Weaker data on the US economy makes a lower policy rate look possible. In the eurozone, on the contrary, this summer brought more clarity on trade and cautious optimism on growth.
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It was a hectic summer about the US economy. Indeed, in recent weeks, it emerged that the economy is performing weaker than previously thought. This was mainly due to the jobs figure for July which disappointed sharply, only 73 thousand jobs were added. It also showed weaker job growth in previous months now that more data is available. With more than a quarter of a million jobs, the figure for May and June was revised downwards.
In addition, consumers reported difficulty in finding jobs, confirming the weaker labour market. And then business surveys on the economy were also weak in July. But it was not all doom and gloom. Retail sales, for instance, were still fine. Still, all this was enough for investors to adjust their views on the economy and possible interest rate cuts by the Federal Reserve.
The latter was also because inflation was not too bad for now, at 2.7% in July. Concerns about sharp price rises thanks to the trade war have proved unfounded for the time being as companies are mainly taking care of their own higher costs. That could still change, but still worries about a new wave of inflation are waning. This is also because price categories, which are not affected by levies, such as rents and energy are actually depressing inflation. Wages, which have a major impact on inflation, also seem to be cooling as the labour market performs weaker.
With the predominantly weaker figures on the economy, US policy rates look set to fall further. While we previously expected interest rates to fall by 0.5 percentage points in December, the Fed appears to be moving rates down earlier. We expect a 0.25 percentage point decline in September, October and December. This is already more in line with the expressed wish of US President Trump, who has been pushing for lower interest rates for some time. Concerns about the Fed's independence remain high among investors and analysts. With that, the question remains whether the Fed will pursue a broader policy in the coming period than you would expect given the state of the economy.
For us in Europe, the summer was a lot less eventful. The trade deal between the EU and the US was initially met with disapproval, but investors were mostly relieved that a further escalation was avoided. Economic data on the European economy are still moving in all directions due to US levies, but certainly do not point to a recession.
Industrial production fell sharply in the eurozone in June, but the manufacturing sector is quietly becoming more positive. In August, the purchasing managers' index for manufacturing was downright positive. With a jump from 50.6 to 52.3, the index suggests that output rose strongly in manufacturing and new orders are also back on the rise. The services sector continues to show moderate growth, which only indicates that hopes for a strong growth spurt seem to be vain. But if the conclusion of a hot summer is that a European recession looks increasingly unlikely, that is already a win.
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