U.S. economic activity remained stable across most regions, according to the Beige Book released by the Federal Reserve on October 23, and it lowered market expectations for further rate cuts.

A survey conducted by the 12 Federal Reserve Banks showed that economic activity was flat in most regions, with only two districts reporting slight growth. Overall employment saw modest increases, with more than half of the regions reporting slight or moderate job growth, while wage growth continued to slow in several areas.

Prices continued to rise moderately, though businesses in many regions noted that input costs were increasing faster than their selling prices, leading to profit margin compression. Consumer spending showed mixed results, with some regions observing a shift towards less expensive substitute goods.

In terms of business activity, the report indicated that manufacturing activity declined in most regions. The banking sector remained steady with mixed loan demand, but lower interest rates led some banks to express a more positive outlook. The real estate market also remained stable, with national housing inventory increasing and home prices mostly unchanged. However, uncertainty around mortgage rates kept some potential buyers in a wait-and-see mode.

Overall, the steady trends in economic activity, employment, and inflation have dampened market expectations for further rate cuts by the Federal Reserve. The yield on the 10-year U.S. Treasury bond has risen to around 4.2%, and Fed Watch data shows a 97% probability of a 25-basis-point rate cut in November.

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The U.S. initial jobless claims have decreased last week, while continuing claims have reached their highest level in nearly three years, potentially reflecting increased difficulty for workers in finding new employment.

The U.S. initial jobless claims for the previous week were 227,000, a decrease of 15,000 from the revised figure of 242,000 from the previous period, according to data released by the U.S. Department of Labor on October 24. The 4-week moving average was 238,500, an increase of 2,000 from the revised figure of 236,500 in the prior period.

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The number of continuing unemployment claims was 1,897,000, an increase of 28,000 from the revised figure of 1,869,000 in the previous period, marking the highest level since November 3, 2023.

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Typically, an increase in continuing claims reflects growing difficulties for workers to find new employment; however, the recent rise may have been influenced by the impact of Hurricanes Helen and Milton.

In addition, Boeing’s multi-week strike may have led to layoffs among some of its suppliers. According to Bloomberg reports, around 33,000 Boeing employees participated in the strike, with approximately 64% rejecting Boeing’s latest contract offer on October 23, extending the strike further.

The rise in initial jobless claims in early October, combined with the effects of the recent hurricanes and Boeing’s strike, may result in an uptick in the October unemployment rate or a slowdown in nonfarm payroll growth.

U.S. existing home sales in September fell by 1% month-on-month and 3.5% year-on-year to 3.84 million units, near a 14-year low, according to data released by the National Association of Realtors (NAR).

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The existing home inventory increased by 1.5% in September to 1.39 million units, representing a 23% rise compared to last year’s 1.13 million units. The months of supply climbed to 4.3 months, up 0.1 from August.

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The median price for existing homes was $404,500 in September, up 3.0% year-on-year and a slight 0.5% increase from the previous period.

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“factors usually associated with higher home sales are developing,” said NAR Chief Economist Lawrence Yun. “There are more inventory choices for consumers, lower mortgage rates than a year ago and continued job additions to the economy. Perhaps, some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election.”

High Interest Rates Continue to Restrain Real Estate Market Activity…

In the past two years, annualized existing home sales have typically ranged from 4 million to 4.5 million units. One major reason is that many homeowners are unwilling to sell properties they bought at lower interest rates during the pandemic.

While the Federal Reserve cut interest rates by 50 basis points in September due to concerns over the labor market, bringing mortgage rates down to a near two-year low, recent improvements in labor market data may lead the Fed to take a more gradual approach to future rate cuts. This may cause mortgage rates to increase again in October, which could further suppress existing home sales.

(Source: MCC, TrendForce)

Given the high home prices and limited supply, many prospective buyers are likely to wait for further rate decreases, indicating that the existing home sales market could remain sluggish for some time.

According to data released by the U.S. Census Bureau on October 17, U.S. retail sales remained strong in September. Retail sales increased by 0.4% month-over-month, exceeding both the previous month’s 0.1% growth and the market expectation of 0.3%.

Breaking down the details, 10 out of 13 major retail categories showed growth. The largest contributor was grocery store sales, which saw a 4.0% month-over-month increase, up 3.7 percentage points from the previous period. The next largest growth was seen in clothing sales, which rose by 1.5%, an increase of 2.7 percentage points from the prior month. On the downside, sales declined in categories such as furniture stores, electronics and appliance stores, and gas stations.

Core retail sales, excluding autos and gas stations, increased by 0.7% month-over-month, higher than the previous month’s 0.3%. The control group for core retail sales also posted a 0.7% increase, up from 0.3% in the previous period.

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Overall, consumer spending in the U.S. remains robust. According to a Federal Reserve research, this strength is likely being driven by higher spending among middle- and upper-income groups.

The report noted that during the pandemic, loose monetary policy and subsequent government subsidies boosted the spending power of all income groups, especially lower-income households. However, since mid-2021, spending patterns have diverged. Middle- and upper-income groups have been able to maintain or even increase their average real spending, while lower-income groups have seen a decline. As of August 2024, average spending by higher-income groups had grown by 16.7%, while lower-income groups saw only a 7.9% increase.

(Source: Federal Reserve, TrendForce) 

Last week, Chinese stocks declined as the absence of new fiscal stimulus measures weighed on the market, with the CSI 300 Index dropping by 3.3%. In contrast, the U.S. S&P 500 Index continued to hit new highs, buoyed by gains across various sectors. In the bond market, easing concerns about the economy pushed the U.S 10-year Treasury yield back above 4%, while the spread between 10-year and 2-year Treasury yields widened to around 13 basis points. The U.S. Dollar Index also edged up slightly to approximately 103.

Key Economic Data Review for Last Week:

U.S. CPI:
The September CPI rose 2.4% year-over-year (previously 2.5%), slightly above market expectations of 2.3%, but still the lowest level since February 2021. This increase primarily reflected higher prices for apparel, medical services, and transportation services.

Meanwhile, rent inflation, which is closely watched by the Federal Reserve, rose 4.8% year-over-year (previously 5.0%), while owners’ equivalent rent increased 5.2% (previously 5.4%), both continuing their gradual decline.

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U.S. Michigan Consumer Sentiment Index:
The preliminary reading for the October University of Michigan Consumer Sentiment Index came in at 68.9, down 1.2 from September. The report showed that consumer optimism about the current economic situation was up 8% compared to the same period last year, although dissatisfaction with high prices remains.

Optimism about business prospects reached its highest level in six months, but confidence in personal finances, both current and future, showed slight declines. With the presidential election approaching, some consumers are finding it difficult to make long-term economic forecasts.

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Key Economic Data Review for This Week:

U.S. Retail Sales (10/17):
September employment data showed that the labor market remains balanced, while services PMI continued to expand, reflecting the resilience of the service sector in supporting U.S. consumption and employment. The market currently expects September retail sales to show a year-over-year decline to 1.8% (previously 2.1%) due to last year’s high base, but strong consumer resilience is likely to support a monthly increase of 0.3% (previously 0.1%).

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Eurozone Monetary Policy Meetings (10/17):
For the first time, the Eurozone’s September Harmonised Index of Consumer Prices (HICP) fell below the 2% target range. With the region’s economy weakening and several central bank officials expressing support for a rate cut, the market expects the European Central Bank to lower rates by 25 basis points in October, with a further 25 basis point cut anticipated in December.

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China GDP (10/18):
Recent monthly data for China’s industrial output, retail sales, and fixed asset investment have all continued to decline. The market expects China’s third-quarter GDP to grow by 4.6% (previously 4.7%) due to weak demand, making the 5% annual growth target increasingly challenging to achieve.

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