He acknowledged that higher rates had slowed industrial production and wage growth, while tighter lending standards were dampening the economy. Nevertheless, Powell observed that economic growth remained above its long-term trend, and the housing sector seemed to be recovering after a substantial slowdown in the past year and a half.
He stated that the Fed will exercise caution in deciding whether to implement further rate hikes in the coming months. However, he didn’t seem to imply that the enduring strength of economic growth would automatically lead to more tightening measures.
Economic data-wise, US durable goods orders showed increased business caution, and the housing sector exhibited strength in new home sales, while existing home sales disappointed. Preliminary data also highlighted a decline in the US Manufacturing PMI from 49 in July to 47 in August, signalling a significant dip in operating conditions. Services PMI also fell to 51 in August, showing the slowest expansion in six months, possibly due to high interest rates and inflationary pressures affecting consumer spending.
The challenge ahead involves understanding how tightening monetary policy will impact the economy, which is already showing some effects despite not being fully reflected in growth data.
In the UK, investors mulled over recent consumer confidence survey results for August 2023, uncovering an uptick in confidence over the period, although the index remained in negative territory. Despite the backdrop of slow declining core inflation, elevated interest rates, and rising average weekly earnings, the consumer confidence index demonstrated a positive trajectory for this month. Although the overall figure continues to stand at a notable -25, prospects for personal financial situations in the upcoming year are trending towards positivity.
Coming up next week we have Japanese Unemployment Rate & retail sales as well as US Consumer Confidence, labour market data and the Fed’s preferred measure of inflation Core PCE. Markets are also expecting Chinese PMIs, ECB Minutes, Eurozone CPI and Unemployment Rate.
Kate Mimnagh, Portfolio Economist