China’s exports rebounded in August, marking the highest increase in 17 months, as reported by the General Administration of Customs of China on September 10. The total export value, measured in USD, reached approximately $309 billion, representing an 8.7% year-on-year growth, surpassing both the previous month’s growth of 7% and the market’s expectations of 6.5%. Meanwhile, total imports amounted to around $200.9 billion, with a modest year-on-year growth of just 0.5%, significantly lower than the previous month’s 7.2% and the market’s forecast of 2%.

China’s economy currently shows a divergence between weak domestic demand and strong external momentum. However, as more countries, including the U.S., Canada, and the EU, increase trade barriers with China, combined with a global slowdown in consumer demand, future export growth may face greater challenges. At the same time, the continued weakness in import growth reflects sluggish domestic consumption, exacerbating deflationary risks. If China is to achieve its full-year GDP growth target of 5%, it may need to introduce stimulus policies aimed at boosting domestic consumption soon.

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China’s CPI recorded positive growth for the seventh consecutive month, rising by 0.6% year-on-year in August, up from 0.5% in the previous month, as reported by the National Bureau of Statistics on September 9. However, the CPI is still below market expectations of 0.7%.

This rise was mainly driven by continuous increases in food prices driven by high temperatures and heavy rainfall, which surged by 2.8% (previously 0%), contributing 0.51 percentage points to the overall CPI growth.

However, non-food prices fell from 0.7% in July to 0.4%, and core CPI, which excludes food and energy, rose by only 0.3%, down from 0.4% in the prior month. August’s PPI reflected similar trends, with China’s PPI declining by 1.8% year-on-year, widening from a 0.8% drop in July. This marks the 23rd consecutive month of contraction, highlighting weak domestic demand and increasing deflationary risks.

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Last week, a series of U.S. employment data fueled concerns about a potential economic recession, causing the S&P 500 to drop 4.2%, marking its worst weekly performance since January 2022. U.S. 2-year and 10-year Treasury yields fell, reflecting market expectations of a more aggressive rate cut path for the rest of the year, with the 10-year/2-year Treasury yield spread turning positive. The U.S. dollar index also declined as expectations for more significant Federal Reserve rate cuts rose. Below is a recap of key economic data from last week:

• United States ISM PMI: The U.S. Manufacturing PMI for August came in at 47.2 (previous 46.8), remaining in contraction territory for the fifth consecutive month. This continued to reflect the restrictive monetary policy and uncertainties around the U.S. election, dampening corporate investment sentiment. Meanwhile, the U.S. Services PMI for August was 51.5 (previous 51.4), marking two consecutive months of expansion, with all sub-indices in expansionary territory.

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• United States Employment Report: The U.S. unemployment rate for August was 4.2% (previous 4.3%), in line with market expectations. Nonfarm payrolls increased by 142,000 (previous 89,000), falling short of market expectations of 164,000. Additionally, nonfarm payrolls for June and July were revised downward, signaling further cooling in the U.S. labor market.

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• Canada Monetary Policy: On September 4, the Bank of Canada (BoC) announced a 25 basis point rate cut, marking the third consecutive rate cut since June. Although inflation has returned to the target range, the BoC has begun to express concerns about the risk of deflation due to economic weakness. As a result, markets now expect that if the Canadian economy continues to deteriorate, the BoC may adopt a more aggressive rate-cutting approach.

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Key Data to Watch This Week

• China CPI (September 9): China’s July CPI rose 0.5% year-on-year (previous 0.2%), driven primarily by food prices due to extreme weather. Excluding food and energy, core CPI was 0.4% (previous 0.6%). The market expects August CPI to rise to 0.7%, supported by seasonal demand during the summer and government policies promoting service consumption.

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• United States CPI (September 11): U.S. CPI for July increased 2.9% year-on-year (previous 3.0%), while core CPI, excluding food and energy, rose 3.2% (previous 3.3%), both in line with market expectations and marking the lowest growth since April 2021. According to the Cleveland Fed’s CPI forecast, August CPI is expected to fall to 2.56%, with core CPI projected to ease to 3.21%.

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• Eurozone Monetary Policy (September 12): The ECB left rates unchanged during its July meeting, mainly due to rising wages, which kept services inflation elevated. However, recent data now supports a rate cut, with August’s harmonised index of consumer prices (HICP) falling to 2.2% year-on-year (previous 2.6%). Additionally, adjusted wage growth, which has been a key driver of inflation, dropped to 3.5% in the second quarter (previous 4.7%). As a result, markets widely expect the ECB to cut rates again in September.

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The U.S. non-farm payroll data for August is set to be released on September 6. Ahead of that, the ADP employment report, often referred to as the “mini-NFP,” was published on September 5. The report revealed that private-sector employment in the US rose by 99,000 jobs in August, significantly lower than the market expectation of 145,000, marking the lowest level since 2021 and signaling a further slowdown in the labor market. This has heightened speculations that the Federal Reserve might increase the scale of rate cuts.

The ISM Services PMI, which was released on the same day, presented a more optimistic picture. The August Services PMI came in at 51.5 (previously 51.4), slightly higher than the market expectation of 51.3, remaining in expansion territory for the second consecutive month.

Breaking down the sub-indices, the employment index fell to 50.2 (previously 51.1), in line with the ongoing labor market slowdown but still indicating growth. The new orders index rose to 53.0 (previously 52.4), and the supplier delivery time index increased to 49.6 (previously 47.6), reflecting continued strong demand for services. However, the business activity index dropped to 53.3 (previously 54.5), suggesting that high interest rates and costs are still exerting some negative pressure on business operations. Despite this, all indices remained in expansion, indicating that the overall services sector is still experiencing stable growth.

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In the commentary from managers surveyed, industries with rising demand (such as finance, information, entertainment, and healthcare) reported continued improvement or strength in business activity. Conversely, sectors with declining demand (such as construction, utilities, and wholesale trade) cited high interest rates and cost pressures as factors weakening business activity. Some companies in these sectors are also conducting layoffs or reducing hiring. Overall, while the demand in the services sector is significantly stronger than in manufacturing, there are still signs of uneven recovery across industries.

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The Bank of Canada (BoC) announced a 25 basis point rate cut on September 4, in line with market expectations, marking the BoC’s third consecutive rate cut since June. The BoC noted that CPI growth across its components has returned to historical range, with core inflation  nearing the target range. Although housing and service inflation remains elevated, it has begun to slow down, and there are currently few signs of significant inflationary pressure in Canada.

The BoC is now placing greater emphasis on signs of economic weakness. Recent data indicate that economic growth is slowing, and the unemployment rate has risen due to an increase in labor supply and a slowdown in hiring, which is easing inflationary pressures and introducing downside risks to inflation.

When asked about the pace of future rate cuts, BoC Governor Tiff Macklem stated that if inflationary pressure exceeds expectations, the central bank will maintain its current pace of rate cuts (25 basis points). However, if the economic condition worsens and inflation falls more rapidly, the BoC may accelerate the pace of rate cuts (50 basis points).

According to a report by Reuters, some economists predict that economic weakness could prompt the BoC to implement a 50 basis point rate cut in October or December.

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