US Economy: Weekly Commentary – January 15, 2024.
US Market Views Synopsis
Inflation rebounded in December and consumers are spending more. We expect the Federal Reserve to cut rates in the second half of 2024 as they cannot take a risk and gamble on inflation.

Inflation rebounds and puts the Federal Reserve on the ropes. The increased tensions in the Red Sea during this last week may cause oil prices to increase again. Thanks to a solid labour market, consumers continue to increase their debt, which jumps to almost record levels, which may put even more pressure on inflation.
Inflation commentary
The CPI increased and PPI unexpectedly decreased. The Federal Reserve will keep the rates higher for longer than the market expects, and the cuts could start in the second half of the year.

In December, the inflation rate in the United States increased by 0.3 per cent, up from 3.1 per cent in November to 3.4 per cent. Meanwhile, core inflation decreased by 0.1 per cent, standing at 3.9 per cent, below the 4 per cent. Particularly, energy prices experienced a positive decline, dropping by -2 per cent on an annual basis. However, the housing sector saw a 6 per cent increase, and transportation services surged by 9.7 per cent. This rebound in inflation adds more pressure on the Federal Reserve in terms of cuts, reinforcing the likelihood of no rate cuts in March.
Unexpectedly, the Producer Prices Index (PPI) saw a 1 per cent month-on-month decrease, marking the third consecutive drop. On a year-on-year basis, the headline PPI rate rose to 1 per cent from 0.8 per cent, falling below the market expectations of 1.3 per cent, while the core rate declined to 1.8 per cent from 2 per cent. Lower energy and food costs primarily drove the monthly decline, while services remained unchanged. The PPI data implies that the inflation increase is temporary and may continue its downward trajectory.

The ongoing conflict in the Red Sea needs attention, as escalating tensions could contribute to further inflationary pressures, particularly concerning oil prices. Despite this, our outlook suggests that inflation will persist on a downward trajectory, and the Federal Reserve is unlikely to cut rates until the latter half of the year. They do not want to gamble with inflation.
Consumer Spending
American consumers skyrocket their spending during the past Christmas season. They currently have an almost record level of debt. It may put more pressure on inflation and push the Fed to hold rates higher for longer than the market expects.

In November, consumer debt surged by $23.75 billion, marking a more than fourfold increase compared to the $5.78 billion recorded in October. This notable rise coincided with the month of heightened Christmas shopping activities. The spike in consumer debt was primarily propelled by elevated levels of revolving credit, particularly from credit cards, reaching over $19 billion.

These figures are expected to contribute to a boost in retail sales. Besides, this shows a robust labour market where Americans are spending more. Despite the positive consumer activity, the surge in debt occurs against the backdrop of high interest rates, raising concerns about a potential uptick in delinquencies. The overall debt in the United States both government and citizen, continues its upward trajectory, raising apprehensions about an eventual debt crisis whose resolution remains uncertain.

Our perspective in terms spending is that consumers will reduce their purchases in the coming months. Furthermore, they will not increase their debt further since rates remain high. We believe that the default rate will increase alongside this 2024. Currently the delinquency rates in credit card are rising.
Labour market commentary
The labour market persists in its tension, yet it shows resilience. Post-Christmas may increase the layoffs, just due to the end of the season.

The job market shows resilience, with both initial and continuing jobless claims decreasing by 1,000 and 34,000, respectively, from the previous week. The number of individuals currently receiving unemployment benefits reached its lowest point since October 2023. Regarding employment figures, there is a sense of stability, suggesting that consumers are maintaining spending habits, and overall economic growth is sustained, albeit potentially at a lower rate than the Q3 2023.

Our forecast for the labour market anticipates minor upticks in unemployment over the next few months, attributed to reduced demand in the post-Christmas period until summer. Despite these modest fluctuations, we expect the labour market to retain its solidity.
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