Key results (October 2024)

Business confidence: 65.7 (Prev: 60.9)

Expectations for own trading activity: 45.9 (Prev: 45.3)

Activity vs same month one year ago: -10.5 (Prev: -18.5)

Inflation expectations: 2.83% (Prev: 2.92%)

Pricing intentions: 44.2 (Prev: 42.8)

General business sentiment rose 5 points in October to 65.7, setting another 10-year high. Firms’ expectations about their own prospects were up only slightly, though there were solid gains for the specific questions about expected hiring, investment and profits.

The surge in confidence in recent months has followed the Reserve Bank’s shift in stance – from warning about the need for interest rates to remain high for an extended period, to delivering 75bp of OCR cuts with the likelihood of more to come.

But while businesses are feeling more optimistic about the outlook for the year ahead, that’s still coming from a weak starting point. A net 10.5% of firms said that their activity was down compared to a year ago – a modest improvement from the net 18.5% in September.

The indicators of price pressures were mixed. Firms’ expectations for inflation in the year ahead ticked down from 2.9% to 2.8%. The September quarter CPI was released mid-October, so likely pre-dated many of the responses to this survey – we may see a more decisive move lower in this measure next month.

In contrast, firms’ own pricing intentions ticked up in October, as they have done for the last four months. That’s not obviously driven by cost pressures – firms’ cost expectations remain elevated compared to pre-Covid levels, but have been drifting lower. So perhaps firms believe that an improving economy will help to restore their pricing power which has been eroded in recent times. We’ll be keeping an eye on how this resolves.

[Quick Facts]

[News Details]

[Today's Focus]

Market Picture

Bitcoin came within a hair’s breadth of an all-time high on Tuesday night, but the overall crypto market is well off its peak. Total cryptocurrency capitalisation at the overnight peak was $2.46 trillion, down $2.48 trillion from the July peak, almost 12% below the March high of $2.77 trillion and around $400 billion below the all-time high reached in November 2021. While the big picture points to a series of lower peaks, the medium-term uptrend since early September still suggests that new highs are a matter of months away. And the acceleration we saw last week suggests it’s a matter of weeks, not months.

Bitcoin has been the main driver, gaining momentum since Saturday. Trading near $72.4K, Bitcoin does not appear to be extremely overheated, leaving room for further strength.

The market seems to be pricing in Trump’s victory and the easing of regulations on cryptocurrencies. The euphoria is particularly evident in Doge, which has gained another 6% in one day, 24% in seven days and over 41% in the last 30 days. The coin has no direct benefit from Trump’s rise to power, but speculators are warming to it because of frequent mentions of Musk, who may get a position in Trump’s government.

News Background

Bitget Research notes that several factors support BTC’s potential growth, including the expected Fed rate cut on 7 November. Market dynamics could also be influenced by the Microsoft board’s vote on the Bitcoin investment scheduled for 10 December.

According to former BitMEX CEO Arthur Hayes, demand for Bitcoin will rise sharply because of the Chinese stimulus. He believes that the injection of money into the economy and the threat of further inflation will lead to increased investment in risky assets.

The annualised yield on Steak, the second most capitalised cryptocurrency, has fallen to ~3%. Kaiko noted that Ether’s steak yield is now lower than that of other major tier 1 protocols, including Cosmos, Polkadot, Celestia, and Solana, which range from 7% to 21%.

Zeta Markets noted that Ethereum’s limitations are forcing users, applications, and capital to turn to L2 networks and competing blockchains such as Solana as demand for faster and more scalable solutions grows.

The U.S. economy expanded by 2.8% quarter-on-quarter (q/q, annualized) in the third quarter, a touch lower than the consensus forecast of 3.0%.

Consumer spending accelerated at its fastest pace since the first quarter of 2023, rising 3.7% q/q. The gain was driven by a sharp rise in goods spending (+6.0% q/q), while spending on services grew by 2.6%.

Business investment rose 3.3% q/q, thanks to another strong quarterly gain in equipment spending (+11.1% q/q). Meanwhile, spending on structures fell by 4.0% q/q, while investment in intellectual property products was relatively flat – up just 0.7% q/q – for the second quarter in a row.

Residential investment (-5.1% q/q) remained a drag on Q3 growth, as both home sales and homebuilding came under further pressure alongside still elevated interest rates.

Government spending rose 5.0% q/q – its strongest quarterly gain in a year – largely stemming from an outsized gain in federal defense outlays (+14.9% q/q). State & local government spending (+2.3% q/q) was also higher last quarter.

On international trade, both imports (+11.2% q/q) and exports (+8.9% q/q) notched sizeable gains, but a larger increase in the former resulted in net trade subtracting 0.6 pp from GDP. Inventory investment (-0.2 pp) was also a small net drag on growth last quarter.

Final domestic demand was up a healthy 3.5% q/q, an acceleration from Q2’s gain 2.8% q/q.

Core PCE inflation – the Fed’s preferred inflation gauge – slowed to 2.2% q/q (annualized), a notable deceleration from Q2’s 2.8%.

Key Implications

Another solid quarter for the U.S. economy, with underlying domestic demand pushing well above 3% and accounting for all of last quarter’s growth. Beyond the housing market, there are very few signs that elevated interest rates are exerting any meaningful drag on domestic activity.

That said, economic growth is likely to round out the year on a softer note, as a further cooling in the labor market leads to some moderation in consumer spending. Equipment investment also looks poised for some giveback after two consecutive quarters of very healthy gains, while Q3’s gain in federal defense spending is unlikely to repeated in Q4. We also can’t forget that fourth quarter growth is likely to see some distortions stemming from hurricane’s Helene and Milton, which have likely displaced some near-term activity across parts of the Southeast. However, history shows that the clean-up and rebuilding efforts that occur following a natural disaster tend to more than offset any lost output.

Bigger picture, the U.S. economy still looks poised to achieve a soft landing. Economic growth is expected to steady closer to 2% in 2025, while inflation is quickly closing in on the Fed’s 2% target. This should allow the FOMC to continue gradually reducing its policy rate over the next year, and potentially have it return to closer to its long-run neutral rate of 3% by Q4-2025.