US: Fed Beige Book not consistent with ISM non-manufacturing plunge - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that as always, the Beige Book released for the FOMC meeting on 21st September had something for everyone given it is a summary of activity across all the Fed districts in the US.

Key Quotes

“But the broad message confirmed an economy as before – modest growth, coupled with a tightening jobs market and modest wage and inflation pressures. What the report did suggest however is that the plunge in business activity reported in the ISM report earlier this week appears something of a misnomer. Some regions did record slower growth and there were references to business sentiment being impacted by political uncertainty ahead of the presidential election but the broad message was of an economy that hadn’t changed much. On jobs in particular, the labour market was described as “tight” in most districts.

That would certainly give credence to the view that FOMC officials who believe the grounds for a rate hike are there will continue making that argument when the FOMC meets later this month. One such FOMC member, Richmond Fed President Lacker (non-voter) will likely make that argument given his comment yesterday that the case for a rate hike at the September meeting “is going to be strong”.

The JOLTS report, released yesterday will certainly add to the belief that the labour market continues to tighten. Job openings hit another record high in July jumping 4% to 5.87mn. The hiring rate increased by 1% to 5.22mn with the gap in growth in hiring and job openings perhaps pointing to the difficulty in getting staff to fill jobs, an issue cited in the Beige Book. While wage inflation remains modest, it is clear the risks remain very much to the upside.

One other factor that argues in favour of the Fed potentially surprising is the slide of the US dollar. The Fed’s Major USD index has dropped by about 7% from the year-to-date high set in January and is closing in on the year-to-date low set on 2nd May. Concerns over excessive dollar strength due to a surprise Fed rate increase will be much less than earlier this year.”