Tom Moeller

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At today’s meeting of the Federal Open Market Committee, the target range for the Federal funds rate was left unchanged at 5.25% - 5.50%. Each member of the FOMC voted in favor of today’s action.

The statement following today’s meeting began, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee's 2 percent inflation objective.”

The Fed continued to mention reducing inflation as its primary goal. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

“In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.”

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- Federal funds rate range remains at 5.25% - 5.50%, where it’s been since early-August 2023.
- Rate stays at highest level since March 2001.
- Fed maintains focus on inflation reduction.

FOMC Holds Funds Rate Steady

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Total housing starts slipped 0.5% (-0.7% y/y) during September to 1.354 million (SAAR) after rising 7.8% in August to 1.361 million, revised from 1.356 million. July starts fell 5.0% to a 1.262 million, revised from 1.237 million. Starts remained 25.9% below the most recent peak of 1.828 million in April 2022. The Action Economics Forecast Survey expected 1.349 million starts in September.

Multi-family starts dropped 9.4% (-16.2% y/y) to 327,000 last month, following a 10.0% August shortfall to 361,000. They reached a high of 624,000 units in November 2022. Offsetting this decline, single-family starts rose 2.7% (5.5% y/y) to 1.027 million after rising 16.1% in August. Single-family starts stood at the highest level since April.

Starts were down in most parts of the country. Starts in the Midwest fell 9.1% (-6.3% y/y) to 179,000 following a 9.4% August increase. Starts in the South weakened 3.4% (-6.6% y/y) to 738,000 after rising 19.7% in August. Also falling were starts in the West which weakened 10.1% (-13.2% y/y) to 257,000 after rising 5.5% in August. Starts in the Northeast surged 57.9% (109.3% y/y) to 180,000 units after falling 34.1% in August.

Building permits weakened 2.9% (-5.7% y/y) in September to 1.428 million units after rising 4.6% in August. Single-family permits edged 0.3% higher (-1.2% y/y) to 970,000 last month after rising 2.8% in August. Multi-family permits declined 8.9% (-14.1% y/y) to 458,000, after increasing 8.2% in August.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Multi-family starts fall sharply but single-family starts rise to five-month high.
- Starts decline in three out of four regions of country.
- Building permits sideways trend continues.

U.S. Housing Starts and Permits Move Lower in September

Robert Brusca

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Japan’s core CPI – the CPI excluding fresh food and energy- rose by 0.2% in September as the headline rate fell by 0.4% - both month-to-month. The measure of all items excluding food and energy rose by 0.1%; prices excluding only fresh food fell by 0.3%.

**Year-on-year inflation trends**
Year-on-year inflation was excessive for the headline at 2.4%, but that was a down-draft from a year-on-year pace of 3.1% from a month-ago. Core inflation settled to target on a 12-month basis as the pace dropped to 2.0% from 2.1% a month ago. Prices less fresh food fell to a 2.4% pace over 12 months from a 2.8% pace a month ago. Prices excluding all food and energy logged a 12-month gain of 1.7%, the same as a month ago. Not surprisingly, different measures show different trends. The headline is a bit hot but the preferred core measure, excluding only fresh food and energy, shows inflation dead-on target. Still, that is not the end of the story.

**Inflation risk rises in the core**
The X-fresh food and energy core (xFFE) is spot-on over 12 months, but that may be a passing fancy. Sequential growth rates for this measure show the xFFE core running at a 2.3% clip over six months and by 3.0% at an annual rate over three months. Inflation may only be transitorily at its 2% target as it builds a head of steam for stronger expansion that, if sustained, would push the core beyond 2%.

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**The BOJ’s policy hurdles**
The Bank of Japan is trying to corral inflation and herd it to its 2% target amid difficult circumstances. Like the rest of the world, COVID hit Japan hard. But Japan also has been in a long slog trying to raise inflation from undershooting after a substantial period of undershooting. This accomplishment may seem like nothing more than textbook central banking. But it occurred in an environment in which Japan’s population is shrinking and as Japan also has faced several severe shocks including a tsunami that triggered a nuclear accident. None of that is garden variety central banking. 

**Japan closes in on policy success**
Japan finds its well distanced from those past issues in policy if not in time. Inflation, by various measures, seems more like it is swarming at or around the 2% target - a sign of more substantial progress. But the BOJ is most interested in its headline and in the Fresh food and ex-energy core. That duo currently casts a dilemma for policy. Headline inflation is excessive but has been cooling as its 3-month pace shows that cooling continues. But the x-fresh food and energy metric that is spot-on-target over 12 months also is moving and its momentum is up and as high as a 3% pace over 3 months. 

**BOJ quandary – a way out**
This divergence leaves the BOJ in a quandary. It is not so far from achieving its goals that it could not just wait things out. The headline vs. core divergence is there but is not severe- it may be a bit uncomfortable but it’s not policy rift. And since the BOJ still has interest rates low and has been seeking an opportunity to normalize rates, the thing to do is probably to pay attention to the core inflation dynamic and raise the policy interest rate to bring core inflation back to heel. The core acceleration would seem to give the BOJ the opportunity it seeks to continue its move to policy normalization without risking economic growth. 

**Enough economic strength to absorb a rate hike**
Japan’s PMIs show readings hovering just above the 50 breakeven mark for growth. The service sector shows more strength than manufacturing – manufacturing has a reading that is just a few ticks below breakeven. Still the ranking of these observations over the last four and one-half years shows the composite PMI and the services PMI with standings in their top-ten percentiles! Manufacturing ranks lower but is still solid at the two-third mark for its historic 4 ½ year ranking. Japan’s Tankan report has echoed these signals with a similarly solid view of manufacturing for large firms and an extremely strong reading for large nonmanufacturing firms. The economy seems to be primed for the BOJ to take the next steps. 

**No pressing need but a step toward a sought objective is within reach**
Nothing on the policy front is pressing and even the yen has begun to gain back some lost ground to help continue inflation. Still, monetary policy is often about opportunity. While central banks are ‘all-powerful’ and can do as they choose, they prefer to make policy moves that seem to come out of the flow of need or to a clear transition toward a known goal. Years ago, in the U.S., Alan Greenspan coined the phrase ‘opportunistic disinflation’ as his policy to get inflation lower, as it was dropping without much Fed action. This year, in the U.S., Chair Powell seems to have hurried a rate cut to start a process already followed by many other global central banks to get the U.S. on the same rate-cut cycle, even though U.S. data have been unclear on the need to cut rates. U.S. circumstances accommodated a cut more than demanded it. Central banks like to change rates when their actions need less rather than more explanation. The Bank of Japan seems to be offered such an opportunity now, for ‘opportunistic normalization.’

Japan

Does Japan’s CPI Pave the Way for Opportunistic Normalization?

Andrew Cates

**Oil prices and yields**
Concerns about the global growth outlook, spurred by cuts from the International Energy Agency to their forecasts for demand, have driven oil prices sharply lower over the past few days. Fears about supply disruptions stemming from geopolitical instability in the Middle East have additionally faded, at least for now. Since oil prices have been a key driver of the market’s inflation expectations, as evidenced in chart 1 below, this has been significant in buoying risk appetite in broader financial markets as well.

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**UK inflation**
There was good news on the UK inflation front this week too thanks to a slew of weaker-than-expected data for wages and prices. For example, private sector regular pay growth rose by just 0.2% m/m August, its lowest monthly growth rate for seven months. The September data for both headline and core CPI inflation additionally dropped quite sharply, partly thanks to a big drop in service sector inflation (see chart 2). The Bank of England will almost certainly take comfort in these numbers, given concerns about how a tight labour market had previously been stoking wage inflation and fuelling price pressures in the service sector.

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**China’s PPI inflation** 
Recent data from China also revealed that inflation outcomes for September were lower than expected, with PPI inflation sliding further into deflationary territory, specifically dropping to -2.8% y/y from -1.8% in the previous month. This intensifying pace of deflation might magnify concerns about excess capacity in China's economy, which could potentially spill over into global markets as China seeks to export this surplus. Notably, China’s PPI has historically led global PPI trends, amplifying worries that this deflationary pressure might influence global inflation dynamics in the near future (chart 3).

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**EM portfolio flows**
Recent policy initiatives from China designed to shore up its economy initially generated much enthusiasm from investors. This can be seen in chart 4 below showing a surge in portfolio inflows to emerging markets, and to Asia in particular, in September. The specific spark for this was the introduction of a range of monetary stimulus measures on September 24th which included lower interest rates and cuts in reserve requirement ratios. However, that initial euphoria has since dissipated as the announcement of a number of fiscal policies designed to address local government debt risks and property market instability, have not met expectations.

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**Banking conditions in the euro area**
On a brighter note the latest ECB bank lending survey suggested that the wheels of credit in the euro area may now be turning more quickly. The latest survey, for example, revealed that euro area banks reported unchanged credit standards for loans to companies in Q3. That follows more than two years of successive tightening. Banks also reported a further net easing of credit standards for loans to households for house purchases. In the meantime net demand for loans by companies increased moderately in Q3 while demand for housing loans rebounded strongly.

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**Global equity sector performance**
Global equity markets have had a good year so far in large part, as noted above, because the world economy appears to be on course for a soft landing and central banks have now begun to ease monetary policy. Structural factors, however, have also been influential, and most notably investor optimism about AI. As chart 6 below suggests, technology stocks have delivered the strongest returns so far in 2024. That’s striking because the technology sector is often perceived to be cyclical. Yet defensive sectors, such as utilities and consumer services, have also performed relatively well so far this year while other cyclical sectors, such as basic materials and consumer goods, have under-performed.

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A soft landing narrative has continued to shape sentiment in financial markets over recent days, supported by several factors. These include upbeat corporate earnings news, a sharp drop in oil prices (see chart 1), and weaker-than-expected inflation data (chart 2). However, concerns about global growth persist, particularly given the underwhelming economic data that’s been emerging from China (chart 3). While the monetary policy initiatives announced in late September were met with enthusiasm from investors (chart 4), subsequent fiscal policy measures have clearly fallen short of expectations. Back to a more positive note, the latest euro area bank lending survey suggests that the ECB's recent easing efforts, including this week’s 25bps rate cut, are starting to reap some benefits (chart 5). Meanwhile, ongoing optimism around the role of AI technology has also contributed to a soft landing narrative, despite the absence of clear productivity gains thus far (chart 6).

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Charts of the Week: Following the Leader

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Total retail sales increased 0.4% (1.7% y/y) during September after an unrevised 0.1% August increase and a minimally revised 1.2% gain in July, according to the U.S. Census Bureau. A 0.3% rise had been expected in the Action Economics Forecast Survey. Excluding motor vehicles & parts, retail sales rose 0.5% (2.2% y/y) after increasing 0.2% in August, revised from 0.1%, and 0.5% in July, revised from 0.4%. A 0.2% gain had been expected.

Sales of motor vehicles & parts held steady (-0.3% y/y) last month after falling 0.4% in August. This compares to a 5.7% rise (2.2% y/y) in unit light vehicle sales which followed a 5.1% August increase.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.7% (4.0% y/y) in September, the fifth straight rise. These sales are used in the construction of personal consumption expenditures in NIPA accounts.

Elsewhere, sales performance was mixed in September. Miscellaneous store sales, which account for 2.2% of the total, surged 4.0% (7.9% y/y) in September after improving 0.3% in August. Clothing & accessory store sales increased 1.5% (3.5% y/y) after weakening 0.8% in August. General merchandise store sales gained 0.5% (2.6% y/y) following a 0.4% decline. Within that category, sales at department stores rose 0.4% in September (-1.2% y/y) after a 1.0% decline. Nonstore retail sales improved 0.4% (7.1% y/y) following a 1.6% rise. Sporting goods, hobby shop, book & music store sales rose 0.3% (-3.5% y/y) after they edged 0.1% higher in August. Building materials & garden equipment store sales rose 0.2% (0.5% y/y) after holding roughly steady in August.

To the downside, electronics & appliance store sales weakened 3.3% in September (-4.6% y/y) after falling 1.7% in August. Furniture & home furnishing store sales declined 1.4% (-2.3% y/y) after they eased 0.4% in August. Gasoline station sales dropped 1.6% (-10.7% y/y) last month, the fourth decline in five months.

In the nondiscretionary sales categories, health & personal care store sales rose 1.1% (4.6% y/y) in last month after a 0.6% August rise. It was the fifth consecutive monthly increase. Food & beverage store sales also were strong last month and rose 1.0% (2.5% y/y) after falling 0.5% in August.

Consumers’ penchant to dine out continued last month. Restaurant & drinking place sales increased 1.0% (3.7% y/y) in September, the sixth consecutive monthly rise.

Retail sales data can be found in Haver's **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Core sales post strong increase.
- Miscellaneous store sales surge.
- Motor vehicle sales steady while gasoline purchases fall sharply.

U.S. Retail Sales Pick Up in September as Nonauto Sales Firm