Market turbulence? Check. Heightened concerns about economic growth—globally and for the US? Check. Does this mean that the Fed won’t raise interest rates this year? Not necessarily. Or so Fed Chair Janet Yellen intimated in a speech today. A slowdown in China’s growth rate and a mixed bag of numbers for the US lead some (many?) economists to conclude that it’s not a good time to start squeezing monetary policy. But Yellen has a different view. Sure, she may have surprised the crowd with the no-hike decision at last week’s FOMC meeting–a decision that was widely interpreted as the Fed’s way of saying that the future looked a bit dicey. But don’t confuse last week’s Yellen with today’s Janet.
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US economic activity in August increased at a pace that’s fractionally above the historical trend, according to this morning’s update of the Chicago Fed National Activity Index’s three-month average (CFNAI-MA3). Last month’s reading of +0.01 ticked down from July’s revised +0.02 level, but both numbers reflect an upbeat macro trend.
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Making the case for optimism isn’t getting any easier. Although the broad US macro trend is still positive, Mr. Market has lost his mojo. In fact, one econometric technique for gauging the state of the US equity market advises that a bear market has recently started. It could be a false warning, of course, but for the moment it’s clear that market risk has popped up. The main reason for reserving judgment: US economic growth is still positive. There are cracks, but a tailwind is still blowing. The caveat is that economic numbers arrive with a lag. Does the market know something that’s not yet reflected in the hard macro data? Maybe, although Mr. Market’s track record on forecasting the business cycle isn’t flawless.
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● US Mfg PMI unchanged at 53.0 in Sep, slowest growth in 22 mos | Markit
● US mortgage apps surge 13.9% in week through Sep 19 | CNBC
● VW scandal poses risks for German economy | Reuters
● Japan Mfg PMI ticks lower, close to neutral rate: 50.9 | Markit
● German business confidence (Ifo) improves in Sep | RTT
● Consumer confidence (Gfk) in Germany eases | Reuters

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise modestly in the August update that’s scheduled for tomorrow (Sep. 24), based on The Capital Spectator’s average point forecast for several econometric estimates. The projection for +0.08 is slightly above July’s zero reading, which reflects economic growth that matches the historical trend. Only negative values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Using today’s estimate for August as a guide, CFNAI’s three-month average is expected to reflect an expansion that’s slightly above the historical trend rate for growth and therefore well above the tipping point that marks the start of a new recession.
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US manufacturing activity is surprisingly firm in September, according to the initial estimate of Markit’s purchasing managers’ index (PMI) for this corner of the economy. I say “surprisingly firm” because three previously released regional indexes for manufacturing in September (via Fed banks) are unusually weak, as I discussed yesterday. But the national trend for manufacturing looks comparatively resilient. Growth is still moderate, bordering on sluggish for manufacturers. But if you’re looking for a dark signal for the US business cycle, today’s PMI update doesn’t offer much red meat.
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Earlier this year I reviewed ten asset allocation mutual funds with a range of strategic designs as an academic exercise for exploring how multi-asset strategies stack up in the real world. Not surprisingly, the results varied, albeit largely by dispensing a variety of gains as of late-February. But that was then. Thanks to the recent spike in market volatility (and the slide in prices), a hefty dose of red ink now weighs on these funds.
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● China Mfg PMI decline falls at slightly faster rate in Sep | Markit
● Eurozone Composite PMI growth ticks lower in Sep to 53.9 | Markit
● Germany Composite PMI growth slips to 54.3 in Sep | Markit
● Richmond Fed Factory Gauge Hits 32-Month Low | IBD
● Redbook: US retail sales slow in September | Dow Jones
● Euro zone consumer confidence eases to -7.1 in September | Reuters

Tomorrow’s flash estimate of the US Manufacturing Purchasing Managers’ Index (PMI) for September is expected to tick up to a moderately positive 53.1, according to Econoday.com’s consensus forecast. Sounds good, except for one small glitch: this month’s numbers for manufacturing via three regional Fed bank indexes paint a considerably darker profile.
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The evidence is mounting that the US GDP report for the third quarter that’s due next month will reflect substantially slower growth vs. Q2’s strong 3.7% rise (seasonally adjusted annual rate). The mystery at this point is the degree of deceleration.
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