged in August. On a year ago basis, the headline index was up 1.4% and the core goods index was up 0.9%, well below the Fed’s inflation target. The consumer price index was unchanged in September. Following a 0.1% increase in August. Energy prices fell 1.4% and food prices only advanced 0.1%. The core CPI increased 0.1%, a slowdown from the 0.3% advances the previous three months. On a year ago basis the headline CPI was up 1.7% and the core index was up 2.4%. The slowdown in inflationary pressures leaves the door wide open for the Fed to cut interest rates in October.
Stockpiles added another modest gain in August. Wholesale inventories grew 0.2%, matching July’s gain. Durable goods inventories increased 0.3%, while nondurable goods rose 0.1%. Wholesale sales were unchanged from July, but the inventory-to-sales ratio remained unchanged at 1.36. Bloated inventories are still weighing on U.S. producers. Although the pace of inventory build has moderated in recent months. Wholesale sales remain weak. Sales are down on a year ago basis. When it takes a long time to clear out wholesale inventories, they purchase fewer goods, hurting production. High inventories are a major reason that manufacturing is in recession. There is a structural change associated with e-commerce that results in higher inventories than we’ve seen in the past. Also, many products are being stockpiled as a hedge for tariffs. Although higher inventories may be the new-normal, inventories do seem to be too high and it will be several moths to clear stocks before production can pick up.
Important Data Releases This Week
September retail sales will be released on Wednesday, October 16 at 8:30 AM EDT. After posting a soft August except for auto sales, we are looking for a 0.3% in sales for September. Sales excluding autos and gasoline are also projected to rise 0.3%.
August business inventories will be released on Wednesday, October 16 at 10:00 AM EDT. Business inventories are expected to rise 0.3% in August down slightly from the 0.4% advance for July.
September housing starts will be released on Thursday, October 17 at 8:30 AM EDT. Starts and permits shot higher in August and matched their best expansion rates of last year. Starts are projected to backtrack to 1.399 million units, down from August’s 1.364 million pace. Permit are projected to come in at 1.335 million, down from August’s 1.419 million pace.
September industrial production will be released on Thursday, October 17 at 9:15 AM EDT. Driven by strong gains across components, industrial production beat expectations in August with a 0.6% rise. Industrial production is expected to gain just a 0.2% advance for September. Manufacturing was also strong in August, with a 0.5% increase. Manufacturing is projected to fall 0.3% for September.
September leading economic indicators will be released on Friday, October 18 at 10:00 AM EDT. The leading indicators were unchanged in August, but we expect a 0.2% rise for September.