3 months ago • 5 mins
Data from around the world show that central banks are starting to get the upper hand in their fights with inflation, but for the economy, the hard work is only getting started.
The state of the US job market holds the clues as to whether the economy can sail out of the inflation storm and into calmer waters. What’s needed is some loosening of the labor market without a recession-inducing round of layoffs. That’s why this week’s JOLTs survey was so important. And it delivered good news, at least as far as America’s rate-setters are concerned. The number of job openings in the US dipped below nine million for the first time since March 2021, and there’s now 0.7 people for every available job.
On Friday, the most important US data of all – the monthly nonfarm payrolls report – showed that the economy added more jobs in August than analysts had predicted, but beneath the hood, there was even more encouraging news for the Fed’s inflation fighters. Unemployment ticked up to 3.8% – that’s the highest it’s been for over a year. Not only that, hourly pay moved up at a slower-than-expected 4.3%. At the risk of seeming too starry-eyed, it might all add up to the perfect not-too-hot, not-too-cold economic environment that stock markets love.
And there wasn’t much in the week’s big inflation data – core personal consumption index (PCE) – that contradicted that view. The index showed July’s prices rose 4.2%, versus the same time last year. And while that was slightly higher than June’s 4.1% pace, it’s worth pointing out that last year’s inflation comparisons made a difference here. As for the next three months’ data, well, that will lap last summer’s hot inflation readings, meaning there’s a decent chance that the PCE’s downward trend will continue.
In Europe, the European Central Bank (ECB) is in a battle royale with inflation. And new data shows that the bloc’s money supply – think: cash circulating in the economy, plus savings and cash on timed deposits – fell in July, for the first time since 2010. That’s a big deal because according to economic theory (the Fisher equation, to be precise), where the money supply goes, inflation follows. But that’s just theory, and right now inflation’s hardly on the ropes across Europe. On Thursday, core inflation for August came in at 5.3% versus the same time last year, matching July’s jump. That was hotter-to-the-touch than pundits had predicted.
Results from Swiss mega-bank UBS suggested that the bank’s recent arranged marriage with Credit Suisse might turn into one of those market fables told for years to come. See, UBS reported something called negative goodwill. Normally, goodwill is the amount of cash paid for an acquisition higher than the actual fair value of what’s being bought. Negative goodwill, then, shows that UBS bought Credit Suisse’s assets for way less than the bank now thinks they’re worth.
Over in China, economic data hasn’t been much to write home about lately. But maybe, just maybe, there’s a glimmer of hope. The country’s official manufacturing purchasing managers’ index (PMI) rose to 49.7 in August. That’s still below the magic 50 level – so that means the country’s manufacturing sector’s still shrinking, rather than growing – but it’s better than July’s 49.3. Hope springs eternal, then.
Maybe it’s time for the Federal Reserve (the Fed) to give itself a cautious pat on the back. At the end of the day, the Fed has two jobs to do. The first is to ensure maximum employment. There’s little doubt it gets an A+ on that front. The second is to ensure stable prices, meaning keeping a lid on inflation. That part’s still a work in progress, but the Fed’s been doing overtime this past year, announcing interest rate hike after interest rate hike to bring inflation down, and it’s paid off, as inflation’s cooled way down. But the Fed probably won’t be in a self-congratulatory mood when it next meets on September 19th. That’s because there’s plenty of hard work still to come.
The central bank’s next big decision is likely to be a matter of when to cut rates, to help the US economy recover from trickier times. And the timing of that call is much tougher than, say, whether to jack up rates when inflation was up near 10%. Even here, though, there’s some good news. The Fed can probably afford to be patient and let the economy simmer down a bit more before it makes a move. A weaker economy would probably be the final nail in inflation’s coffin, after all, and the Fed has a healthy war chest of more than 5% interest rate cuts to deploy as and when it needs to. That’s not something any Fed chair’s been able to say for some time. One thing’s for sure, the Fed’s been up against it for a couple of years and has had its critics, so perhaps it’s time to give credit where credit’s due.
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