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Summary: ifo business climate index declines 1.2 points to 97.7 in October, slightly below expected figure; expectations, current conditions indices both down; business sentiment “clouded over”; supply problems continue, falling capacity utilisation rates; expectations index implies euro-zone GDP contraction of 0.2% in year to January 2022.

Following a recession in 2009/2010, the ifo Institute’s business climate index largely ignored the European debt-crisis of 2010-2012, remaining at average-to-elevated levels through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously. The rebound which began in May of that year was almost as sharp but it was also characterised by a period of below-average readings which lasted until early 2021.

According to the latest figures released by the Institute, its business climate index declined to 97.7 in October. The reading was slightly below the expected reading of 98.0 as well as September’s final reading of 98.9. The average reading since January 2005 is just above 97.

“Sentiment in the German economy has clouded over,” said Clemens Fuest, President of the ifo Institute. “Supply problems are giving businesses headaches. Capacity utilisation in manufacturing is falling.”

The expectations index also fell from September’s revised figure of 97.4 to 95.4, lower than the generally-expected figure of 96.6. The current situation index declined from 100.4 to 100.1.

German and French long-term bond yields declined a little on the day. By the close of business, German and French 10-year yields had each slipped 1bp to -0.12% and 0.22% respectively.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter.  October’s expectations index implies a 0.2% year-on-year contraction rate to the end of January 2022.

Summary: US leading index up 0.2% in September, above expectations; suggests economy remains on more moderate growth path compared to first half; Conference Board 2021 forecast trimmed from 6.0% to 5.7%.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy recovered rapidly.

The latest reading of the LEI indicates it rose by 0.2% in September. The result was in contrast to the 0.5% fall which had been generally expected but noticeably lower than August’s revised figure of 0.8%. On an annual basis, the LEI growth rate slowed from 9.9% to 9.4%.

“The US LEI rose again in September, though at a slower rate, suggesting the economy remains on a more moderate growth trajectory compared to the first half of the year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

US Treasury bond yields rose on the day, especially at the short end. By the close of business, the 2-year Treasury yield had increased by 8bps to 0.46%, the 10-year yield had gained 5bps to 1.70% while the 30-year yield finished 2bps higher at 2.15%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months firmed noticeably. October 2022 futures contracts implied an effective federal funds rate of 0.41%, 33bps above the spot rate.

Regression analysis suggests the latest reading implies a 5.0% year-on-year growth rate in December, down from November’s comparable figure of 5.2% after revisions. The Conference Board currently forecasts an expansion of nearly 5.7% for calendar 2021, a slightly slower rate than their forecast of 6.0% one month ago.

Summary: Euro-zone households less optimistic in October; index falls 0.8 points to -4.8; still well above long-term average; euro-zone sovereign bond yields moderately higher.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels in March 2021.

Consumer confidence deteriorated slightly in October according to the latest survey conducted by the European Commission. Its Consumer Confidence index recorded a reading of -4.8, slightly above the -5.0 which had been generally expected but lower than September’s figure of -4.0. The current reading is still well above the long-term average of -11.6.

Sovereign bond yields increased moderately in major euro-zone bond markets on the day. By the end of it, German and French 10-year bond yields had each gained 3bps to -0.09% and +0.25% respectively.

Summary:  Leading index growth rate falls again in September; first negative reading since September 2021; reading implies annual GDP growth of 2.25% during December/March quarters; “another strong rebound” expected once both Sydney, Melbourne reopen; Westpac maintains growth forecasts.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings were markedly higher but more-recent readings have steadily declined.

The latest reading of the six month annualised growth rate of the indicator fell in September, from August’s figure of +0.50% to -0.50%.

“This is the first negative read, signalling below trend growth, since September last year when the economy was moving out of COVID lockdowns,” said Westpac Chief Economist Bill Evans.

Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.75% per annum. The index is said to lead GDP by up to nine months, so theoretically the current reading represents an annual GDP growth rate of around 2.25% in the final quarter of 2021 or the first quarter of 2022.

Long-term domestic Treasury bond yields moved significantly higher on the day, outpacing overnight movements of their US Treasury counterparts. By the close of business, the 10-year ACGB yield had gained 8bps to 1.83% and the 20-year yield had jumped 12bps to 2.45%. However, shorter-term yields declined and the 3-year yield finished 2bps lower at 0.95%.

Evans noted September was the last full month in which Sydney and Melbourne were both facing “stay at home” orders. He expects “another strong rebound in the economy” once both cities reopen in a repeat of last year’s post-lockdown recovery. “Moreover, this recovery is not expected to be disrupted by the various state snap lock-downs that dogged the previous recovery through much of late 2020 and early 2021.”

Westpac has maintained its GDP growth forecasts for the September and December quarter at -4.0% and +1.6% respectively. Westpac also expects a 7.4% growth rate over calendar 2022.

Summary: US industrial output contracts by 1.3% in September, contrasts with expected +0.2%; up 4.6% over past 12 months; data reminder supply bottle necks still affecting US economy; lingering effects of Hurricane Ida subtracts 0.6ppt; capacity utilisation rate falls 1ppt to 75.2%; back below February 2020 figure, still well below long-term average.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component.US production collapsed through March and April of 2020 but then began recovering in subsequent months.

According to the Federal Reserve, US industrial production contracted by 1.3% on a seasonally adjusted basis in September. The result was in contrast to the 0.2% increase which had been generally expected and a larger contraction than August’s -0.1% after it was revised down from +0.4%. On an annual basis, the expansion rate slowed from August’s revised figure of 5.7% to 4.6%.

“The data is a reminder that although the US is less exposed to the energy crunch, supply bottlenecks are still affecting its economy, particularly in sectors [where] there is a shortage of workers, raw materials and chips,” said NAB currency strategist Rodrigo Catril.

Despite the report missing expectations, US Treasury bond yields generally moved higher on the day. By the close of business, the 2-year Treasury yield had gained 4bps to 0.43%, the 10-year yield had added 2bps to 1.59% while the 30-year yield finished unchanged at 2.04%.

The report stated production would have been an estimated 0.6% percentage points higher were it not “lingering effects of Hurricane Ida” which continued to affect mining and manufacturing operations.

The same report includes US capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage had hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. September’s reading declined from August’s revised figure of 76.2% to 75.2%, back under February 2020’s reading of 76.3% and still well short of the long-term average of 80.1%.

While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.

Summary:  US retail sales rise by 0.7% in September, contrasts with -0.3% expected; report “encouraging” but impact of consumption on Sep quarter GDP less than in June quarter; rises in all retail categories except two; “general merchandise” segment” the largest single influence, rises 2.0%.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0%. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent it into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit US households in early 2021.

According to the latest “advance” sales numbers released by the US Census Bureau, total retail sales increased by 0.7% in September. The rise was in contrast to the 0.3% decline which had been generally expected but not quite as large as August’s 0.9% increase after it was revised up from 0.7%. On an annual basis, the growth rate slowed from August’s revised figure of 15.4% to 13.9%.

US Treasury bond yields rose on the day. By the close of business, the 2-year Treasury yields had added 3bps to 0.39%, the 10-year yield had gained 5bps to 1.57% while the 30-year yield finished 2bps higher at 2.04%.

“Overall, the retail sales data were encouraging although real private consumption will have contributed significantly less to GDP in Q3 than in Q2,” said ANZ Head of Australian Economics David Plank.

All except two of the categories recorded higher sales over the month. The “General merchandise” segment provided the largest single influence on the overall result, rising by 2.0% for the month and by 13.2% for the year. Sales at petrol (“gasoline”) stations also had a significant influence on the total, rising by 1.8%.

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It now accounts for a bit over 14% of all US retail sales and it has become the second largest segment after the vehicles and parts segment. On annual basis, sales were 10.5% higher.

Summary: US consumer confidence deteriorates slightly in October; University of Michigan index below consensus figure; views of present conditions, future conditions both deteriorate; decline across all demographics, political groups; Delta variant, supply-chain shortages, reduced labour force participation rates will continue to drag on spending; confidence in government policies declines “significantly” during past six months.

US consumer confidence started 2020 at an elevated level. However, surveys had begun to reflect a growing unease with the global spread of COVID-19 and its reach into the US by March of that year. After a plunge in April, household confidence recovered in a haphazard fashion, generally fluctuating at below-average levels until it recovered back to the long-term average in April 2021.

The latest survey conducted by the University of Michigan indicates confidence among US households deteriorated slightly on average in October. The University’s preliminary reading of its Index of Consumer Sentiment registered 71.4, below the generally expected figure of 73.5 and September’s final figure of 72.8. Consumers’ views of current conditions and expectations regarding future conditions both deteriorated in comparison to those held at the time of the September survey.

“The decline in confidence in economic policies was recorded across all age, income and education subgroups as well as among Democrats, Independents and Republicans,” said the University’s Surveys of Consumers chief economist, Richard Curtin.

US Treasury bond yields rose on the day. By the close of business, the 2-year Treasury yields had added 3bps to 0.39%, the 10-year yield had gained 5bps to 1.57% while the 30-year yield finished 2bps higher at 2.04%.

“The Delta variant, supply-chain shortages and reduced labour force participation rates will continue to dim the pace of consumer spending into 2022,” said Curtin. However, he also noted “confidence in government economic policies has significantly declined during the past six months”, a factor he said also “contributed to the slump in optimism.”

More-confident households are generally inclined to spend more and save less; some increase in household spending could be expected to follow. As private consumption expenditures account for a majority of GDP in advanced economies, a higher rate of household spending growth would flow through to higher GDP growth if other GDP components did not compensate.

Summary: Prices received by US producers (PPI) rise by 0.5% in September, less than expected figure; annual rate increases to 8.6%; “core” PPI increases by 0.2%; annual increase largest since 2010; goods prices up 1.3%, services up 0.2%.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but recent months’ annual rates have been well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 0.5% after seasonal adjustments in September. The increase was less than the 0.6% rise which had been generally expected as well as August’s 0.7% increase. On a 12-month basis, the rate of producer price inflation after seasonal adjustments increased from 8.3% to 8.6%.

PPI inflation excluding foods and energy, or “core” PPI inflation, rose by 0.2% after seasonal adjustments, markedly less than the consensus expectation of a 0.5% increase as well as August’s 0.6%. However, the annual rate accelerated again, this time from 6.7% to 6.8%.

Long-term US Treasury bond yields fell modestly on the day. By the end of it, 10-year and 30-year Treasury yields had both shed 2bps to 1.52% and 2.02% respectively. The 2-year yield finished unchanged at 0.36%.

“While slightly lower than expected and lower than the lift in July or August, the annual increase of 8.6% was the largest advance since 12-month data were first calculated in November 2010,” said ANZ economist Kishti Sen.

The BLS stated higher prices for final demand goods accounted for about 80% of the month’s increase after they rose by 1.3% on average. Prices of final demand services rose by 0.2%.

The producer price index (PPI) is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data.

Summary: US CPI increases by 0.4% in September, more than 0.3% expected; “core” rate up 0.2%, in line with expectations; supply disruptions continuing to lift prices; non-energy services main driver of headline rise; shelter data “concerning”; cyclical inflation pressures “intensifying”.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March of this year.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by 0.4% on average in September. The result was higher than the 0.3% consensus expectation and August’s 0.3% rise. On a 12-month basis, the inflation rate rose from August’s seasonally adjusted reading of 5.2% to 5.4%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the more variable food and energy components of the index, increased by 0.2% on a seasonally-adjusted basis for the month. The result was in line with the expected figure but more than August’s 0.2% increase. The annual growth rate remained unchanged at 4.0%.

“Supply chain disruptions are continuing to lift prices, although gains have moderated over the last three months. Used vehicle and airfare prices fell in September after a large three-month climb through June. There were large gains in new car and food prices but a large drop in apparel prices,” said Westpac Head of New Zealand Strategy Imre Speizer.

Shorter-term US Treasury bond yields rose while longer-term yields fell on the day. By the close of business, the 2-year Treasury yield had gained 2bps to 0.36%, the 10-year yield had lost 3bps to 1.54% and the 30-year yield finished 4bps lower at 2.04%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months have hardened recently. October 2022 futures contracts implied an effective federal funds rate of 0.31%, 23bps above the spot rate.

The largest influence on headline results is often the change in fuel prices. In September, “Energy commodities”, the segment which contains vehicle fuels, increased by 1.2%, adding 0.05 percentage points. However, prices of “Services less energy services”, the segment which includes actual and implied rents, increased by 0.2% and added 0.12 percentage points, making it the single largest contributor to the overall rise.

“The shelter data is concerning. Rents are cyclical and are firming and the end of the eviction moratorium on 4 October may add upward pressure,” said ANZ economist Daniel Been. He added “cyclical inflation pressures in the US are intensifying” when transport services were excluded.

Summary: Euro-zone industrial production slumps 1.6% in August, fall slightly less than expected figure; annual growth rate falls to 5.1%; now 1.5% below pre-pandemic peak output; production down in two of euro-zone’s four largest economies, Germany down significantly.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in 2016. Growth rates then fluctuated for two years before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 which then took over a year to claw back.

According to the latest figures released by Eurostat, euro-zone industrial production slumped by 1.6% in August on a seasonally-adjusted and calendar-adjusted basis. The fall was not quite as large as the 1.7% decrease which had been generally expected and it was in contrast to July’s 1.4% jump after revisions. On an annual basis, the calendar-adjusted growth rate slowed from July’s revised rate of 8.0% to 5.1%.

“Euro-area industrial production is now 1.5% below its pre-pandemic peak and so far the contribution from the industrial sector to GDP in Q3 is looking flat,” said ANZ economist Daniel Been.

German and French sovereign bond yields fell moderately on the day. By the close of business, the German 10-year bund yield had lost 3bps to -0.13% and the French 10-year OAT yield had shed 4bps to 0.20%.

Industrial production growth contracted in two of the euro-zone’s four largest economies but production in Germany, the largest of the four, contracted significantly. Germany’s production contracted by 4.1% while the comparable figures for France, Italy and Spain were +1.0%, -0.2% and +0.1% respectively.