Introduction

Mutually assured tariff increases are set to take effect over the weekend in what would mark a major escalation in the US-China trade war. What higher tariffs are doing to international trade is clear, that is leading to wide slowing in country trade flows. Whether these effects will become more severe is uncertain, and also uncertain is how economic policy will adapt to a less friendly global market. How the tariff war is affecting general confidence is yet another uncertainty, with some measurements falling while others, as we shall see, showing resilient strength. But first we'll start the week's rundown with a slam dunk when it comes to monetary policy, that is flat core PCE inflation in the US that would appear to raise the chances, however much employment and consumer spending may be booming, for a Federal Reserve rate cut at their September 17-18 meeting.

The Economy

Inflation

Inflation in the US did show pressure at the core consumer level in June and July yet price pressures are difficult to find in the latest personal consumption expenditures data. Both core PCE prices (ex-food ex-energy) and overall PCE prices posted modest and as-expected 0.2 percent monthly gains in August. Not hitting expectations was the year-on-year core rate which failed to budge at 1.6 percent. The basket of goods and services tracked in this report is updated regularly to match changes in consumer spending habits, making it the Fed's preferred inflation gauge and the single most important inflation reading for US monetary policy. It's lack of improvement toward the Fed's 2 percent goal clearly shifts the momentum to the rate-cut doves going into September's FOMC. Overall PCE prices edged 1 tenth higher to a still very subdued 1.4 percent.

Confidence readings

GfK's consumer climate index was confirmed at 9.7 in August, a level that is expected to hold in September and a tick short of its July mark. The latest results were on the firm side of the market consensus but still suggest that household morale is at its lowest level in more than three years. Expectations in August fell a sizeable 8.3 points to minus 12.0, a six-and-a-half-year trough and more than 30 points below a year ago. Trade conflicts with the US and the threat of tariffs against German exports as well as the rising risk of a no-deal Brexit have left German consumers more concerned about a possible recession. Income expectations also declined but only marginally and at 50.0 were down just 0.7 points on the month and 1.4 points on the year. Still, there may be growing downside risk for income given increasing signs that the jobs market is cooling – especially with some firms in Germany having already announced cuts in working hours. By contrast, the propensity to buy rose 2.5 points to 48.8. Although still nearly 6 points below a year ago, this sub-index remains relatively firm. Indeed, the latest results are not too bad. Nonetheless, with consumer spending growth having almost dried up last quarter, prospects for the current period do not look particularly good.

Confidence readings out of Italy have also been soft but are holding up better than Germany. Households were in a more cautious mood in August as confidence dropped from 113.3 in July to 111.9. Nevertheless, this only partially reversed July's 3.5 point spike which may yet mark a pivot higher for this index. This report also includes business sentiment which worsened in August, down 2.3 points to 98.9 and more than reversing July's nearly two point bounce and making for the lowest result since February. The economy-wide deterioration was only partially reflected in manufacturing where morale lost 0.4 points to only a marginally softer-than-expected 99.7. Yet this is still its weakest reading since December 2014. Elsewhere, there were fresh declines in services, retail and construction. All sectors saw multi-month, if not multi-year, lows. The general tone of the August data is soft and warns of another poor set of PMIs coming up. Third quarter GDP in Italy looks to be on shaky ground.

Like Italy, there are hints of improvement, or at least mixed hints, in US confidence data. The confidence report from the Conference Board surprisingly held onto the bulk of an 11.5 point surge in July, at 135.1 in August versus 135.8 in July. In fact, the present situation component, reflecting unusually strong assessments of the labor market, jumped more than 6 points to 177.2 and a 19-year high. What weakness there is in the confidence report is on the expectations side, down more than 5 points but at a still strong 107.0. And one outlook that is clearly showing cracks is for the stock market where the separation between bulls and bears has narrowed sharply, from a 41.3 percent versus 22.3 percent spread in July to a 36.3 to 30.5 percent spread in August. The consumer sentiment report is telling a more uniform story, falling well below low expectations to 89.8 for the worst reading since October 2016. The expectations component, in line with the direction of the confidence report, fell more than 10 points in the month to 79.9, however the current conditions component didn't rise at all, instead it fell 5 points to 105.3. The report cites consumer apprehension over rising tariffs which, for this phone sample, were spontaneously mentioned by 1/3 of the respondents. The contrast between the sentiment and confidence reports likely lies in the confidence report's concentration on job market assessments, an area that has been strong and likely giving this report a lift. The state of the consumer's mood probably lies somewhere in between and remains, at the worst, not that bad.

International trade

Speaking of tariff cliffs, spillover is increasingly apparent in some of the smaller economies in Asia. Hong Kong imports during July dropped a year-on-year 8.7 percent as tracked in the blue columns of the accompanying graph. This is the eighth straight decline. Exports from Hong Kong aren't doing much better, down a year-on-year 5.7 percent in July for a ninth straight decline. External demand from major markets was again weak in July, with exports to mainland China down 7.1 percent on the year and those to the US down 10.3 percent. Officials again cited weaker global growth and ongoing trade tensions between the US and China as factors weighing on exports and noted the near-term outlook would depend heavily on whether these factors improve. Yet the mix, as it is in many trade reports, is actually favorable for GDP as contraction in imports is exceeding contraction in exports. Hong Kong's merchandise trade deficit narrowed from HK$55.2 billion in June to HK$32.2 billion in July.

Industrial production

Weakness in trade has a direct effect on demand for goods, and lower demand for goods means lower rates of production. Singapore's industrial output was down 0.4 percent in July after falling 8.1 percent in June. Production has now fallen on the year in four of the last five months, broadly in line with similar results for Singapore's exports over this period. Yet July did show improvement, largely driven by electronics output where contraction eased to 0.9 percent on the year after falling 18.2 percent in June. Chemicals, transport engineering, and general manufacturing industries also improved in July. This was partly offset by weaker growth for the precision engineering industry and also weaker growth in biomedical output which rose 0.8 percent on the year, slowing from 5.4 percent previously. Excluding the volatile biomedical industry, manufacturing output fell 0.7 percent on the year in June after dropping 11.5 percent in June.

Capital goods

Slowing demand for goods points to slowing demand for the equipment and materials needed to make the goods. This is the central concern of many policy makers, including Jerome Powell who is squarely focused on weakness in manufacturing and its effects on the outlook for business investment. And the latest indications are mostly but not entirely positive. Core capital goods orders (nondefense ex-aircraft) rose a much stronger-than-expected 0.4 percent in the month of July following a 0.9 percent spike higher in June. Yet the two months of gains couldn't keep July's year-on-year rate, at minus 0.3 percent as tracked by the red line of the graph, from dipping below the zero line for the first time in three years. There were, in fact, several key industries important for capital goods that posted sharp declines in July including primary metals, fabrications, and machinery. Yet helping to offset this weakness were sharp gains in two other capital-goods intensive areas: communications equipment and electrical equipment. Yet despite overall improvement, shipments of core capitals goods in July, reflecting prior weakness in orders and which are tracked in GDP data, opened the third quarter with a steep 0.7 percent July decline. Business investment contracted in the second quarter and though orders point to improvement, the outlook for the third-quarter is up in the air.

GDP

And GDP is where we'll end this week's data run, turning to a country that is on the recession line and another where moderating growth is the unmistakable trend. Quarterly GDP in Italy was unrevised in the second look at the April-June period leaving total output unchanged from its level in the first quarter. However, the annual rate, as tracked in the graph, was shaded a tick lower and now stands in negative territory at minus 0.1 percent. The flat quarterly performance reflected a 0.3 percentage point contribution from final domestic demand that was offset by an equivalent decline in stock building. Within the former, household spending was only unchanged but gross fixed investment expanded a surprisingly solid 1.9 percent as transport equipment climbed an unsustainably steep 5.8 percent. Government consumption was off 0.1 percent while net foreign trade had a neutral impact as exports rose 1.0 percent and imports just a tick more. Italy's economy has still not seen quarterly growth in excess of 0.1 percent since the first quarter of 2018. In fact, GDP last quarter was still some 5 percent below its peak level in the first quarter of 2008, just before the onset of the global financial crisis. The bounce in investment may signal that firms are less worried about the economic outlook yet the risk of a reversal here could increase the risk of renewed contraction in overall GDP for the third quarter.

Slowing sharply from the first quarter, India's gross domestic product increased 5.0 percent on the year in the second quarter versus 5.8 percent in the first quarter and far short of expectations. This is the fourth consecutive decline in year-on-year growth and the weakest growth in more than six years. Unlike other central banks which are tentatively beginning to add stimulus, the Reserve Bank of India has been cutting rates very aggressively this year, by 35 basis points at its most recent policy meeting in early August after cuts of 25 basis points at the previous two meetings. Officials at the August meeting also lowered their near-term growth forecasts and indicated they remained open to lowering rates again in upcoming meetings if inflation held below the mid-point of the RBI's target range which it so far has. The weakness in economic activity shown in second-quarter GDP likely boosts the chances for further policy easing at the bank's next meeting in October.

Markets: The inexorable lightness of the yuan

Tit-for-tat tariff escalation is only one side of the building trade war. The other side, one that directly affects the financial markets as well as policy structure, is currency devaluation. This is quietly unfolding in the synchronized moves among many global central banks to either lower rates or promise to lower rates very soon. In China, of course, specific devaluation is front and center and is accelerating quickly in a very short period of time. It was only several weeks ago the People's Bank of China pushed the yuan through the longstanding 7-to-the-dollar barrier as seen in the accompanying graph. Before this, the bank's management of the currency was very deliberate, evident by the unnatural flatness of the yuan through most of this graph. But now what are China's intentions? Will devaluation become an incremental process to offset specific actions by its trading partners — or is the sky the limit? In actual warfare, unified command is generally seen as a positive. In the US, however, command over the currency is not really unified. The White House through the Treasury Department has traditionally had the responsibility for jawboning the dollar up or down, but jawboning pales against the concrete effects of Federal Reserve rate policy especially when that policy is not aligned with the administration's strategy. However the dollar turns out, the intentional weakening of the yuan stands to be the most important economic development in 2019.

The bottom line

As long as inflation remains dormant, the tempo and magnitude of central bank stimulus may well build going into year end. Ultimately, rate cuts will be efforts among individual nations to protect their manufacturing base. Manufacturing globally may be at the cusp of recession as indicated by the various PMIs but whether it falls into recession is still playing out. Yet however much the health of manufacturing may be at increasing risk, consumer confidence in most reports is not showing increasing deterioration, at least for now.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of September 2 to September 6

Monetary policy may or may not upend the coming week which, for economic data at least, looks routine, beginning over the weekend with what are expected to be flat PMI results out of China's manufacturing sector and ending Friday with August employment data from what has been a surprisingly strong US labor market. Yet like China, the manufacturing sector in the US has been in retreat with the outside risk on Tuesday of the first sub-50 or near-50 ISM index in three years. Yet however much manufacturing may be suffering, US trade data on Wednesday are expected to show improvement unlike German manufacturing orders on Thursday in which contraction is the expectation. Thursday's calendar also includes second-quarter GDP out of Switzerland, an economy that has been standing up against weakness in Europe and is likely to get increasing attention given demand for safety in the financial markets. Industrial production out of Germany will open Friday's session which will be capped by US employment where Econoday's consensus is calling for a very respectable nonfarm payroll rise of 158,000. Aside from data, there will be announcements from two central banks in the week with contrasting biases, first from the Reserve Bank of Australia which has been cutting rates and the Bank of Canada which has not. No action is expected from either bank. The week winds up on Friday with an evening speech in Zurich by Jerome Powell and a title that actually hints at a market mover: "Economic Outlook and Monetary Policy".

China: CFLP Manufacturing PMI for August (Fri 21:00 EDT; Sat 01:00 GMT; Sat 09:00 CST)

Consensus Forecast: 49.6

The CFLP manufacturing PMI in July came in slightly above expectations, up 3 tenths at 49.7 but still below 50 for the third month in a row. For August, forecasters see a fourth straight month of contraction at a consensus 49.6.

Chinese Caixin Manufacturing PMI for August (Sun 21:45 EDT; Mon 01:45 GMT; Mon 09:45 CST)

Consensus Forecast: 49.8 

The Caixin PMI has been hovering just below the 50 breakeven line with the consensus for August at 49.8. Respondents have been citing China-US trade tensions as the central factor for the deterioration in activity and sentiment.

Reserve Bank of Australia Announcement (Tue 00:30 EDT; Tue 04:30 GMT; Tue 14:30 AET)

Consensus Forecast, Change: 0 bp

Consensus Forecast, Level: 1.00%

The Reserve Bank of Australia is not expected to cut rates further at its September meeting. The last meeting in August produced no change as was expected following 25-basis-point cuts in each of the two prior meetings. But future rate cuts did remain on the table should continued slack become evident in the labor market.

US: ISM Manufacturing Index for August (Tue 10:00 EDT; Tue 14:00 GMT)

Consensus Forecast: 51.3

Consensus Range: 50.5 to 53.0

Stalling growth has been this year's consistent signal from the ISM manufacturing index which in July came in at 51.2 for the fourth decline in a row. Most indications in July's report slowed though new orders, at 50.8, did improve though only marginally. For August, Econoday's consensus is 51.3 though the bottom of the consensus range, at 50.5, is uncomfortably close to the 50 line.

Eurozone Retail Sales for July (Wed 05:00 EDT; Wed 09:00 GMT; Wed 11:00 CEST)

Consensus Forecast, Month-to-Month: -0.6%

Eurozone retail sales rose a stronger-than-expected 1.1 percent in June for the fifth increase in six months. Yet give back is the call for July at a consensus 0.6 percent decline.

US International Trade Balance for July (Wed 08:30 EDT; Wed 12:30 GMT)

Consensus Forecast: -$53.5 billion

Consensus Range: -$55.4 to -$53.8 billion

Tangible narrowing is the call for July's international trade deficit, at consensus $53.5 billion versus $55.2 billion in June. Advance data for the goods portion of July's report showed a lower-than-expected deficit of $72.3 billion for a $1.9 billion monthly decrease from June.

Bank of Canada Announcement (Wed 10:00 EDT; Wed 14:00 GMT)

Consensus Forecast, Change: 0 bp

Consensus Forecast, Level: 1.75%

Though underscoring risks from global trade tensions, the Bank of Canada nevertheless kept rates steady in their last meeting in July and no change is expected for the September meeting with the policy rate seen holding at 1.75 percent.

Swiss Second-Quarter GDP (Thu 01:45 EDT; Thu 05:45 GMT; Thu 07:45 CEST)

Consensus Forecast, Quarter-to-Quarter: 0.2%

Consensus Forecast, Year-over-Year: 1.0%

Second-quarter GDP is expected to rise a quarterly 0.2 percent versus 0.6 percent in the first quarter which beat expectations. The year-on-year call is modest at 1.0 percent growth.

German Manufacturers' Orders for July (Thu 02:00 EDT; Thu 06:00 GMT; Thu 08:00 CEST)

Consensus Forecast, Month-to-Month: -1.5%

At 2.5 percent, June orders rose much more strongly than expected for their best showing so far this year. Yet the month was unbalanced as gains were centered in overseas demand, not domestic demand which remained weak. For July, forecasters are looking for a 1.5 percent decrease.

German Industrial Production for July (Fri 02:00 EDT; Fri 06:00 GMT; Fri 08:00 CEST)

Consensus Forecast, Month-to-Month: 0.4%.

Industrial production in June fell an unexpectedly deep 1.5 percent with weakness centered in intermediates and capital goods. For July's monthly change forecasters are looking for a 0.4 percent increase.

US Nonfarm Payrolls for August (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: 158,000

Consensus Range: 150,000 to 180,000

Unemployment Rate

Consensus Forecast: 3.7%

Consensus Range: 3.6% to 3.8%

Private Payrolls 

Consensus Forecast: 148,000

Consensus Range: 143,000 to 155,000

Manufacturing Payrolls 

Consensus Forecast: 8,000

Consensus Range: 1,000 to 10,000

Participation Rate

Consensus Forecast: 62.9%

Consensus Range: 62.9% to 63.0%

Average Hourly Earnings

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

Consensus Range: 0.2% to 0.4%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.1%

Consensus Range: 3.0% to 3.4%

Average Workweek

Consensus Forecast: 34.4 hours

Consensus Range: 34.4 to 34.4 hours

Solid and steady are the expectations for August nonfarm payrolls, at a consensus 158,000 versus a 164,000 increase in July that beat expectations for a second month in a row. The unemployment rate is holding steady at 3.7 percent with average hourly earnings, which did move higher in July, holding steady with a monthly increase of 0.3 percent. In an offset, the year-on-year rate for earnings is expected to ease 1 tenth to 3.1 percent. Private payrolls are seen rising 148,000 with manufacturing payrolls, which were highlights of both the July and June reports, expected to increase 8,000. Weakness in the workweek was a negative surprise in July but is seen rising back to 34.4 hours with the labor participation rate seen easing 1 tenth to 62.9 percent.