Introduction

September looks to be the month of more stimulus, whether in the coming week from the European Central Bank or in the following week by the Federal Reserve and Swiss National Bank. Global economic data have been showing cracks in trade, manufacturing and perhaps now in US employment as well, but the data aren't showing much weakness at all for service sectors which in size dominate the global economy. And not all central banks are cutting rates and not all central banks that have cut rates have continued to cut rates, at least not so far. We open our week's rundown with news out of one economy which has yet to see much of a slowdown at all, Canada.

Monetary Policy

There were no changes to key interest rates at the Bank of Canada's September meeting. In line with expectations, the target for the benchmark overnight rate was held steady at 1.75 percent. Yet much of the accompanying statement wasn't about economic strength at all but about the risk of weakness. The bank warned that as the US-China trade conflict has escalated, world trade has contracted and business investment has weakened, weighing on global economic momentum more heavily than projected in the July monetary policy report. Commodity prices have drifted lower on concerns about global growth prospects which together with rate cut responses by some central banks have pushed bond yields to historic lows and inverted yield curves in a number of economies, including Canada. And the BoC's outlook was less than robust noting that second quarter GDP growth of 3.7 percent was strong though the bank expects some of this strength to be temporary, driven as it was by a turn higher for energy production and related export growth as both recovered from weak performances in the first quarter. The bank warned that while housing also regained strength at a greater than expected pace, in part due to lower mortgage rates, rising sales could add to already high levels of household debt. And while continuing acceleration in wage growth boosted Canadian household income, consumption was unexpectedly soft in the second quarter, according to the BoC. Business investment, meanwhile, contracted sharply from the strong levels in the first quarter, mainly due to heightened trade uncertainty. Given these conditions, the central bank said it expects slower economic growth in the second half of the year.

International trade

Yet much of the economic news coming out of the Canada is in fact strong, especially employment which surged by a far higher than expected 81,100 in August and also the Ivey PMI which jumped more than 7 points to 58.6, a 3-month high that points to general acceleration for the Canadian economy. Yet not strong, at least for GDP, was the country's trade report for July which fell into deficit at C$1.1 billion reflecting a monthly 1.2 percent increase in imports and a 0.9 percent decline for exports. On a year-on-year basis as tracked in the accompanying graph, import contraction eased to 0.7 percent though export contraction deepened to 2.9 percent. The drop in exports was concentrated in energy products where prices were down in the month. In contrast, non-energy exports rose 0.5 percent despite a 20.9 percent decrease in wheat that took farm product sales down 5.4 percent, as this was more than offset by an 8.5 percent rise in metal & non-metallic mineral products that reflected higher sales of refined gold to the US and banking-sector transfers of gold. On the import side, consumer goods contributed most to the increase, rising 2.4 percent and led by a 19.7 percent jump in imports of pharmaceutical products to a record high mainly due to gains by Switzerland and Germany. Imports of aircraft and other transportation also contributed, rising 10.2 percent mainly on higher purchases of locomotive cars used to transport crude oil. Canada's surplus with the US, its main trading partner, narrowed to C$4.6 billion in July as exports fell 1.1 percent while imports rose 1.6 percent. July's report indicates a loss of the momentum for trade which was largely responsible for the second quarter's 3.7 percent pace, the strongest in two years.

After making 25 basis point cuts in May and June, the Reserve Bank of Australia left its policy rate unchanged in the week at a record low 1.0 percent. Yet the week's data out of Australia were soft including a 0.1 percent decline in July retail sales and a 1.4 percent year-on-year GDP rate for the second quarter that was a 10-year low and was pulled down by private capital spending. Helping GDP in the quarter was a large drop in imports for Australia, a country that, unlike many, continues to benefit from cross-border trade. Yet the country's trade surplus did narrow in monthly data for July to A$7.268 billion from A$7.977 billion in June reflecting a slower pace for exports and a rebound for imports. Exports rose a monthly 0.6 percent in July, down from growth of 1.4 percent in June and were down for both rural and especially non-rural goods offsetting a rise in service exports. Nevertheless, year-on-year growth in total exports, as tracked in the red line of the graph, picked up from 15.8 percent in June to 16.6 percent in July. Imports rose 2.9 percent on a monthly basis in July and were up 3.0 percent on the year after falling 3.5 percent in June. Ongoing strength for exports aside, however, the slowing in GDP likely reinforces the RBA's assessment that further policy easing may be required in coming months.

Industrial economy

And reinforcing the European Central Bank's prior hints that policy easing may resume are continuing warning alarms coming from Germany. Goods production failed to rebound as expected in July, contracting a further 0.6 percent for the third decline in the last four months and the first back-to-back decrease since late last year. Year-on-year change, as tracked in the graph, did improve from minus 4.8 percent to minus 4.2 percent but this only reflected an even sharper decrease in production a year ago. July's monthly decline was led by capital goods which were down a hefty 1.2 percent but intermediates, down 0.7 percent, were also very soft. Simply put, the July report leaves overall German manufacturing in dire straits. Total goods output in July was at its lowest level since December 2016 and 1.3 percent below its second quarter average. August and September will need to see a decent rebound if the sector is not to subtract from GDP this quarter. Yet as illustrated by the week's data on manufacturers' orders, demand remains very subdued and the outlook less than upbeat to say the least.

German manufacturers' orders fell a sharper than expected 2.7 percent in July, pulling year-on-year contraction from minus 3.5 percent to minus 5.3 percent and one of the worst readings in years. July's setback was mainly attributable to foreign demand which contracted a monthly 4.2 percent despite a 0.3 percent increase in the rest of the Eurozone. But the domestic market also shrank, down 0.5 percent for its sixth decrease in the last seven months and near a 5-year low. Within the overall monthly change, declines were widespread with consumer goods down 2.4 percent, capital goods 3.0 percent and intermediates 2.2 percent. The July report puts total orders at their lowest level since February 2016 and some 1.6 percent below their second quarter average.

GDP

Given strong demand for the Swiss franc during this time of global uncertainty, Switzerland is one economy that bears watching especially as a monetary policy decision is scheduled for September 19, the day after the Fed's decision and a week after the coming decision by the ECB. Swiss economic growth slowed in the second quarter with total output up a quarterly 0.3 percent, a tick short of a downward revised rate for the first quarter. As a result, annual growth declined from 1.0 percent to just 0.2 percent as tracked in the graph. Deceleration reflected a sharp reversal in equipment and software investment which contracted a quarterly 1.0 percent after a 2.4 percent spurt at the start of the year. Construction spending, at minus 0.1 percent, also went into reverse while government consumption, up 0.1 percent after 0.5 percent, provided a significantly smaller boost. Foreign demand similarly offered little help as exports of goods (excluding valuables) fell 0.8 percent while services were off 0.2 percent. Imports of goods (excluding valuables) were also weaker, down 1.7 percent, though services climbed 1.5 percent having declined in the previous three quarters. Outside of the household sector were growth was steady at a 0.3 percent quarterly rate, second-quarter GDP points to a broad-based slowdown in economic activity. Weaker exports are only partly to blame but the drop here will simply fuel worries at the Swiss National Bank about the buoyancy of the Swiss franc. This makes a fresh loosening of domestic monetary policy at the coming meeting all the more likely should, as is widely anticipated, the ECB ease again in the coming week.

Purchasing managers' indexes

Not yet touched upon in the week's assessment is of course the approach of the great asteroid that, as far as we know right now, may or may not strike earth and the developed economies. But it's definitely focusing attention, at least in the UK, on the great beyond at the expense of the here and now, and this was reflected in the week's dips in the CIPS services and construction PMIs. Yet it is specifically manufacturing that's considered the leading sector when it comes to directional signals for the economy as a whole and the signals from the UK are, well, not good. In fact, at a lower than expected 47.0, down from July's 48.0, the manufacturing PMI recorded its weakest reading since July 2012. To underscore the seriousness of the matter, the latest decline was led by new orders which saw their steepest fall in more than seven years. With both domestic and overseas demand contracting, headcount was pared at one of the fastest rates in the last six-and-a-half years and business optimism sank to a new record low. Stocks of finished goods rose, probably in anticipation of the October Brexit date, but underlying weakness was reflected in reduced input inventories. And unlike other countries, inflation pressures are on the rise with a weak exchange rate for the pound typically cited as a key factor in rising input costs. Factory gate prices were also hiked again. August's report is consistent with around a 2 percent quarterly rate of contraction in manufacturing output. Yet with prices on the up, the implications for Bank of England policy are less than clear. The upcoming BoE meeting on September 19 seems certain to leave the policy rate at 0.75 percent but beyond that, prospective Brexit developments could see interest rates move in either direction.

If central banks do lower rates this month — from the ECB, to the Fed, to the SNB — there would be plenty of justification if based on nothing but deterioration in trade volumes and global manufacturing. But many of the indications remain positive, a conflict illustrated in the US by disparate data published by the Institute For Supply Management. In the best showing since May and a reminder that the domestic US economy remains solid, ISM's non-manufacturing index easily beat expectations in August at 56.4. New orders were the big news in the report, jumping more than six points and over 60 at 60.3. And these orders were helping August's business activity index (akin to a production index in manufacturing) which rose more than eight points to 61.5. Underscoring the breadth of August's strength, 16 of 17 industries tracked in the survey reported composite growth in the month. Yet for policy makers, it's ISM manufacturing not non-manufacturing that is most closely watched and this index dropped below 50 to 49.1. New orders fell well below 50, down 3.6 points at 47.2, with new export orders down nearly 5 points at a sobering 43.3. Backlogs in this sample are in contraction as are employment and prices. This report suddenly looks like many of the global manufacturing PMIs whether out of Germany or the UK. And the separation between ISM's two indexes underscores 2019's economic theme — strength in domestic demand versus trouble for global demand and resulting trouble for domestic manufacturing, the latter the central justification for more stimulus.

Employment

Yet whether the Fed cuts rate later this month is still not a foregone conclusion, given not only circumspect statements by Jerome Powell at week's end but also a widely mixed US employment report that showed hints of inflation. Yet there are also indications that support a rate cut which is where we'll begin, most prominently a headline 130,000 rise for nonfarm payrolls that was 20,000 short of the bottom of Econoday's consensus range. Private payrolls, which exclude a census driven 34,000 rise in government payrolls, came in at only 96,000 which was 40,000 short of the low estimate. Manufacturing did manage to make the consensus range but the 3,000 increase was 5,000 short of the median with July revised a very steep 12,000 lower to growth of only 4,000. Yet the 130,000 overall showing really shouldn't have been that much of a surprise to forecasters given that monthly payroll growth, since February, has averaged no better than 136,000 which compares with monthly growth of 235,000 from January 2018 to January 2019. Now we'll turn to the data in the report that supports no action which are led by an outsized 0.4 percent rise in average hourly earnings to $28.11, a result that speaks to wage pressures tied to a narrowing supply of labor. Earnings have now posted four straight elevated readings, joining 0.3 percent increases in July, June and May as well. Wages have been climbing as the participation rate, up a sharp 2 tenths in August to 63.2 percent, has been rising this year and pointing to the risk of a diminishing supply of labor. The unemployment rate did not move in August, holding at 3.7 percent which, however, is historically very low and next only to 3.6 percent rates seen back in April and May. Sandwiched between slowing employment growth and rising wages is not the ideal policy combination for the Federal Reserve which would find itself in a bind should inflation begin to accelerate at the same time that global growth and the nation's manufacturing sector are turning lower. The latter underscores the weakness in manufacturing payrolls that, on the margin, probably tilts the conclusion toward the need, at least in a limited way, to add more stimulus to the economy.

We end the week's economic run with a warning of sorts from Challenger's US layoff count, one that doesn't point at all to rising wages. Versus 38,845 in July, layoff announcements totaled 53,480 in August more than 10,000 of which trade issues (that's right, specifically trade issues) were cited as the cause. Announcements in August were led by technology where layoffs this year are up more than threefold. Warehousing companies, losing contracts with retailers and e-tailers, have also been announcing layoffs this year according to the report as have mining companies. With new cross-border tariffs between the US and China having taken effect at the beginning of the month and despite the pending resumption of US-China trade talks, the outlook for Challenger's count in next month's report may not be that promising.

Markets: Trade talks boost stocks, as do rate-cut expectations

Confirmation at midweek that US and Chinese negotiations are set to resume as well as Hong Kong's move to withdraw the China extradition law along with reports of new stimulus for China, including a cut in bank reserve requirements, all made for a strong week in the global stock markets. China's Shanghai composite ended the week with a 1.8 percent weekly rise, Germany's Dax with a 2.1 percent gain, and the Dow out of the US with a 1.5 percent rally. Year-to-date gains, after wavering badly during the trade escalation of August, are back on track and very strong, at 20.3 percent for Shanghai, 15.5 percent for the Dax, and 14.9 percent for the Dow. In the background during the week are of course expectations for a sweep of interest rate cuts this month, starting next week for the European Central Bank followed by the Federal Reserve and possibly the Swiss National Bank as well. However likely the coming rate cuts appear to be, there are no certainties, underscored by cautious comments at week's end from Fed Chair Jerome Powell who wasn't sounding exceptionally dovish, once again saying the US economy is performing well and is in a "good place." Are rate cuts already priced into the global stock markets? Unfortunately the only way we would ever really know for sure is if the cuts don't pile up and any expected gains subsequently extracted.

The bottom line

The week was a swirl of cross-currents, some of them rip tides like German industrial production and ISM manufacturing that evoke the unpleasant feeling of being pulled out to sea. Others were positive including ISM non-manufacturing as well perhaps as Jerome Powell's faith that the US economy, despite trade troubles and slowing payroll growth, remains strong. Nevertheless, the risk that the downturn in global manufacturing will sooner than later depress services, however strong they may now remain, is what likely insures, or at least strongly suggests, that September could well be remembered as the month of central bank stimulus.

Week of September 9 to September 13

The European Central Bank's decision on Thursday is very certain to be the week's most important event, and though forecasters may not see a cut for the policy rate into the no-man's land of negative rates, they do see other stimulus measures being taken. Thursday and Friday will see key reports out of the US, first consumer prices then retail sales which should settle whether, or more accurately by how much, the Federal Reserve cuts rates at their policy announcement on September 18. The week starts off with the latest update on trade effects out of China on Monday followed through the week by a run of industrial production reports including out of France which is vying for the best performing economy of 2019.

Chinese Merchandise Trade Balance for August (Monday CST: Release Time Not Set)

Year-on-Year Exports, Consensus Forecast: 2.5%

Year-on-Year Imports, Consensus Forecast: -5.7%

Imports are seen rising 2.5 percent following July's 5.6 percent drop while exports are expected to decrease 5.7 percent versus July's 3.3 percent rise. China's trade data have been beating expectations and showing unexpected strength in exports.

UK Merchandise Trade for July (Mon 04:30 EDT; Mon 08:30 GMT; Mon 09:30 BST)

Consensus Forecast, Month-to-Month: -£9.4 billion

A deficit of £9.4 billion is expected for July merchandise trade. The deficit in June proved smaller-than-expected at £7.01 billion benefiting from a sharp rise in exports and a decline in imports.

Chinese CPI for August (Mon 21:30 EDT; Tue 01:30 GMT; Tue 09:30 CEST)

Consensus Forecast, Year-over-Year: 2.6%

The CPI in July rose 1 tenth to 2.8 percent for the highest reading since early last year. For August, the consensus forecast is 2.6 percent.

French Industrial Production for July (Tue 02:45 EDT; Tue 06:45 GMT; Tue 08:45 CEST)

Consensus Forecast, Month-to-Month: 0.5%

Following a 2.3 percent fall in June in a month that manufacturing contracted 2.2 percent, a 0.5 percent increase is the expectation for headline industrial production in July.

Canadian Housing Starts for July  (Wed 08:15 EDT; Wed 12:15 GMT)

Consensus Forecast: 214,500

Starts were stronger than expected in July but, at 222,013, were still down 11 percent on the year. For August, the consensus is 214,500.

Japanese Machine Orders for July (Wed 19:50 EDT; Wed 23:50 GMT; Thu 08:50 JST)

Consensus Forecast, Month-to-Month: -9.9%

At a month-to-month 9.9 percent decrease, forecasters see Japanese machine orders reversing much of June's unexpectedly strong 13.9 percent monthly increase. The non-manufacturing component rose sharply in June.

Eurozone Industrial Production for July (Thu 05:00 EDT; Thu 09:00 GMT; Thu 11:00 CEST)

Consensus Forecast, Month-to-Month: 0.2%

After rising sharply in May, Eurozone industrial production fell very sharply in June and included a drop in capital goods. For July the consensus is a monthly 0.2 percent gain.

European Central Bank Announcement (Thu 07:45 EDT; Thu 11:45 GMT; Thu 13:45 CEST)

Consensus Forecast, Change: No change

Consensus Forecast, Level: 0.00%

The ECB is not expected to cut its benchmark refi rate (0.00 percent), but it is seen lowering its deposit rate by 10 basis points to minus 0.50 percent as well as restarting its QE programme. It will also probably modify its forward guidance.

US Consumer Price Index for August (Thu 08:30 EDT; Thu 12:30 GMT)

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

Consensus Range: -0.2% to 0.2%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.8%

Consensus Range: 1.6% to 1.9%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.3%

Consensus Range: 2.2% to 2.4%

The core rate showed the most two months of pressure, up 0.3 percent in both June and July, in nearly 15 years and raised talk that higher tariffs are now being passed through to the consumer. But forecasters see only an incremental increase in pressure for August, at a consensus 0.1 percent overall and a gain of 0.2 percent for the ex-food and ex-gas core. Year-on-year rates are expected to hold steady overall at 1.8 percent and rise slightly to 2.3 percent for the core.

US Retail Sales for August, Month-to-Month (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 0.4%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: 0.0% to 0.4%

Retail Sales Ex-Autos & Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.6%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.6%

Having easily exceeded expectations in July at a 0.7 percent rise, modest cooling is the forecast for August where the consensus is looking for a 0.3 percent increase. Sales have been very strong in recent reports led by nonstore retailers and also including the discretionary category of restaurants. Unit vehicle sales rose in August which may hold down ex-auto sales which are expected to rise 0.2 percent. Ex-autos & ex-gasoline are expected at 0.4 percent with the control group seen very strong at 0.5 percent.