Introduction

Data may have been scarce in the week but not drama. The week ended with China saying they will raise tariffs on $75 billion of US imports in two steps, first on September 1 then on December 15 in a retaliatory move that coincides exactly with US intentions to raise tariffs in two steps on $300 billion of Chinese imports. Jerome Powell and President Trump then took the stage, the Federal Reserve chief sounding dovish but non-committal to further rate cuts followed by the president asking in a tweet: "My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" Trump then tweeted that he has "hereby ordered" US firms "to immediately start looking for an alternative to China" in comments that are certain to keep upper management and the legal staffs at the US multi-nationals busy.

Trade issues also continued to play out in the week's global economic data, manifested in slowing for both global manufacturing and cross-border trade. Inflationary pressures, widely targeted by global central banks at 2 percent, have never really taken hold this whole expansion and may now be moderating further, in what may be another effect tied to tariffs and related slowing in demand. But we begin the week with a looming risk that, for Europe at least, may be the greatest of all: Brexit.

The Economy

UK in focus

The Confederation of British Industry's August Distributive Trades Survey found retailers in dire straits in August. At minus 49 percent, the balance of respondents reporting a yearly rise in sales was down 33 percentage points from July, the sharpest decline since December 2008. Within sub-sectors, only non-store retailing (mostly online) posted a year-on-year rise in sales, while volumes dropped across most other sectors including grocers, clothing and hardware & do-it-yourself. The unexpectedly weak sales have led to a large overhang of stocks, according to the survey, with stock levels compared to expected sales spiking higher to match the survey record high seen in November 2014. Orders placed with suppliers fell at the quickest rate since December 2008 (minus 29 percent), and most retailers did not expect business conditions to improve over the next three months (minus 25 percent). Investment intentions for the year ahead remained negative for the sixth consecutive quarter, albeit to the least extent over this year so far. Employment also fell for the eleventh straight quarter in August. On a brighter note, sales were judged only slightly below average for the time of year (minus 6 percent) and to a lesser extent than last time (minus 20 percent). Retailers also expect sales to fall at a slower pace (minus 10 percent) next month.

The uncertainties of Brexit have been front and center in the CBI's industrial trends survey though the results staged a recovery in August after sagging woefully in July. Posting the first gain in six months and more than offsetting the July decline, the headline total orders balance gained 21 percentage points to minus 13 percent, in line with the long-run average. Export order books also improved significantly (minus 15 percent after minus 32 percent), as did output volume over the past three months (minus 3 percent after minus 11 percent). Output volumes expanded in 7 of the 17 sub-sectors in the three months to August, with chemicals, mechanical engineering and plastic products driving the positive contribution. Dragging down growth, however, were the sub-sectors of paper, printing and media. Yet the improved current conditions picture did not translate into improvement for outlook. Respondents took a dimmer view of output volume over the next three months than previously (minus 1 percent versus 6 percent) while expectations for growth in average selling prices for the next three months fell to the lowest balance since February 2016 (minus 2 percent after 12 percent).

Manufacturing

For manufacturers outside Europe and the UK, Brexit is still an abstract and less immediate threat compared to the rise underway in global trade tensions. Manufacturing sales in Canada fell 1.2 percent in June following, however, a 1.6 percent gain in May. The year-on-year rate, as tracked in the accompanying graph, fell to 0.1 percent and barely over the zero line. But results look less troubling in volume terms, with sales down just 0.2 percent on the month and up 2.3 percent year-on-year. Nevertheless June sales were down in 16 of 21 industries, representing 68.0 percent of total manufacturing sales. Accounting for the bulk of the monthly slide were petroleum & coal products as well as food. The former posted the first decline (minus 3.8 percent) after five consecutive monthly increases, while the latter fell 2.5 percent in widespread declines across the majority of food manufacturing though most pronounced in the meat, grains, and oilseed industries. Partly offsetting these declines was an 11.7 percent monthly surge in primary metals sales. In another constructive note, inventory levels fell 1.5 percent in June following six months of consecutive increases in a broad-based draw that included 15 of 21 industries, led by transportation equipment (minus 4.5 percent), primary metals (minus 3.1 percent), petroleum and coal products (minus 2.1 percent) and paper (minus 3.4 percent). In a reminder of the overall slack picture for manufacturing, unfilled orders in June fell 1.2 percent mainly due to industries producing aerospace products & parts and those manufacturing computer & electronic products. And future weakness is indicated by new orders which fell a sharp 4.2 percent in June following May's 2.8 percent gain. June's decrease was mostly due to lower aerospace orders. Finally, capacity utilization for the manufacturing sector declined 0.9 percentage points to 81.2 percent in June, falling in 16 of 21 industries led by chemicals.

International trade

Trouble for manufacturers is the result of slowing in exports which, if not offset by greater slowing in imports, can lead to rising deficits for some nations and falling surpluses for others, such as Switzerland. The country's trade surplus shrank from CHF4.01 billion in June to CHF3.63 billion in July. The deterioration reflected lopsided contraction in the balance sheet, with a 3.9 percent monthly decline in exports more than twice as steep as a 1.7 percent monthly drop in imports. Leading the decline in July exports was an 11.3 percent monthly drop in chemicals and pharmaceuticals, Switzerland's flagship export industry accounting for about half of foreign sales. Geographically, a 12.4 percent drop in sales to North America was the major contributor. The bulk of the overall drop in imports came from a 3.9 percent decrease in imports from Europe, partly offset by a 10.5 percent increase in imports from Asia. The July report still leaves intact a wobbly longer-term rising trend in exports while imports appear to be stagnant. Nevertheless, real trade flows based on current trends may struggle to provide a positive contribution from net exports to third-quarter GDP growth.

Japan's merchandise trade balance shifted from a revised surplus of Y589.6 billion in June to a deficit of Y249.6 billion in July as exports here too fell more than imports. Exports were down 1.6 percent from July last year which, however, is an improvement from a 6.6 percent drop in June. Imports fell 1.2 percent on the year in July after dropping 5.2 percent previously. Japanese exports to China fell 9.3 percent on the year in July after dropping 10.1 percent in June, with year-on-year export growth to the US picking up from 4.8 percent to 8.4 percent and exports to the European Union rising 2.2 percent on the year after June's 6.7 percent decline. July's smaller fall in total import growth was largely driven by iron ore imports, which rose 25.4 percent on the year in July after falling 7.2 percent in June. Manufactured imports also recorded a smaller year-on-year drop in July. This was offset by weaker petroleum imports, down 10.0 percent on the year after increasing 2.6 percent previously. Though improved, Japan's exports in July were nevertheless subdued and broadly in line with previously released trade data out of China and Singapore.

Manufacturing versus Services

A structural shift may be underway in the global economy as declines in cross-border trade are compensated for by increases in internal trade, an outcome that has kept US GDP healthy. Yet the risk here is that domestic activity will not keep up and that manufacturing weakness will begin to pull total demand lower. This is a prominent threat right now for Germany as cited repeatedly by the Bundesbank. But before turning to Germany let's look at several other countries and what their manufacturing and services PMIs are indicating. August's flash of the Japan manufacturing PMI remained under breakeven 50, at 49.5 and little changed from July. If confirmed by final data early next month, this survey will indicate contraction in the Japanese manufacturing sector for six of the last seven months. Output in this sample fell for an eighth consecutive month though at a slower pace than in July, while new orders likewise fell to a lesser extent. However, the survey's measures of new export orders, employment growth, and business confidence all weakened relative to July. Input costs were reported to have increased at a slower pace in August while respondents lowered their selling prices but to a lesser extent than July. Despite manufacturing proving stagnant, the services sample reported better growth in August, at 53.4 from July's 51.8. If confirmed by final data early next month, this survey indicates that activity in the Japanese services sector expanded in August at the fastest pace since 2015. Though the survey's measure of business confidence fell relative to July, respondents reported stronger growth in output, new orders, new export orders, and employment in August. Input costs in this sample increased at a faster pace in August while respondents also raised selling prices at a faster pace.

There was not only improvement for services in France's PMIs but for manufacturing as well. The services index rose 0.9 points in the August flash to 53.3 for the highest level in nine months. New orders for service providers accelerated for a fifth straight month and to the best pace since late last year. And manufacturing popped out of contraction, to 51.0 from July's 49.7 with this sample reporting the fastest increase in new work since September of last year. Capacity pressures for both samples increased with backlogs of orders rising for the fourth month in a row, albeit at a slower pace. Optimism towards the business outlook was weaker than in July but remained slightly above the historical average. On the inflation front, input costs continued to rise sharply and at the quickest rate in three months for both samples. In contrast output charges increased at a slower pace in August, with service providers reporting the softest rise in three months. Selling prices aside, the August survey suggests that the French economy is outperforming its peers and is on course for moderate third quarter GDP growth.

Manufacturing may not be having much impact on Japan and France but weakness here does appear to be a services negative for the US. No better than flat are the conditions being reported by the PMIs in the US. Manufacturing is fractionally below 50 at 49.9 and a 10-year low while services are down sharply this month at 50.9. Members of the sample are citing subdued levels of corporate spending underscoring the Federal Reserve's concern that business investment is slowing as businesses lower their outlooks. For manufacturing, a diminishing contribution from new orders is August's major weakness with export sales falling at the fastest rate in exactly 10 years. This sample is actively trimming inventories. For service respondents, they're reporting the weakest rate of new orders growth in another 3-1/2 year low. Backlogs for this sample are down for the first time this year with business expectations at a 10-year low. Not surprisingly, total job creation for the combined samples is at a nine-year low with the general year-ahead outlook falling for a seventh straight month and to a record low. Further confirming weakness is the first contraction in combined input costs since the recession 10 years ago and the first contraction in selling prices in 3-1/2 years.

In contrast to the convergence in the US between manufacturing and services, divergence remains the iffy and perhaps unsustainable theme for Germany's PMIs. Solid and steady growth in services at 54.4 in August was again countered by deep contraction for manufacturing, at 43.6 versus July's 43.2. Yet the details for services have their weak points especially new orders where growth is modest and at the weakest pace in seven months. Backlog orders for this sample as well as exports are both down. For manufacturers, new orders are contracting at the fastest rate in more than six years and include particular weakness for exports. Backlogs for this sample are also down with employment posting its sharpest decline in seven years. Business confidence in Germany is suffering from general concerns over demand amid special weakness in the car industry. For the first time in five years, the number of manufacturers expecting output to fall over the next twelve months exceeded those predicting a rise. Regarding the outlook, optimism among service providers is the lowest since 2014 while manufacturers' expectations are the weakest since mid-2012. If the services index in Germany begins to converge with manufacturing, concern over European growth and the risk of a possible recession would build (Brexit risks aside). Such a convergence would also confirm the structural understanding among policy makers, that changes in manufacturing precede changes in services.

Housing

We close the week's data run by looking at a sector that has underperformed this year but rarely gets the attention of policy makers, and that's US housing. Resales have been trending cautiously higher this year with July proving the best month since February, at a 5.420 million annual pace and the first year-on-year growth, though modest at 0.6 percent, since February last year. Single-family homes led the month rising to a 4.840 million rate and a 1.0 percent on-year gain to offset condos which were steady at 580,000. Sales of new single-family homes in July came in near expectations at a 635,000 rate though June was revised sharply higher, to a 728,000 rate and a new expansion high. Housing data are notorious for their volatility which makes three-month averages central when discussing home sales. The accompanying graph tracks the three-month average for new single-family homes (blue line) against the three-month average for single-family resales (green line). Sales rates clearly improved earlier in the year but have been struggling since, especially for new homes which burst out of the gate in 2019 but have since faded. Lower mortgage rates combined with strong demand in the jobs market are concrete positives for housing which, despite ups and downs, may yet become a positive contributor to the US economy.

Markets: Turbulence building, currency stability at risk

Economic data weren't behind the week's action in the financial markets, rather monetary policy and President Trump's reaction to it. Expectations in the financial markets are clearly focused on another rate cut for the Fed this year even after Powell's speech at Jackson Hole where the chair did sound dovish, citing the risks of rising US-China tariffs and further global slowing, but concluded that the economy remains in a "favorable place". President Trump's tweets on Friday included a reference to the dollar which he said may begin to strengthen, in what is a reminder that unwanted strengthening would add a new burden to US exports. The apparent global movement toward competitive currency devaluation, all with the aim to protect exports and domestic manufacturing, is taking its form indirectly in more accommodative central bank policies with the exception, of course, of China which earlier this month lowered the value of the yuan in stated retaliation against US trade pressures. So far movements among the major currencies have been limited with no substantial dislocations yet apparent. Yet currency dislocations may be a new risk to watch, one that central banks have so far steered clear of citing. Perhaps the currencies most at risk of sudden breaks are the pound and the euro due to the possibility of a Halloween Brexit (both currencies have been depreciating together as tracked in the accompanying graph). As long as currency moves are stable and along existing trends, the risks of jolts to the global economy and financial system may be limited. Yet should sudden and dramatic moves take hold, that's another question.

The bottom line

A lack of inner unity may be a fair charge against Federal Reserve policy that in only eight months time has shifted from restrictive, to neutral, to accommodative, and apparently perhaps back to neutral again. Yet Jerome Powell is in charge of an institution and has to build a consensus, a reality underscored by the split 7 to 2 vote at the July FOMC and again at Jackson Hole where other FOMC members were sounding hawkish including Patrick Harper of the Philadelphia Fed who was in support of July's rate cut. As long as growth in domestic demand outstrips slowing in foreign demand, the need for accommodative policies — on a global basis — will be limited. If, however, the latter begins to pull down the former, rate cuts and new quantitative easing, perhaps at accelerated rates, should be no surprise.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of August 26 to August 30

Central bank activities are light in the coming week when inflation updates instead will be in the spotlight. Core PCE prices out of the US will cap the week on Friday and, despite unexpected pressure in recent core consumer prices, only an incremental rise is expected for the annual rate which is seen up 1 tenth to 1.7 percent and still below the Federal Reserve's 2 percent target. The first look at the German CPI in August, which likewise isn't expected to show much pressure, will be posted on Thursday with the Eurozone harmonized flash out on Friday. Sentiment readings, of special focus during times of shifting economic data, will include German and French business assessments with the Ifo and business climate indicator on Monday and Tuesday, US consumer confidence on Tuesday, and both business and consumer views in Thursday's EC economic sentiment data. None of these are expected to show much strength. Data on manufacturing will be posted Monday with the durable goods report out of the US followed on Thursday with industrial production from Japan. Retail sales will be posted on Friday by both Japan and Germany. If the week goes as expected, inflation will continue to look soft as will sentiment and possibly manufacturing as well.

German Ifo Survey for August (Mon 04:00 EDT; Mon 08:00 GMT; Mon 10:00 CEST)

Consensus Forecast: 95.2

Economic sentiment in August is expected to slip to 95.2 versus 95.7 in July which was its fourth decline in as many months and its weakest reading since May 2010. Morale in both manufacturing and trade were down sharply in July with services at a 3-month low.

US Durable Goods Orders for July (Mon 08:30 EDT; Mon 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 1.1%

Consensus Range: -1.6% to 1.8%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: -0.1%

Consensus Range: -0.9% to 1.0%

Core Capital Goods Orders (Nondefense Ex-Aircraft)

Consensus Forecast: 0.0%

Consensus Range: -0.2% to 0.1%

A surge in core capital goods orders was the highlight of a strong durable goods report in June though forecasters, outside of an expected aircraft-related gain for the headline, see give back for July. Consensus for the headline is a 1.1 percent increase versus a 1.9 percent jump in June (revised from an initial 2.0 percent) with ex-transportation, however, expected at minus 0.1 percent in July and with core capital goods unchanged.

French Business Climate Indicator for August (Tue 02:45 EDT; Tue 06:45 GMT; Tue 08:45 CEST)

Manufacturing, Consensus Forecast: 101

Business sentiment in manufacturing slipped another 1 point lower in July to 101 and a 4-year low. Order books in this sample were also at a 4-year low. Forecasters don't see any improvement for August with the consensus unchanged at 101.

US Consumer Confidence Index for August (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast: 130.0

Consensus Range: 127.5 to 133.0

The consumer confidence index rose sharply in July on strength in the assessment of the current labor market and expected strength six months out. For August, forecasters are looking for a nearly six-point correction lower to 130.0 versus July's 135.7.

Eurozone: EC Economic Sentiment for August (Thu 05:00 EDT; Thu 09:00 GMT; Thu 11:00 CEST)

Consensus Forecast, Economic Sentiment: 102.5

The European Commission's economic sentiment index is at a 3-year low and has declined in 12 of the last 13 months. The consensus for August is 102.5 versus July's 102.7.

German Preliminary CPI for August (Thu 08:00 EDT; Thu 12:00 GMT; Thu 14:00 CEST)

Consensus Forecast, Month-to-Month: -0.1%

Consensus Forecast, Year-over-Year: 1.5%

Strength in food prices offset slowing in services prices to lift July's CPI by a sharp 0.5 percent for a 1.7 percent yearly rate. For August's preliminary CPI, a 0.1 percent dip is the monthly consensus with plus 1.5 percent the yearly consensus.

Japanese Industrial Production for July (Thu 19:50 EDT; Thu 23:50 GMT: Fri 08:50 JST)

Consensus Forecast: 0.3%

Industrial production has been up and down and was down 3.6 percent on the month in June. A percent 0.3 percent increase is the expectation for July.

Japanese Retail Sales for July (Thu 19:50 EDT; Thu 23:50 GMT: Fri 08:50 JST)

Consensus Forecast, Year-over-Year: -0.8%

Retail sales are expected to fall 0.8 percent in July after missing expectations at growth of 0.5 percent year-on-year in June. Vehicle sales were down in June while food and beverage sales rose slightly.

German Retail Sales for July (Fri 02:00 EDT; Fri 06:00 GMT; Fri 08:00 CEST)

Consensus Forecast, Month-to-Month: -1.1%

June was a better month for retail sales which jumped a far higher-than-expected 3.5 percent. Yet, given prior weakness, the trend for sales has been no better than flat and for July forecasters are looking for a 1.1 percent decrease.

French CPI, Preliminary August (Fri 02:45 EDT; Fri 06:45 GMT; Fri 08:45 CEST)

Consensus Forecast, Month-to-Month: 0.5%

Consensus Forecast, Year-over-Year: 1.2%

After a 0.2 percent decline in July, the CPI for preliminary August is expected to rise a monthly 0.5 percent for a subdued year-on-year increase of 1.2 percent.

Eurozone HICP Flash for August (Fri 05:00 EDT; Fri 09:00 GMT; Fri 11:00 CEST)

Underlying HICP, Consensus Forecast, Year-over-Year: 1.0%

Underlying Eurozone inflation (ex-energy ex-food) is expected to remain subdued in August, at a consensus 1.0 percent in what would be 1 tenth lower versus a final yearly rate of 0.9 percent in July.

Eurozone Unemployment Rate for July (Fri 05:00 EDT; Fri 09:00 GMT; Fri 11:00 CEST)

Consensus Forecast: 7.5%

The unemployment rate in the Eurozone is expected to hold steady versus June's as-expected 7.5 percent.

Canadian GDP for Second Quarter (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast, Annualized: 3.0%

A 3.0 percent annualized growth rate is the consensus for second-quarter GDP, one reflecting a price-related rebound for the oil & gas sector and an expected gain for residential investment. The rate would compare with only 0.4 percent growth in the first quarter which was held down by consumer spending and business investment.

US Personal Income for July (Fri 08:30 EDT, Fri 12:30 GMT)

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.4%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.3% to 0.5%

PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.3%

Consensus Range: 0.2% to 0.3%

Core PCE Price Index, Month-to-Month Change

Consensus Forecast: 0.2%

Consensus Range: 0.2% to 0.3%

PCE Price Index, Year-on-Year Change

Consensus Forecast: 1.5%

Consensus Range: 1.4% to 1.5%

Core PCE Price Index, Year-on-Year Change

Consensus Forecast: 1.7%

Consensus Range: 1.6% to 1.7%

Consumer spending slowed from April through June but growth remained solid, while growth in income has been consistently solid month to month. For July, forecasters see a strong 0.5 percent rise for spending and a moderate-to-solid 0.3 percent gain for income. Core PCE prices have been marginally firming with expectations for July steady, at a monthly 0.2 percent gain for a 1 tenth increase in the year-on-year rate to 1.7 percent. Overall PCE prices are seen rising 0.3 percent on the month and 1.5 percent on the year.