Give us a smile

That’s what I tell the Mister whenever I take his picture, with mixed success. I like to make my audiences smile, which they were not as I delivered my election presentation this week to bankers and bank regulators in Dallas and Grand Rapids. As just the messenger, I didn’t take it personally. Our Michigan host had a “break the ice” exercise for colleagues from nine states asking, “Which do you prefer? Dogs or cats? Summer or winter? Seeing the movie or reading the book?” It was dogs in the summer at the movies by a landslide.  As to “preference for living in the past or the future,” I heard a “past” picker tell a “future” picker “The future will be bad, I’m sorry.” Last year, 100% of this same group voted electronically that we’d be in a recession by now! (Might not have been smiling then, either!) This year, 76% of them expect a “President Harris.” Election Night could easily turn into Election Winter this year, given the extent of mail-in voting and the potential for contentious disputes. If so, here are three dates of note: December 11 is the deadline for states to finish their counts, on December 17 electors vote in the various state capitols, and January 6, 2025 is when the new Congress votes to certify the election. In presidential elections, the popular vote usually, though not always, lines up with the electoral vote winner: 54 of 59 times, or 91.5%. There were two exceptions earlier this century, in 2000 and 2016. The other times this happened were in the 19th century (1824, 1876 and 1888). This past week at a speech in Georgia, Trump put forth his economic policy, calling for a “new American industrialism” and a “manufacturing renaissance,” with tariffs front and center in this agenda. The following day, Harris set forth her proposals for an “opportunity economy” in a speech in Pittsburgh. Lots of promises are unlikely to become law, although Trump would likely be able to enact a number of tariffs without Congress’ approval.

With regard to China, there appear to be two attitudes in Washington: the neoconservatives who see China as an enemy and the mercantilists who look at China and see a competitor. The first group sees tariffs as a way to break the US free of dependence on a hostile power. Mercantilists, by contrast, see tariffs as a negotiating tactic. It appears that Trump and Harris both prefer a mercantilist approach—though differing widely in their commitment to tariffs. To underscore that it takes its economic stagnation seriously, the Chinese government moved forward to September its meeting of the Politburo, which would normally have come in October. The Politburo called for an injection of liquidity to banks and a special bond issuance amounting to $284 billion. Just beforehand, the People’s Bank of China had cut rates, lowered bank reserve requirements and offered leverage for brokers to buy stocks. It’s a sign that the Fed’s big cut is giving other central banks cover to ease. Perhaps oddly given the country’s ideology, these moves are not really directed at stimulating consumption in the broader economy but are designed to reassure the investor class. It likely won’t be enough to make a major improvement to China’s economic growth, but it does lower the risk of a meltdown there, which tempers risks for the global economy as a whole. If China is settling down, the situation at the US’s East Coast ports is heating up. Dockworkers at the ports, which handle 40% of US trade, are due to go on strike October 1. The Biden Administration can contain the damage by forcing workers back on the job, but there is likely to be something of a drag as long as it lasts.

The S&P got off to a bad start in September, down 4% in the first week. It’s now up about 2% on the month, on track to mark eight of nine months this year that the S&P has risen. This would be the first time since 1928 that the S&P finished positive for September after falling 1.5% or more the first week of the month. There are plenty of bullish signs out there—the S&P and the Dow are at all-time highs, credit spreads are tight, interest rates are falling while yield curves are steepening, market breadth is healthy, the calendar is favorable (post-presidential election November-January seasonal strength), and China is turning to stimulus, to name a few. Speaking of China, the Shanghai Composite just had its best week since 2008. On a short-term basis, China and Hong Kong may now be overbought but the momentum there is bullish. It’s the US, however, that remains central to the global asset picture. Plus, there’s US exceptionalism! Inflation victory may be ours, the labor market is back to normal, and S&P 500 profit margins and earnings are at record levels. (S&P 500 forward earnings per share rose to a record $268.89 this month.) Empirical Research agrees that the soft landing is still likely, with the economy “mid business cycle.” Typically, August-September seasonal weakness extends into October but this year one has to wonder whether an autumn rally is already underway. I think this “you can’t make it up” election cycle, with no market-unfriendly possible conclusion remotely priced, had my banker groups concerned. I resisted the temptation to coax, “Come on, give us a smile!”

Positives

• Inflation moderation PCE and core PCE inflation both rose a modest 0.1% on the month to 2.2% y/y for the headline number and 2.7% y/y for core. The goods sector is down almost 1% y/y, particularly due to weak motor vehicle spending. The savings rate dropped to 4.8%, though large income revisions in real domestic gross income mean the Q2 savings rate was revised up from 3.3% to 5.2%. Real consumer spending looks to be up 3.1% in Q3.
• A good start Sales of new homes fell to 716K, but the three-month average rose to its highest since early 2022. Mortgage refinancings increased more than 20% last week, also to the highest level since the first half of 2022. Refinancing should give consumers more spending money. Mortgage applications, while low, have increased for five straight weeks, and home prices are at a fresh high.
• Industrial strength Durable goods orders held steady in August against expectations of a 2.6% decrease. On an ex-transportation basis, orders picked up by 0.5%, the most since December. Meanwhile, core capital goods orders marginally outperformed expectations while core capital goods shipments were in-line with expectations.

Negatives

• Consumers aren’t smiling The Conference Board’s consumer confidence index fell in September to 98.7, versus expectations of 104. It was not all bad, as low levels of respondents said jobs were hard to get, while discretionary spending stayed strong. The University of Michigan’s consumer sentiment survey, by contrast, rose to 70.1, slightly beating expectations of 69.4.
• Manufacturing still mired The Richmond’s Fed’s manufacturing PMI fell in September from -19 to -21, while the Kansas City Fed’s manufacturing survey dropped from -3 to -8. S&P Global’s US services index declined to 55.4.
• Europe even more mired Germany’s composite PMI dipped into contraction. The manufacturing sector has been suffering for some time and now services is weak as well. So far unemployment in Germany has remained contained at 6%, below the long-term trend, though layoffs are ticking higher.

What Else

Software spending looks set to grow A survey of IT professionals says software spending intentions are heading higher. Spending is expected to increase 10.1% this year and 11.3% next year. Both numbers are higher than in a December 2023 version of the survey. 

Divided we make do Current projections are for a narrowly divided Congress, with the House going to the Democrats and the Senate to the Republicans. If so, whoever wins the White House would face challenges making progress with a legislative agenda. Policies that can be advanced with an executive order would be especially attractive.

A determined electorate The RealClearPolitics betting averages currently give Harris a 50.7% chance of winning versus Trump’s 47.7%. Two notable events that, perhaps surprisingly, didn’t move the needle much at all: the presidential debate and the second Trump assassination attempt.