US Economy: Weekly Commentary – February 12, 2024.
Synopsis of US market sentiments
Increasing inflation pressures and a resilient labour market means that the Fed will not cut in March (we also think that a May cut is unlikely). Credit card defaults are starting to increase.
The economy shows inflation rebounding during January with services and manufacturing costs increasing. The labour market remains resilient for now, but layoffs are increasing, and unemployment rate may increase in the coming months. Credit card and household debt is increasing fast with credit card defaults starting to rise.
The economy shows inflation rebounding during January with services and manufacturing costs increasing. The labour market remains resilient for now, but layoffs are increasing, and unemployment rate may increase in the coming months. Credit card and household debt is increasing fast with credit card defaults starting to rise.
Business activity commentary
The US ISM and S&P Global PMI data accompany the narrative of not cutting rates in March and keeping rates high for longer due to the rapid increase in prices.
Both S&P Global and ISM non-manufacturing data have shown improvements compared to December. However, there has been a notable uptick in prices, with ISM indicating a 7.3% increase. Additionally, recent reports on Friday highlighted a rise in salaries. Despite these positive indicators, the Federal Reserve is not expected to lower rates in the short term. Instead, their focus is on a potential reduction at the end of the year, as previously mentioned.
The disruptions in the Suez Canal transportation, coming from disturbances in the Red Sea and issues in the Panama Canal, are exerting pressure on costs. Ultimately, these elevated costs are likely to translate into higher prices for consumers.
From our perspective, inflationary pressures in both services and manufacturing sectors are anticipated to persist in the coming months. With the current surge in costs, there is a growing risk of a second inflation wave, although not expected to be as substantial as the previous one. The escalation in costs could potentially lead to future price hikes for consumers. The cuts will come in the second half of the year.
Both S&P Global and ISM non-manufacturing data have shown improvements compared to December. However, there has been a notable uptick in prices, with ISM indicating a 7.3% increase. Additionally, recent reports on Friday highlighted a rise in salaries. Despite these positive indicators, the Federal Reserve is not expected to lower rates in the short term. Instead, their focus is on a potential reduction at the end of the year, as previously mentioned.
The disruptions in the Suez Canal transportation, coming from disturbances in the Red Sea and issues in the Panama Canal, are exerting pressure on costs. Ultimately, these elevated costs are likely to translate into higher prices for consumers.
From our perspective, inflationary pressures in both services and manufacturing sectors are anticipated to persist in the coming months. With the current surge in costs, there is a growing risk of a second inflation wave, although not expected to be as substantial as the previous one. The escalation in costs could potentially lead to future price hikes for consumers. The cuts will come in the second half of the year.
Labour market
Layoffs are increasing among the main big companies in the US. Claims will increase in the coming months and the unemployment rate will be at 4%.
Last week, initial claims for unemployment benefits among Americans fell from 227k to 218k, while continuing claims for unemployment benefits decreased from 1.894 million to 1.871 million. The data indicates a relatively stable trend compared to the previous week. Despite this stability, the prospect of rising numbers in the coming months is fuelled by numerous announced layoffs and the emergence of more cautious workforce reductions. In 2024 we are already seeing layoff announcements. Technology giants such as Amazon, Google, Meta and Microsoft, or large banks such as Citigroup or Deutsche Bank, are among those implementing job cuts.
Our outlook is that the labour market is weakening, and we will see more increases in layoffs in the coming months. We believe that the unemployment rate could increase to 4%.
Last week, initial claims for unemployment benefits among Americans fell from 227k to 218k, while continuing claims for unemployment benefits decreased from 1.894 million to 1.871 million. The data indicates a relatively stable trend compared to the previous week. Despite this stability, the prospect of rising numbers in the coming months is fuelled by numerous announced layoffs and the emergence of more cautious workforce reductions. In 2024 we are already seeing layoff announcements. Technology giants such as Amazon, Google, Meta and Microsoft, or large banks such as Citigroup or Deutsche Bank, are among those implementing job cuts.
Our outlook is that the labour market is weakening, and we will see more increases in layoffs in the coming months. We believe that the unemployment rate could increase to 4%.
Debt commentary
Consumer debt is rising and continued high rates imply increased interest payments and it could end in massive default.
In the final quarter of 2023, credit card debt surged by $50 billion, reaching an unprecedented high. By the end of December, the total credit card balances escalated to $1.13 trillion, marking a more than 4% increase compared to the third quarter of 2023. These figures represent the highest levels observed in over two decades. Simultaneously, household debt saw a substantial uptick, with a $212 billion rise in the fourth quarter, bringing the overall debt to $17.5 trillion.
Wilbert van der Klaauw, an economic adviser at the New York Fed, highlighted that the incidence of credit cards and auto loans transitioning into delinquency surpassed pre-pandemic levels. This trend suggests an escalation in financial strain, particularly among younger and lower-income households. At the close of the fourth quarter, approximately 8.5% of annualized credit card balances and 7.7% of annualized auto loan balances became delinquent. Notably, serious credit card delinquencies surged across all age groups, with younger borrowers surpassing pre-pandemic levels, indicating a concerning financial landscape.
In the final quarter of 2023, credit card debt surged by $50 billion, reaching an unprecedented high. By the end of December, the total credit card balances escalated to $1.13 trillion, marking a more than 4% increase compared to the third quarter of 2023. These figures represent the highest levels observed in over two decades. Simultaneously, household debt saw a substantial uptick, with a $212 billion rise in the fourth quarter, bringing the overall debt to $17.5 trillion.
Wilbert van der Klaauw, an economic adviser at the New York Fed, highlighted that the incidence of credit cards and auto loans transitioning into delinquency surpassed pre-pandemic levels. This trend suggests an escalation in financial strain, particularly among younger and lower-income households. At the close of the fourth quarter, approximately 8.5% of annualized credit card balances and 7.7% of annualized auto loan balances became delinquent. Notably, serious credit card delinquencies surged across all age groups, with younger borrowers surpassing pre-pandemic levels, indicating a concerning financial landscape.
Disclaimer
This commentary is for information purposes only and does not take into account the specific circumstances of any recipient. The information contained in this commentary does not constitute the provision of investment advice nor a recommendation, offer or solicitation to acquire (or dispose of) any financial instruments and/or services. Prior to making any investment decision investors should seek independent professional advice and draw their own conclusions regarding suitability of any transaction including the economic benefits and risks and legal, regulatory, credit, accounting and tax implications. The past performance of financial instruments is not indicative of future results and you may get back less than the amount you invested.
No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750)
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved
No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750)
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved