The U.S. economy saw job creation decelerate in October, confirming persistent expectations for a slowdown and possibly taking some heat off the Federal Reserve in its fight against inflation. Nonfarm payrolls increased by 150,000 for the month, the Bureau of Labor Statistics on Friday. This figure represents the lowest monthly addition since June and is slightly over half of the 297,000 jobs added in September. The unemployment rate saw a marginal uptick to 3.9%, marking its highest point since January 2022, though it remains relatively low in historical context. Hourly earnings experienced a modest increase of only 0.2%, the smallest increase since February 2022. These statistics, in part, reflect the impact of the United Autoworkers strike, which temporarily removed around 40,000 workers from the workforce, resulting in a reported decrease of 35,000 workers in the manufacturing sector. This hiring slowdown may also indicate that the Federal Reserve's anti-inflation interest rate hikes, initiated in March 2022, are starting to exert a more noticeable influence on the economy.
Following this, the U.S. manufacturing sector experienced a significant contraction in October, despite showing signs of improvement in previous months. This decline was primarily driven by a significant drop in new orders and employment, likely influenced by strikes organized by the United Auto Workers (UAW) union against the three major car manufacturers in Detroit. The Institute for Supply Management (ISM) reported that the manufacturing Purchasing Managers' Index (PMI) declined to 46.7 last month from September's 49.0, the highest reading since November 2022. This marks the 12th consecutive month with a PMI below 50, indicating a contraction in the manufacturing sector. This extended period of contraction is the longest since the Great Recession of 2007-2009.
Concurrently, the growth of the US service sector slowed in October to its weakest pace in five months, driven by softer business activity and reduced hiring by employers. The Institute for Supply Management's overall gauge of services declined by 1.8 points, marking the most significant drop since March, and stood at 51.8 last month, down from September's 53.6. Over the past year, the index has shown fluctuations from month to month, but it has consistently stayed above the 50-point threshold, signifying expansion.
In its latest meeting, the US Federal Reserve (Fed) maintained interest rates at a 22-year high, while keeping the door open for potential further monetary tightening, driven by increasing signs of the enduring strength of the US economy. This marks the second consecutive meeting where the Federal Open Market Committee chose not to raise interest rates, as policymakers deliberate over the sufficiency of current monetary policy in addressing inflation concerns. With a total of 11 hikes since March 2022, the benchmark federal funds rate remains within the range of 5.25% to 5.5%. Federal Reserve Chair, Jay Powell, remarked that the substantial economic indicators, including a resilient labor market and unexpectedly strong consumer spending that drove accelerated GDP growth in the third quarter, may necessitate continued efforts by the central bank to meet its inflation target.
Eurozone inflation fell to 2.9% in October, a notable decline from the 4.3% recorded in September and marking its lowest point in over two years. This development has reinforced the anticipation that the European Central Bank is unlikely to implement further interest rate hikes. The primary factors contributing to this downturn are the third-quarter economic contraction within the Eurozone, accompanied by diminishing energy prices and reduced food inflation, as reported by Eurostat, the statistical agency of the European Union.
China faced an unexpected contraction in its manufacturing activity in October, shedding light on the formidable challenge ahead for policymakers striving to reinvigorate economic growth as the year draws to a close and 2024 looms, all while confronting various challenges both domestically and abroad. Despite recent positive signs indicating stabilization in the world's second-largest economy, driven by a series of supportive policy measures, persistent issues such as a prolonged property crisis and subdued global demand continue to pose significant obstacles. According to data from the National Bureau of Statistics, the official purchasing managers' index (PMI) dropped from 50.2 in September to 49.5 in October, falling below the critical 50-point threshold that signifies a shift from expansion to contraction. Furthermore, the non-manufacturing PMI also declined from 51.7 in September to 50.6 last month, signifying a slowdown in activity within the extensive service sector and construction industry.
The S&P 500 Index achieved its most substantial weekly increase in almost a year, boosted by indications of an economic slowdown and a Federal Reserve policy statement that was widely interpreted as dovish. The week concluded with the S&P 500 posting a significant weekly increase of +5.85%. Both the Dow Jones (+5.07%) and the tech-heavy Nasdaq Composite (+6.61%) also closed the week in positive territory. In Europe, the Euro Stoxx 50 and the UK's FTSE 100 recorded gains of +3.99% and +0.99%, respectively. Meanwhile, Chinese stocks advanced as speculation that U.S. interest rates may have peaked countered broader concerns about China's slowing growth. The Shanghai Composite Index increased by 0.43%, while the Hang Seng Index in Hong Kong rose by 1.65%. Similarly, Japan's stock markets saw gains, with the Nikkei 225 Index concluding the week with a positive increase of +3.09%.
Market Moves of the Week
South Africa's Finance Minister is planning to introduce tax reforms in the coming year as part of an effort to restore stability to public finances that have been strained by declining mining revenue, as indicated in a mid-term budget review presented on Wednesday. The budget report provided to parliament anticipates wider deficits in the next three years and projects a higher peak in debt levels compared to February when the primary budget was presented. Finance Minister Enoch Godongwana has outlined the National Treasury's intention to generate an additional R15 billion in tax revenue in 2024 to address revenue concerns. Additionally, the National Treasury has expressed a commitment to expenditure reductions, implementing moderate tax measures, and achieving efficiency gains through the consolidation or closure of public entities, some of which have required repeated financial support in recent years.
Much like global markets, local equities in South Africa also saw positive movement. The JSE All-Share Index experienced significant gains of +4.90%, driven by strong performances in the financial (+8.29%), property (+6.08%), and industrial (+5.80%) sectors. In contrast, the resources sector saw more modest gains, rising by +0.67% for the week. The South African rand strengthened following the release of better-than-expected budget forecasts. By Friday's close, the rand was trading at R18.25 against the U.S. Dollar, marking a weekly appreciation of +3.23%.
Chart of the Week:
An index of the dollar’s strength is pushing toward its highest level since November. Risk aversion Job growth has significantly decelerated from its rapid pace in 2021 and 2022, where monthly increases averaged 605,000 and nearly 400,000, respectively. Credits: Strategic IQ