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Good morning. The mighty US consumer could be about to buckle, Biden says China is distracted from Taiwan, and Volkswagen feels the heat. He [View in browser]( [Bloomberg]( Good morning. The mighty US consumer could be about to buckle, Biden says China is distracted from Taiwan, and Volkswagen feels the heat. Here’s what’s moving markets. Consumer Cutbacks After staving off recession for longer than many thought possible, the US consumer is [finally about to crack](, according to Bloomberg’s latest Markets Live Pulse survey. More than half of 526 respondents said that personal consumption — the most important driver of economic growth — will shrink in early 2024, which would be the first quarterly decline since the onset of the pandemic. The finding is at odds with the optimism that’s permeated US equity markets for most of the summer, as cooling inflation and low unemployment bolstered hopes for a so-called soft landing. On Sunday, Treasury Secretary Janet Yellen said [she’s increasingly confident]( that the US will be able to contain inflation without major damage to the job market. Should the economy stop growing it could mean more downside for stocks, which have already slipped from late-July highs. Distracted China President Joe Biden said China’s recent downturn has left President Xi Jinping with “his hands full,” and that could diminish any [inclination by Beijing to invade Taiwan](. Biden was speaking in Vietnam, where he traveled after the G20 summit, where he met with Chinese Premier Li Qiang. Pressed on why he hasn’t met with Chinese President Xi Jinping in 10 months, Biden said Xi “has his hands full right now.” The Chinese president opted not to attend the G-20, giving no explanation. “China has a difficult economic problem right now for a whole range of reasons that relate to international growth and lack thereof, and the policies that China has followed,” said Biden during a press conference in Hanoi, adding, “I don’t think it’s going to cause China to invade Taiwan, matter of fact the opposite, probably doesn’t have the same capacity as it had before.” Volkswagen’s Vise Shortly after taking the most important job in German industry, Volkswagen Chief Executive Officer Oliver Blume got some bad news. A top executive had been dispatched to China, who told his new boss that Europe’s largest carmaker was losing the electric-vehicle race in its most important market and had no prospect of catching up on its own. Half a world away, Tesla has continued to expand and has laid claim to leadership in automotive innovation, undermining the German giant’s cash cow Audi. The competitive vise squeezing Volkswagen from top to bottom and from the US to China is [the subject of today’s Big Take](. The issues could evolve into its biggest crisis since the 2015 diesel scandal, and might be even harder to overcome. Dollar Dip S&P 500 futures are up 0.35% and Nasdaq 100 contracts are up 0.53% as of 5:25 a.m. in New York. The dollar’s hot streak is under threat as the yen and yuan rose about 1% after comments from the Bank of Japan and the People’s Bank of China boosted those currencies, respectively. European equities advanced while Asian stocks were mixed. US Treasury yields climbed, gold was up 0.48%, the most in two weeks, and oil dipped. Coming Up… The New York Fed releases one-year inflation expectations at 11.00 a.m. An hour later Treasury Deputy Secretary Wally Adeyemo speaks. The US House returns from its summer recess today. Oracle will release earnings. What We’ve Been Reading This is what’s caught our eye over the past 24 hours. - UBS to [cut hundreds of wealth jobs]( in Hong Kong, Singapore - Supercomputer could drive [Tesla share price surge](, says Morgan Stanley - Italy’s Melonis [signals country’s exit]( from China’s Belt and Road - UK rents to [rise a quarter by 2026]( as landlords pass on mortgage costs - Kim Jong Un’s luxury armored train is [headed to Russia]( - Oppenheimer’s [Stoltzfus says]( US stocks are likely to dip further - College-educated workers worry about being [automated by AI]( And finally, here's what Joe’s interested in this morning Hello and Happy CPI Week. This Wednesday we get inflation data for August, which will be the last major economic datapoint before the Fed decision, which comes out a week later. The expectation is that the Fed will not be hiking rates at its forthcoming meeting, nonetheless the data could inform decisions at subsequent meetings. In the meantime, the consensus is that sequential core CPI will rise 0.2%, and that on a year-over-year basis, the core figure will come in at 4.3% down from 4.7% in the previous month. Ok, all that being said, we have seen a lot of improvement in the inflation data since the start of the year. But there a remains a debate about why the numbers have come down. It's true that the Fed has hiked rates aggressively. However, this rate hiking cycle, and this disinflation has not been accompanied by significant labor market weakness. As such it's still unclear about the degree to which rate hikes can take credit for the cooling inflation, or whether the decline is due to the reversal of price spikes that were... transitory. Last week [Mike Konczal of the Roosevelt Institute]( published an an article arguing that the majority of the disinflation that we've seen is a result of expanding supply and not diminished demand. He writes: The majority of disinflation has been driven by expanding supply rather than decreasing demand. Decomposing price and quantity changes for 123 core PCE items, I find 73 percent of all core items, and 66 percent of services, see prices falling with quantities increasing—a sign of expanding supply. There's quite a few interesting aspects of this paper. First again, the headline point is that since December 2022 — across both goods and services — the majority of items have seen both a decrease in price and an increase in volume. As you can see in this chart, there are very few categories in the bottom left quadrant, where price declines have coincided with a reduction in demand. Where we see improvement in price is much more in areas where the quantity has gone up. Another interesting thing is Konczal looks specifically at PCE categories that prior research has characterized as showing "procyclical inflation" properties. In other words, [per an SF Fed paper]( from 2017, there are some consumption categories (like housing and food service) that tend to be very linked to the business cycle. When economic activity is declining, inflation in these areas goes down. And vise versa. Other categories (like healthcare services) tend to have acylical inflation properties, with prices largely disconnected from overall activity. What's important is that Konczal finds that even in the categories that are historical cyclical — with price trends correlated to overall economic activity — we see inflation having decelerated in 2023, even with demand remaining robust. There's more [in the paper](, including an important discussion on how while inflation remains elevated, there's strong evidence that it's not "entrenched" in a way that would have resembled the inflation of the 1970s. Of course, there is still more work to do. And it's possible that for inflation to come down to the Fed's target, that there will need to be some more weakening. In fact, a [recent SF Fed paper]( from [Adam Shapiro]( argues that the supply-drive deflation is now basically over. If that's true, then the question is how much, exactly, labor side weakness would need to occur. In the meantime, it looks like a big part of the 2023 story is the normalization of the supply side of the economy, as driver of cooling inflation. Follow Bloomberg's Joe Weisenthal on Twitter [@TheStalwart]( Like Bloomberg's Five Things? [Subscribe for unlimited access]( to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. Want to sponsor this newsletter? [Get in touch here](. You received this message because you are subscribed to Bloomberg's Five Things to Start Your Day: Americas Edition newsletter. If a friend forwarded you this message, [sign up here]( to get it in your inbox. 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