Introduction

Global trade is on the edge of contraction, evident in many trade reports across Europe and Asia and that includes the US as well. And global manufacturing as a result may already be in contraction, a perhaps inexorable outcome highlighted dramatically in the week by the latest reports from the ISM. But central banks really aren't to blame for all this trouble; they've been doing their share all year by cutting rates and cutting rates again and trying to keep inflation up. Yet how low can rates go? In our search for this answer, we start with a country that hasn't been in recession for a very long time but, as far as monetary policy goes, is running out of traditional fire power to prevent one.

The economy

Monetary policy

As many expected, the Reserve Bank of Australia on Tuesday cut its main policy rate by 25 basis points to 0.75 percent and a new record low. This follows cuts of 25 basis points at the RBA's meetings in May and June. The outlook for the global economy, according to the latest statement, remains "reasonable" but the text again cautioned that risks are tilted to the downside due to uncertainty over global trade and technology disputes. The statement noted that domestic growth in the second quarter was weaker than expected though, together with the first quarter, was a little better than the second half of 2018. This may indicate a "gentle turning point" for the economy, with near term growth to be supported by a number of factors including low interest rates, recent tax cuts, infrastructure spending, and "signs of stabilisation" in parts of the housing market. Prospects for household consumption were again cited as the main domestic uncertainty.

Officials' assessment of labour market conditions played a major role in their decision to cut rates earlier in the year and they noted in the latest statement that the unemployment rate has remained steady around 5.25 percent. They retained their assessment that this level of spare capacity in the labour market indicates that the economy can sustain lower rates of unemployment without triggering an unwelcome jolt in inflation. Turning to the inflation outlook, officials noted that price pressures are in fact "subdued", with headline inflation still below their 2 to 3 percent target range. But they continue to expect inflation to "increase gradually", forecasting underlying inflation to be "a little under" 2 percent in 2020 then "a little above" that level in 2021. Based on this assessment, officials decided that a rate cut was appropriate to not only support employment but to also "provide greater confidence that inflation will be consistent with the medium-term target". The statement notes that it is "reasonable to expect" that policy rates will stay low for an "extended period" to make more "assured progress" towards hitting the inflation target.

The Reserve Bank of India made for a one-two rate-cut punchout, cutting its benchmark repurchase rate as expected on Friday by 25 basis points to 5.15 percent. This follows a cut of 35 basis points at their last meeting in August and cuts of 25 basis points at the previous three meetings. This rate is now at its lowest level since mid-2010. Since the RBI's August meeting, incoming data have generally been weak. Year-on-year GDP growth has slowed for four consecutive quarters, from 5.8 percent in the March quarter to a six-year low of 5.0 percent in the June quarter, and PMI survey data suggest this weakness extended into the September quarter as well in both the services and manufacturing sectors. RBI officials now forecast GDP growth of 6.1 percent in the 2019-20 fiscal year ending next March, well down from their previous forecast of 6.9 percent, with their forecast for the first quarter of the 2020-21 fiscal year also revised lower. On inflation, which has been steady the last three months around 3.2 percent, officials did upgrade their forecasts for the next three quarters to 3.4 percent, 3.5 percent and 3.7 percent respectively, yet this would still be below the 4 percent mid-point of the bank's 2 to 6 percent target range. And with the outlook for growth now lowered, officials concluded that there was "policy space" to address growth concerns and cut rates further. Until headline inflation moves decisively higher, the bank's policy bias over the coming months will likely remain toward further policy rate cuts.

Anecdotal indications

But the week's big news that rattled the markets wasn't actual rate cuts but data, and anecdotal data at that, that point squarely to further rate cuts ahead, specifically for the US Federal Reserve. The Institute For Supply Management had a memorable week, memorable for the impact that rough and ready diffusion indexes can have on the economic outlook though perhaps regrettably so since the indications are less than favorable. The risk that exports may be buckling is the Fed's immediate concern, one that is strongly underscored by this report's new export index which, falling more than 2 points to 41.0, is at a ten-year low. The composite index, at a 47.8 headline, was more than 1 point under Econoday's consensus range which is also memorable since nearly all forecasters take a stab at this report. September's data showed sweeping contraction whether for total orders or for employment, the latter detail offering a useful foreshadowing of Friday's outright decline in manufacturing payrolls which we'll get to later. Other ISM manufacturing details included flat price pressures for inputs, contraction in inventories, and improvement in delivery times – all consistent with a sample that is sinking.

The ISM's second punch landed on Thursday with an unexpectedly weak non-manufacturing report where the composite headline, at 52.6, likewise came in well below the consensus range and a three-year low. Slowing in new orders for this report, down 6.6 points to 53.7, was especially abrupt though new export orders did hold above breakeven 50 with a 1.5 point gain to a tangibly positive 52.0. Yet the report's other readings, including a 6.3 point drop for business activity, are consistent with a decisive break lower for this sample. Report after anecdotal report, headlined in the US by the ISM and including Markit Economics' international PMIs, are signaling economic slowing if not contraction underway right now, representing a downward pivot for the global economy from mid-year.

International trade

Not all countries are suffering outright contraction in cross-border trade but the US appears to be right on the cusp, posting flat readings for exports and imports whether on a monthly basis or a yearly basis. US exports managed only a 0.2 percent monthly gain in August with the yearly increase half that, at only 0.1 percent. Imports into US rose 0.5 percent on the month in August, but as tracked by the red line of the accompanying graph, were no better than unchanged from a year ago. For GDP, the level of exports and imports doesn't count, it's their relationship that does and this, as in many other countries showing import and export declines, is largely neutral right now, that is both sides of the ledger are sinking at the same pace. August's deficit of $54.9 billion lifts the third-quarter monthly average to $54.5 billion which is up but not dramatically from a $54.0 billion monthly average in the second quarter. With one month still to go, net exports look to be a possible negative for third-quarter GDP.

Of special note in the August trade data, one that underscores structural improvement tied to higher domestic oil production, was the lowest US petroleum deficit ever, at $0.3 billion in the month. But another low, and this an unwanted one, was a two-year low in capital goods exports, down $1.4 billion in the month to $44.3 billion in what underscores concerns over global business investment and declines for US aircraft amid the 737 grounding. The trade gap in goods with China narrowed by $1.0 billion in August to $31.8 billion, but the level nevertheless is much larger than $20 billion monthly gaps earlier in the year. Yet country data aren't adjusted for seasonal and calendar effects which make immediate conclusions, amid like-for-like tariffs, hard to draw. A conclusion not hard to draw is that cross-border trade is in constriction and poses risks to the US manufacturing base.

Retail sales

Global trade and related trouble in manufacturing have proven, however, to be comfortably distant from consumer activity, at least so far. Retail sales have generally been holding up, whether in the US or Europe where volumes, in data for August, climbed 0.3 percent to put annual growth, as tracked in the accompanying graph, at 2.1 percent, down just a tick from July. The underlying picture was marginally firmer as non-food purchases, excluding auto fuel, rose 0.4 percent on the month, although this did follow a sizeable dip of 0.7 percent in July. Outside of food, drink and tobacco which was unchanged on the month, all major categories posted gains led by pharmaceutical and medical goods (1.6 percent) and computer and electrical equipment (0.8 percent). Regionally, there were monthly advances in France (0.6 percent), Germany (0.5 percent) and Spain (0.6 percent), each following either a fall or no change in July. The results put average Eurozone sales in July and August 0.1 percent above their mean level in the second quarter. Apart from any revisions, the sector will make a positive contribution to third quarter GDP growth unless September sees a drop in excess of 0.5 percent. Retail sales in Europe remain on a gentle upswing.

The Reserve Bank of Australia cited concern over household consumption in its statement early in the week but data later in the week were positive. Retail sales in Australia rose 0.4 percent on the month in August after no change in July. On the year, retail sales were up 2.9 percent, slightly higher than July's 2.6 percent gain. Five of the seven major categories of spending posted stronger rates of growth in August. Sales of clothing, footwear and accessories rose 1.8 percent after falling 0.9 percent previously, while sales for cafes, restaurants and takeaway food services fell 0.3 percent after dropping 0.3 percent in July. Sales growth for the largest category, food, was steady at a monthly 0.4 percent. Sales rose in six of Australia's eight states and territories and fell in the other two with the first and second most populous states, New South Wales and Victoria, both recording an increase of 0.3 percent. Recent reductions in policy rates and tax rates have likely provided some boost to retail sales though, for the RBA, growth probably remains relatively subdued and would be better if not for sluggish gains in household disposable income.

Wage inflation

Sluggish income growth is actually a puzzle right now playing out in the US where unemployment is very low and wages are not very high. The question is whether there is or isn't available slack in the labor market? Judging by September's 3.5 percent unemployment rate, a 50-year low that fell below Econoday's consensus range, there may not be much available capacity at all. Yet wage pressures, as measured by average hourly earnings, eased significantly in September for a 2.9 percent year-on-year growth rate that is the lowest since July last year. Payroll growth itself is running a notch or two below last year and is well under 200,000, but it is still steady and very solid and looks to further test the labor market's available capacity. Nonfarm payrolls rose 136,000 in September with August revised sharply higher, up an additional 38,000 to 168,000. Yet manufacturing, the economy's weak link right now, is showing weakness, down 2,000 in September versus expectations for a 3,000 gain. Over the last three months this sector has added only 4,000 payroll jobs, a detail that won't miss the eye of Fed policy makers who are focused specifically, and with concern, on the health of this sector.

But the other half of this report's theme is strength, that is steady demand approaching limited supply. The pool of available workers fell 545,000 in the month to 10.6 million which is an eight-year low. Included in the pool are the number of unemployed which fell 275,000 in the month to 5.8 million and a nine-year low. Yet however much these readings may make policy hawks uneasy, the drying up of the labor pool has yet to trigger sustained wage inflation. For policy makers the danger that the economy is running ahead of what the labor market can sustain is secondary, at least for the doves, to the danger that the nation's manufacturing base may be taking a direct hit.

Consumer inflation

The sagging in US wage pressure is, in fact, in line with the large majority of inflation data including Eurozone consumer prices which are also sagging or at best holding steady. At a 0.9 percent annual rate, September's flash estimate was a tick below August and on the soft side of expectations. It was also the first sub-1 percent outturn since November 2016. Yet the deceleration in the headline rate was not mirrored in key core measures. Excluding energy, food, alcohol and tobacco, inflation edged 0.1 percentage point firmer to 1.0 percent, its fifth consecutive reading within a tight 0.8 to 1.0 percent range. Similarly, omitting just energy and unprocessed food the rate was also a tick higher at 1.2 percent. Elsewhere, services accelerated from 1.3 percent to 1.5 percent while non-industrial goods held flat at 0.3 percent. Energy (minus 1.8 percent after minus 0.6 percent) and food, alcohol and tobacco (1.6 percent after 2.0 percent) provided the main downward pressure. The stability of underlying inflation no doubt comes as a relief to the European Central Bank. Still, inflation remains far too low and does raise the question whether inflation expectations may begin to breakdown.

We end where we began, and that is a central bank (the RBA) cutting rates to lift inflation. It doesn't appear to have helped much in Switzerland. Consumer prices were surprisingly weak in September, down a monthly 0.1 percent that reduced the annual inflation rate from 0.3 percent to a microscopic 0.1 percent, its third consecutive decline and its weakest reading since December 2016. The headline deceleration was wholly attributable to import prices where the yearly rate dropped from 0.1 percent to minus 0.5 percent. Strength in the Swiss franc continues to be a major factor here. By contrast, the rate for domestic prices was unchanged at 0.4 percent. Within the CPI basket, the main downward pressure on the monthly change came from recreation and culture which posted a 1.2 percent decrease and alone subtracted more than 0.1 percentage point. Petroleum products (minus 1.0 percent) also had a significant negative effect as did restaurants and hotels (minus 0.4 percent). However, most other categories recorded modest gains (clothing and footwear a hefty seasonal 4.1 percent) such that the core CPI, which excludes energy and unprocessed food, was unchanged on the month and 0.4 percent higher on the year, also matching August's results. Nonetheless, core inflation remains dangerously low; the Swiss National Bank's task of meeting its price stability goals is not getting any easier.

MARKETS: Keeping your head up and your currency down

Lower prices for imports reflect in part lower global demand for imports which may well be an element playing out right now in the inflation picture. But lower import prices also reflect, and this is something central banks can immediately act against, a rise in a national currency, appreciation that makes imports cheaper and less inflationary and exports less competitive. Though the Reserve Bank of Australia is doing its part to keep down demand for its national currency by lowering rates, it has, however, squeezed its available policy space. With only 75 basis points to go before hitting zero, that means only three more incremental cuts, ones that could well prove increasingly less and less effective and would increasingly raise expectations for the now completely conventional policy tool that was once so unconventional, that is direct central-bank buying of financial assets. The RBA is moving toward a wall that the Bank of Japan has had its back to for a long time. The BoJ has been promising strong stimulative measures without hesitation all year but with its policy rate already at minus 0.1 percent, where it can go? The accompanying graph tracks the value of the Australian dollar which, thanks in part to the RBA, has been going down all year against a mostly rising trend for dollar-yen, tracked here in reverse order to show the yen's rising value.

The bottom line

Australia hasn't been in recession in nearly 30 years but the direction of the RBA's policy rate does raise the question, if nothing else, that the outlook for economic growth has slowed considerably. Constriction in cross border trade is clearly wearing down many global indicators especially those that track manufacturing. Yet employment and consumer spending still remain solid and until they show some cracks, actual GDP rates are likely to hold up. But if and when they do begin to show cracks it would very likely, for policy makers seeking to smooth booms and busts, already be too late.

**Jeremy Hawkins and Brian Jackson contributed to this article

Week of October 7 to October 11

The deteriorating health of manufacturing is the global focus right now and the coming week will see a series of important updates on the sector. Germany has been showing the most trouble and the country's manufacturers' orders will be the focus of Monday's session while on Tuesday the focus will be German industrial production. Neither report is expected to show much strength. But it will be Thursday when industrial production reports completely dominate the calendar, first from France then Italy followed by the UK. Throw in Japanese machinery orders on Wednesday and the status of global manufacturing and the unfolding impact from slowing global trade should be fully updated. The week also sees household spending data out of Japan and retail sales out of Italy with US consumer prices on Thursday and Canada's Labour Force Survey on Friday rounding out the week. Federal Reserve Chair Jerome Powell will be making a number of US appearances in the week including luncheon remarks on Tuesday before an economics group.

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

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

Manufacturers' orders during July fell 2.7 percent in a monthly decline that reflected sharp contraction in foreign demand. In what would offer the latest indication of trouble out of Germany, August is not expected to show much improvement with the consensus calling for a 1.5 percent decline. 

Japanese Household Spending for August (Mon 19:30 EDT; Mon 23:30 GMT; Tue 08:30 JST)

Consensus Forecast, Month-to-Month: 2.8%

Consensus Forecast, Year-over-Year: 1.2%

Japanese household spending is expected to improve, posting a yearly increase of 1.2 percent in August versus plus 0.8 percent in July. Sales in July were held down by weaker spending on food and utilities that offset higher spending on housing. August's month-to-month call is up 2.8 percent versus July's 0.9 percent decline.

German Industrial Production for August (Tue 02:00 EDT; Tue 06:00 GMT; Tue 08:00 CEST)

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

Consensus Forecast, Year-over-Year: -4.2%

Industrial production in July, at a monthly decline of 0.6 percent following minus 1.1 percent in June, fell into back-to-back monthly contraction for the first time since late last year. For August the expectation for Germany is a third decline, though just barely at 0.1 percent. Year-on-year, the expectation is minus 4.2 percent which would match July's annual rate of contraction.

Italian Retail Sales for August (Tue 04:00 EDT; Tue 08:00 GMT; Tue 10:00 CEST)

Consensus Forecast, Month-to-Month: 0.2%

Consensus Forecast, Year-over-Year: 3.1%

After a strong June, Italian retail sales significantly missed expectations in July at 0.5 percent monthly contraction. For August the consensus is a 0.2 percent increase on the month for yearly growth of 3.1 percent that would, however, come in below July's annual growth of 2.6 percent.

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

Consensus Forecast, Month-to-Month: -2.5%

At a month-to-month decline of 2.5 percent, Japanese machinery orders in August are expected to improve from July's sharp but still less severe-than-expected 6.6 percent decline. Non-manufacturing orders fell sharply in July to offset a gain for manufacturing.

French Industrial Production for August (Thu 02:45 EDT; Thu 06:45 GMT; Thu 08:45 CEST)

Consensus Forecast, Month-to-Month: 0.4%

Industrial production is expected to increase a monthly 0.4 percent in August after rising 0.3 percent in July that followed sharp spikes higher and lower in May and June. France's manufacturing component also rose a monthly 0.3 percent in July.

Italian Industrial Production for August (Thu 04:00 EDT; Thu 08:00 GMT; Thu 10:00 CEST)

Consensus Forecast, Month-to-Month: 0.2%

Consensus Forecast, Year-over-Year: -1.9%

Industrial production in Italy has fallen in four of the last five months, at a monthly minus 0.7 percent in July that showed special weakness for capital goods. Plus 0.2 percent is the forecast for August with the year-on-year rate expected to come in at minus 1.9 versus July's minus 0.7 percent.

UK Industrial Production for August (Thu 04:30 EDT; Thu 08:30 GMT; Thu 09:30 BST)

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

Consensus Forecast, Year-over-Year: -0.9%

UK Manufacturing Production

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

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

Forecasters are calling for 0.1 percent August decreases for both overall industrial production as well as manufacturing. July, at plus 0.1 percent overall and plus 0.3 percent for manufacturing, was a moderately positive month for this report though annual rates, at minus 0.9 percent and minus 0.6 percent respectively, remained in the negative column. Year-on-year rates for August are also expected to remain in the negative column, at minus 0.9 percent overall and minus 0.8 percent for manufacturing.

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

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

Consensus Range: -0.1% to 0.3%

Consumer Price Index

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

Consensus Range: 1.6% to 2.0%

CPI Core, Less Food & Energy

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

Consensus Range: 0.2% to 0.3%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.4%

Consensus Range: 2.4% to 2.6%

A fourth straight 0.3 percent rise for the core rate is not expected, at a consensus 0.2 percent for September. Year-on-year, the US core is expected to hold steady at 2.4 percent. The overall CPI is forecast to rise 0.1 percent with this yearly rate up 1 tenth to 1.8 percent.

Canadian Labour Force Survey for September (Fri 08:30 EDT; Fri 12:30 GMT)

Consensus Forecast, Unemployment Rate: 5.7%

Canada's unemployment rate is expected hold unchanged at 5.7 percent in September. August employment surged 81,100 to far reverse back-to-back declines in July and June.