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Investors on Recession Watch as Powell Speaks: Economy Week

Simon Kennedy
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Investors on Recession Watch as Powell Speaks: Economy Week

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The U.S. economy is in entering dire straits as the longest expansion in its history increasingly looks in jeopardy.

Manufacturing is contracting, services look wobbly and now the previously solid labor market is cracking. That leaves investors worried that the economy is barreling toward its first recession since 2009 even though Bloomberg Economics sees just a 25% chance of that occurring next year.

Having previously indicated a willingness to take to the sidelines after reducing interest rates twice this year, Federal Reserve Chairman Jerome Powell has two opportunities this week to re-calibrate his outlook as investors increasingly press for a third cut this month.

Powell speaks on Tuesday in Denver and the following day in Kansas City. He does so after saying Friday that the economy is in a good place but faces some risks, and before the Fed releases minutes on Wednesday of its last meeting, the contents of which may have been overtaken by events.

What Bloomberg’s Economists Say...

“Bloomberg Economics remains of the view that the household-income trend is sturdy enough to prop up personal spending, and hence, overall growth through year-end -- albeit at a markedly slower pace relative to the first half of the year. In such a growth environment, we view it prudent for the Fed to take additional insurance against downside risks by cutting rates in both October and December.”Click here to read full note

Adding to the tension is the U.S. and China resuming trade talks on Thursday and Friday in Washington. Some sense of a breakthrough would ease market concerns.

Here’s what happened last week and below is our weekly wrap of what’s going on in the world economy this week.

The U.S. and Canada

With the global economy wobbling, World Bank President David Malpass on Monday and new International Monetary Fund Managing Director Kristalina Georgieva will give their outlooks on Monday and Tuesday respectively.

Services Inflation Stable, Goods Accelerate

U.S. consumer price data is scheduled for release on Thursday and may demonstrate how much room the central bank has to cut rates again. The median of forecasts by economists is for prices to have gained 1.8% in September. In Canada, the election campaign enters its fourth week with employment data due on Friday.

For more, read Bloomberg Economics’ full Week Ahead for the U.S.

Europe, Middle East and Africa

German factory orders and industrial production will give a vital clue on the state of Europe’s biggest economy. Bloomberg Economics reckons the output data for August will provide the pivotal indication on whether gross domestic product declined for the second successive quarter -- the official definition of a recession.

German Production Weakness Is Widespread

Meanwhile, minutes of the ECB’s contentious decision will be released, which will make interesting reading on how the institution papers over the charged emotions of a tense meeting. In the U.K., the Bank of England’s financial stability committee will release a quarterly statement, made all the more prominent by the prospect of a no-deal Brexit potentially happening three weeks later. Monthly output data for August due on Thursday will also give a final glimpse of the deteriorating economic situation.

U.K. Returning to Growth

Israel’s central bank is running out of policy room before its benchmark interest rate hits zero. A Bloomberg survey sees it holding at 0.25% on Monday, but the market is pricing in a cut as the next move. Policy makers could turn to negative rates as soon as the second half of next year, according to Amir Kahanovich, chief economist for Phoenix-Excellence.

In Uganda, inflation slowed to a 16-month-low and the shilling has rebounded, reducing the chance on Tuesday of more rate cuts, which looked like a certainty two months ago. In Egypt, the latest inflation data will be out on Thursday. The finance minister told Bloomberg he supports the central bank’s easing -- it could continue until the real rate of return on Egyptian debt is around 3%, from about 5.7% now, he said.

For more, read Bloomberg Economics’ full Week Ahead for EMEA

Asia

The resumption of U.S.-China trade talks widely has the potential to influence which way the global economy turns for the remainder of 2019 and into 2020. With the outlook souring, any partial accord or signal that both sides are keen to patch up relations could spur a rebound in markets and sentiment. If the impasse remains and talks end without any sign of progress, the risk-off mood will continue to weigh on global growth.

MAS May Ease Policy Settings in October

The Monetary Authority of Singapore may decide to deliver fresh stimulus and Sri Lanka’s central bank meets on Friday. On the data schedule, Bloomberg Economics reckons Japanese producer prices probably deepened their decline in a report to be released on Thursday, while Indian industrial production likely slowed.

For more, read Bloomberg Economics’ full Week Ahead for Asia

Latin America

Inflation is poised to further slow in Latin America’s two largest economies on Wednesday, making room for additional interest rate cuts. In Brazil, the benchmark IPCA index for September is forecast to rise 3%, way below the central bank’s 4.25% target for the year. Mexico’s consumer prices are also seen increasing at a similar pace, the slowest since 2016, as the economy halts.

On the following day, the Mexican central bank will release minutes of its latest monetary policy meeting, when three board members voted for a quarter-point cut and two for a half-point cut. The document will be watched closely by investors for signs of how deep divisions are within Banxico.

For more, read Bloomberg Economics’ full Week Ahead for Latin America

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: Stephanie Flanders at flanders@bloomberg.net, Zoe Schneeweiss

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