US Economy: Weekly Commentary – March 18, 2024.
Synopsis of US market sentiments
Inflation has surged unexpectedly and is proving to be more persistent than anticipated. There is a concerning downward trajectory in retail sales.
Inflation surged in February, and remains still above the Fed's target, prompting caution regarding rate cuts. Retail sales increased but showed a downward trend, while the labour market cooled. Industrial production also dropped, signalling economic issues. Consumer sentiment weakened, with expectations declining, suggesting the need for rate cuts to stimulate confidence and spending. We expect cuts in the H2, likely just one in December due to inflation remaining too high.
Inflation surged in February, and remains still above the Fed's target, prompting caution regarding rate cuts. Retail sales increased but showed a downward trend, while the labour market cooled. Industrial production also dropped, signalling economic issues. Consumer sentiment weakened, with expectations declining, suggesting the need for rate cuts to stimulate confidence and spending. We expect cuts in the H2, likely just one in December due to inflation remaining too high.
Inflation
Inflation has risen once more, prompting caution from the Federal Reserve regarding the timing of potential rate cuts. It appears that the cuts may be delayed beyond initial expectations.
In February, the United States' CPI rose to 3.2% YoY and increased by 0.4% MoM, significantly exceeding the Federal Reserve's 2% target. The majority of this increase, 60%, was attributed to rising housing and gasoline prices, with the energy price index growing by 2.3% compared to January, while food prices remained nearly unchanged. Core CPI rose by 0.36%, while the YoY rate decreased to 3.8%.
While Powell's efforts are showing some success, inflation remains sticky, making it difficult to achieve the 2% target. The timing of potential rate cuts hinges on inflation trends, with implications for policy decisions leading up to the elections. That is why if the Fed does not lower rates in July, we will not see cuts until December (post-election).
In February, the United States' CPI rose to 3.2% YoY and increased by 0.4% MoM, significantly exceeding the Federal Reserve's 2% target. The majority of this increase, 60%, was attributed to rising housing and gasoline prices, with the energy price index growing by 2.3% compared to January, while food prices remained nearly unchanged. Core CPI rose by 0.36%, while the YoY rate decreased to 3.8%.
While Powell's efforts are showing some success, inflation remains sticky, making it difficult to achieve the 2% target. The timing of potential rate cuts hinges on inflation trends, with implications for policy decisions leading up to the elections. That is why if the Fed does not lower rates in July, we will not see cuts until December (post-election).
PPI surged by 0.6% over the month, twice the anticipated increase of 0.3%. The headline PPI climbed by 1.6% YoY (vs. 1.1% Jan). This places the annual PPI at its highest level since September 2023. Meanwhile, core PPI saw a monthly uptick of 0.3%, with headline core PPI rising to 2.0% YoY. The battle against inflation at the Fed is ongoing. As energy prices continue to rise (almost 70% of the increase is attributed to energy), wholesale inflation is expected to remain elevated for longer than anticipated by financial markets.
In light of the current circumstances, it is improbable that the Federal Reserve will hastily implement rate cuts in response to another surge in inflation. We anticipate that the Federal Open Market Committee (FOMC) will opt to keep the Fed funds rate unchanged during the March meeting, with the possibility of considering easing measures in the second half of the year. The data underscores the enduring nature of inflationary pressures, indicating that achieving the target inflation rate will likely necessitate a prolonged timeframe.
In light of the current circumstances, it is improbable that the Federal Reserve will hastily implement rate cuts in response to another surge in inflation. We anticipate that the Federal Open Market Committee (FOMC) will opt to keep the Fed funds rate unchanged during the March meeting, with the possibility of considering easing measures in the second half of the year. The data underscores the enduring nature of inflationary pressures, indicating that achieving the target inflation rate will likely necessitate a prolonged timeframe.
Consumer situation
While there has been a recent increase in retail sales, it's important to note that the overall trend remains downward. Additionally, there are signs of cooling in the labour market.
US retail sales increased by 0.6% MoM in February, rebounding from a revised -1.1% decline in January (previously reported as -0.7%). This relatively modest upturn, alongside a marked deceleration in January, suggests a significant slowdown in consumer spending. Real retail sales, adjusted for inflation, have contracted in 12 of the last 16 months. Additionally, the graph below reveals a downward trend since April 2021.
US retail sales increased by 0.6% MoM in February, rebounding from a revised -1.1% decline in January (previously reported as -0.7%). This relatively modest upturn, alongside a marked deceleration in January, suggests a significant slowdown in consumer spending. Real retail sales, adjusted for inflation, have contracted in 12 of the last 16 months. Additionally, the graph below reveals a downward trend since April 2021.
There are signs of a cooling labour market. Weekly job applications have continued to rise, reaching 1,811 (vs. 1,794 previous week). This trend indicates low job affordability, which means takes more time to find new positions.
Given the stagnation and downward trajectory of retail sales, alongside emerging signs of a cooling labour market, speculation has arisen regarding potential interest rate reductions by the Federal Reserve. We continue to uphold the view that any potential rate cuts will occur in the second half of the year.
Given the stagnation and downward trajectory of retail sales, alongside emerging signs of a cooling labour market, speculation has arisen regarding potential interest rate reductions by the Federal Reserve. We continue to uphold the view that any potential rate cuts will occur in the second half of the year.
Business activity
The recent drop in industrial production, coupled with a sharp decrease in New York economic activity, may cause an increase in the call for Federal Reserve to consider rate cuts.
Industrial production experienced a decline of 0.2% (vs. 0.03% Jan). This downturn underscores the ongoing weakness in the industrial sector. In construction, production plummeted by 2.2% YoY, reflecting challenges stemming from high rates and lack of builds.
The March 2024 Empire State Manufacturing Survey reveals a troubling outlook for businesses in New York State. The survey indicates a continued decline in business activity, with the general business conditions index plummeting by nineteen points to -20.9. This decline is reflected across various indicators, including significant drops in new orders and shipments. Moreover, labour market indicators show signs of weakening, with declines in both employment levels and hours worked.
Although the rate of input price increases has moderated slightly, overall optimism remains subdued. However, there is some hope for improvement in the next six months. Despite this cautious optimism, capital spending plans remain tepid, suggesting a cautious approach to investment amidst the current economic climate.
Anticipating further weakness in business activity during the first two quarters, the combination of high interest rates, escalating energy prices, and inflationary pressures will exert significant influence. However, as the Federal Reserve begins to implement rate cuts in the second half of the year, we anticipate a gradual improvement in overall business conditions, fostering a recovery.
Industrial production experienced a decline of 0.2% (vs. 0.03% Jan). This downturn underscores the ongoing weakness in the industrial sector. In construction, production plummeted by 2.2% YoY, reflecting challenges stemming from high rates and lack of builds.
The March 2024 Empire State Manufacturing Survey reveals a troubling outlook for businesses in New York State. The survey indicates a continued decline in business activity, with the general business conditions index plummeting by nineteen points to -20.9. This decline is reflected across various indicators, including significant drops in new orders and shipments. Moreover, labour market indicators show signs of weakening, with declines in both employment levels and hours worked.
Although the rate of input price increases has moderated slightly, overall optimism remains subdued. However, there is some hope for improvement in the next six months. Despite this cautious optimism, capital spending plans remain tepid, suggesting a cautious approach to investment amidst the current economic climate.
Anticipating further weakness in business activity during the first two quarters, the combination of high interest rates, escalating energy prices, and inflationary pressures will exert significant influence. However, as the Federal Reserve begins to implement rate cuts in the second half of the year, we anticipate a gradual improvement in overall business conditions, fostering a recovery.
Consumer sentiment
In March, consumer sentiment experienced a decline, signalling potential concerns or uncertainties among consumers. However, inflation expectations have remained unchanged during this period.
The UoM Consumer Sentiment Index experienced a slight decrease, contributing to a weakening of consumer confidence in the US. The index dipped to 76.5 from 76.9 in February.
The survey also indicated that the 1-year and 5-year Inflation Expectations remained unchanged at 3% and 2.9% respectively. Surveys of Consumers Director noted that while there were minor improvements in personal finances, expectations for business conditions saw modest declines. Following a period of strong gains between November 2023 and January 2024, consumer sentiment has stabilized, with individuals perceiving few indications of economic improvement or deterioration. Many are reserving judgment on the economy's long-term trajectory, particularly awaiting the outcomes of the November election.
We anticipate a continued decline in consumer confidence, driven by weakening trends in the labour market. A growing number of individuals are resorting to part-time employment, indicating potential economic strain. If this trend persists, or if retail sales worsen, the Federal Reserve may give more serious consideration to implementing rate cuts.
The UoM Consumer Sentiment Index experienced a slight decrease, contributing to a weakening of consumer confidence in the US. The index dipped to 76.5 from 76.9 in February.
The survey also indicated that the 1-year and 5-year Inflation Expectations remained unchanged at 3% and 2.9% respectively. Surveys of Consumers Director noted that while there were minor improvements in personal finances, expectations for business conditions saw modest declines. Following a period of strong gains between November 2023 and January 2024, consumer sentiment has stabilized, with individuals perceiving few indications of economic improvement or deterioration. Many are reserving judgment on the economy's long-term trajectory, particularly awaiting the outcomes of the November election.
We anticipate a continued decline in consumer confidence, driven by weakening trends in the labour market. A growing number of individuals are resorting to part-time employment, indicating potential economic strain. If this trend persists, or if retail sales worsen, the Federal Reserve may give more serious consideration to implementing rate cuts.
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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