US Economy:Weekly Commentary – November 28, 2023
US Market Views Synopsis
Given the weakness in the economy, we do not expect rates to rise. We expect the Fed to cut rates in Q3 2024.

The US economy is weak, and the most recent data indicates that the current level of interest rates is appropriate. We see that the manufacturing sector is struggling, the labour market is quite tight, and the housing market remains cold. Overall, we expect that at the next meeting on December 13, 2023, the Federal Reserve will keep rates at their current level and maintain them for a longer period than generally expected, including during last week's FOMC meeting. Most members agreed that the current rate level is high enough, but they did not doubt if it must rise, which is unlikely. Additionally, we think it is more likely that rates will be reduced around the third quarter of 2024 rather than raised.

Minutes of the Federal Open Market Committee
FOMC members sound tougher and they do not want investors to bet that there will be a rate cut in 2024 prompting an easing of financial conditions due to lower yields. Whilst they may be contemplating further rises, we are not of that mindset and envisage a pause for longer than expected.

The unanimous agreement among participants is to maintain current interest rates, although future monetary policy hinges on coming data. There's contemplation about tightening policies if progress toward inflation goals remains insufficient, leaving the possibility of a rate hike open. They observed that inflation persists rather than decreasing as anticipated, continuing to show positive price growth.

Forecasts suggest total PCE price inflation could hit around 3.0 per cent by year-end, with core PCE inflation hovering at approximately 3.5 per cent. However, expectations indicate a potential decline in inflation in the upcoming years as market demands and supplies reach better equilibrium. By 2026, both total and core PCE price inflation rates are expected to approach 2 per cent, though prevailing uncertainty surrounds these projections. Risks related to inflation forecasts seem tilted toward higher levels, considering the potential for enduring inflation or adverse supply shocks. Conversely, risks to actual activity forecasts lean toward the downside. Moreover, additional monetary tightening, leading to prolonged inflation and the possibility of tighter financial conditions, poses risks to real activity projections.

Given the somewhat mixed outlook, future attempts to lower inflation might prove challenging. Consumer spending data surpassed expectations, likely due to a robust labour market and stable household finances. The labour market is gradually stabilizing in terms of supply and demand, but unemployment data suggests difficulty for job seekers in finding new opportunities, contributing to a rise in long-term unemployment.

Looking ahead, forthcoming data in the coming months will shed light on the ongoing disinflation process and the evolving labour market, which appear pivotal for the Fed's future decisions.

In their assessment, the Fed has taken a firmer stance due to investor speculation about potential interest rate cuts in 2024. As bond yields drop and financial conditions ease, there's a potential for inflation to rise again. While the FOMC members injected some caution into the markets, it's not believed that they will raise interest rates again.

Housing market prospect
A tight housing market is observed, exacerbated by homeowners not wanting to sell their houses and the lack of new inventory. Whilst house price affordability has hit the lowest point since the early 1980s, the average homeowner has accumulated more than USD 100,000 in housing wealth over the past three years, holding up consumer confidence.

In October, existing home sales dropped by 4.1%, marking a 14.6% decline year over year—the lowest levels since August 2010. Median existing home prices rose by 3.4% compared to a year ago, marking the fourth consecutive month of such increases. Inventory decreased by 5.7% from last year, contributing to the ongoing challenge for homebuyers amid high mortgage rates. However, the mortgage rates are decreasing now the 30-year average rate is 7.41 per cent.

While home sellers are benefiting from rising prices, buyers are grappling with limited inventory and high mortgage rates, making it another tough month. Despite a recent drop for three consecutive weeks, mortgage rates remain relatively high, discouraging homeowners from selling. Overall, Housing affordability has hit its lowest point since the early 1980s.

The persistent supply shortage continues to drive prices up, further constricting the market. Anticipating a prolonged tight market, the housing sector's vulnerability hinges significantly on the labour market's performance. Although hints of strain are emerging, a substantial impact has yet to materialize. If labour market woes escalate, the housing market might start to show weak signs ahead.

In our opinion, the current conditions in the property market are poised to remain for the foreseeable future. The reluctance to sell coupled with builders' inability to match the robust demand will likely keep house prices elevated. A decline in prices seems improbable unless mortgage rates decrease, and the labour market experiences significant turmoil.
Labour market
The number of Americans applying for unemployment benefits dropped sharply last week a sign that the US labour market remains resilient despite higher interest rates and troubles in the economy.

The latest figures on initial jobless claims showcase a notable decline of 24,000 from the previous week, settling at 209k. This substantial decrease surpasses the expectations of the market. These applications serve as a gauge for potential layoffs, and their consistently low numbers, even by historical standards, indicate a remarkable level of job security for most Americans. Simultaneously, continued jobless claims have also seen a reduction of 22,000, marking a total of 1,840k. However, the challenge persists for individuals who face job loss in finding new employment due to issues of affordability.

Despite a sluggish economy and persistently high inflation and interest rates, the labour market remains resilient. Remarkably, unemployment rates continue to stay low. Besides, this enduring strength in the labour market may exert upward pressure on salaries if sustained.

Our outlook is that the data reveals a strong and enduring labour market amidst economic challenges, emphasizing both job security for many and the difficulties faced by those seeking new employment opportunities due to economic constraints. However, we expect more weakness in the labour market during the first quarter of 2024.
Manufacturing commentary
Durable goods are decreasing, however, in the coming months there could see a recovery and start to appreciate more strength in the manufacturing sector at the beginning of 2024. Also, the PMIs could turn to the positive side in early 2024.

The manufacturing sector, a great contributor to economic stability and industrial growth, faces significant challenges amid recent economic trends. Durable goods orders underwent a steeper-than-expected decline, plummeting by 5.4 per cent after a notable 4 per cent surge in September. This drastic drop was largely fuelled by an extraordinary 92.5 per cent spike in non-aircraft military spending. It marks the second-largest decline in durable goods orders since April 2020, driven by diminished interest in transportation equipment. Excluding transportation, new orders remained relatively stagnant compared to the prior month, while excluding defense categories revealed a 6.7 per cent decline. Intriguingly, all defense categories witnessed an upsurge in orders, with defense capital goods leading the charge with a notable 24.5 per cent increase.

Despite the overall decrease in new orders, substantial support from defense categories mitigated a steeper decline that could have otherwise occurred. However, the economy grapples with significant challenges, especially within the manufacturing sector, expected to remain in contraction territory for an extended period. This sector experienced a more pronounced decline than anticipated, registering at 49.4 and slipping back into contraction, contrasting with an unexpected increase in services in the United States, surpassing market expectations at 50.8.

Amid these challenges, there are glimmers of hope within the private sector. Companies managed to alleviate margin pressures by increasing selling prices. Input prices, though on the rise, saw the slowest pace of increase since October 2020, attributed partly to reduced energy and raw material costs, along with a reduction in the workforce. Manufacturers witnessed a notable deceleration in input price inflation following consecutive monthly accelerations between July and October. Service sector companies led a swifter rise in overall selling prices in November, experiencing an acceleration in inflation from October's three-year low.

The manufacturing sector is weak; we expect more weakness in the coming months. Consequently, the economy will be struggling more and supports the stance that the FED may opt for no more hikes in the coming meetings.
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