US Economy: Weekly Commentary – July 1, 2024.
US Market Review
US bond yields rose amid persistent inflation; equities, led by small-caps, gained; dollar strong; oil prices were up; gold stable; Bitcoin declined.

US bond yields increased across the yield curve, with the two-year bond yield reaching 4.768% and the 10-year bond yield climbing to 4.402%. This rise coincided with ongoing inflationary pressures and sustained economic expansion.

Equity markets recorded weekly gains, driven by strong performances in small- and micro-cap stocks, which are currently trading at more attractive valuation multiples compared to large-caps. The "Magnificent 7" posted a 1.58% increase for the week, while Nike saw a significant decline of 22.59%.

Meanwhile, the US dollar maintained its strength against the euro, with the USD/EUR exchange rate holding steady at 0.9334. WTI crude oil prices rose by 1.08%, influenced by geopolitical tensions involving Israel and the Iran-backed Hezbollah militia, which overshadowed weak US gasoline demand. Gold prices remained relatively stable amid higher bond yields and a robust dollar. In the cryptocurrency markets, Bitcoin experienced a 5.41% loss for the week, contrasting with Solana's 2.76% increase.
US Market Views Synopsis
In Q1 2024, US GDP grew 1.4%, its slowest since early 2022. Personal consumption fell unexpectedly, while inflation rose to 3.1%, driven by housing costs. Despite calls for rate cuts, the Fed is unlikely to act until year-end amid economic uncertainties.

In Q1 2024, US GDP grew by 1.4%, marking its slowest expansion since early 2022. Personal consumption decreased unexpectedly, while fixed investment bolstered growth. Inflation rose to 3.1%, primarily driven by housing costs. Despite calls for rate cuts, the Federal Reserve is unlikely to act until year-end amid mixed economic signals. The housing market faces challenges with declining sales and high mortgage rates, dampening recovery hopes. Consumer sentiment held steady in June, tempered by concerns over high prices despite expected interest rate adjustments. Overall, economic growth continues, and inflation remains sticky, so we do not expect cuts until the end of the year.
The US GDP grew at 1.4% in Q1 2024, with concerns about consumption decline and inflation at 3.1%. The Fed is unlikely to lower interest rates until year-end.

The final GDP reading for the first quarter of 2024 indicated that the US economy expanded at an annualized rate of 1.4%. This figure is slightly higher than the 1.3% reported in the second estimate but represents the slowest growth since the contractions experienced in the first half of 2022.

Despite the overall GDP growth, the underlying components revealed some concerning trends. Personal consumption unexpectedly declined from an annualized rate of 2.0% to 1.5%. Fixed investment contributed 1.19 percentage points to GDP growth, up from the previously reported 1.02 points. Changes in private inventories remained nearly unchanged. Net trade reduced GDP by 0.65 percentage points, an improvement from the previous -0.89 points, and is expected to continue declining in the second quarter due to the stronger dollar. Public consumption saw a modest increase from 0.23 percentage points to 0.31 points.

Inflation has accelerated to 3.1%, according to the GDP data, and maintaining these levels is not favourable. However, in a 1.4% growth environment, reducing inflation should not be overly challenging, though it is important to note that a significant portion of inflation stems from housing rents.

Considering that growth exceeds 1% and inflation is rising, confirming the difficulty of reducing it in the final stretch, we believe the Fed is in no rush to cut interest rates. It appears unlikely that we will see rate cuts until the end of the year.
Easing inflation and slowing consumer spending in the US raise the likelihood of Fed rate cuts, starting in September, to prevent an unnecessary recession and transition to a less restrictive policy.

The Fed's preferred measure of inflation exhibited a modest MoM increase of 0.1%, suggesting a reduction in the high inflation rates experienced during the first quarter. Concurrently, US consumer spending is decelerating, with first-quarter growth anticipated to be less than half of that recorded in the latter half of 2023. According to the May personal income and spending report, the core personal consumption expenditures (PCE) deflator—a broader inflation metric than the Consumer Price Index (CPI)—rose by 0.1% MoM and 2.6% YoY. Despite a slight upward revision in April's figures, the overall data indicates a stabilization of inflation. This, coupled with a decline in consumer spending, increases the probability that the Fed will ease its monetary policy, potentially leading to interest rate cuts.

Additionally, consumer spending trends have shown a cooling effect, with real household disposable income and spending rising modestly in May. However, the overall trend indicates a slowdown, with anticipated consumer spending growth for the first half of 2024 being half that of the latter half of 2023. The Fed, which currently maintains a restrictive monetary policy stance, aims to avoid triggering an unnecessary recession. Should inflation pressures continue to abate, labour market slack increase, and consumer spending further decelerate, the Fed may initiate rate cuts as early as September.

We do not anticipate rate cuts until the end of the year. The Fed can maintain high rates longer, as the economy appears strong enough to withstand them.
Housing Market
The housing market is challenged by declining new home sales and cautious optimism awaiting potential mortgage rate cuts for future recovery.

Sales of new homes dropped 11.3% MoM to their lowest level since November 2023. Concurrently, the month's supply hit its highest since October 2022. The median sale price of a new home decreased slightly by 0.9% YoY, remaining 9% below the 2022 peak. Mortgage rates exceeding 7% in June have heightened pessimism among builders and buyers. Despite incentives from builders, higher rates have significantly affected builder sentiment, which is now at its lowest since December 2023. Building permits and housing starts also declined in May. However, a shortage of existing homes, recent dips in mortgage rates below 7%, and reductions in median new home prices may support the new home market.

The housing market remains structurally undersupplied, with potential buyers waiting for more favourable conditions. Revised April new home sales figures, adjusted upwards, partially explain the 11.3% decline in May. With new home inventory at its highest since 2008, builders are expected to continue offering sales incentives. If mortgage rates continue to moderate, the new home market could recover. The inventory of completed homes is at its highest since 2009, homes under construction remain historically high, and the inventory of homes not started is at an all-time high. Although pending home sales declined by 2.1% MoM, some rate-sensitive buyers are starting to respond to moderate rates. However, ongoing affordability issues continue to hinder a robust recovery.

We foresee that market recovery and increased supply will not materialize until 2025 when reductions in mortgage rates are expected to reignite activity among consumers and builders alike.
Consumer Sentiment
Consumer sentiment was stable in June; concerns over high prices offset optimism from expected interest rate changes.

Consumer sentiment remained stable in June, with the month's reading only 0.9 index points below May, a difference that falls within the margin of error. Despite the confidence that inflation will moderate, concerns persist about the impact of high prices and weakening incomes on personal finances, counterbalancing improvements in the short- and long-term outlook for business conditions due to expected softening interest rates. Nevertheless, sentiment is approximately 36% higher than the low observed in June 2022. Year-ahead inflation expectations declined from 3.3% to 3.0%, aligning with the 2.3-3.0% range of the two years preceding the pandemic. Long-run inflation expectations remained steady at 3.0% for the third consecutive month, slightly elevated compared to the pre-pandemic range of 2.2-2.6%.

We expect consumer confidence to remain steady throughout the remainder of the year, despite persistent high inflation. Economic growth remains positive; however, significant changes on the consumer side are not anticipated until late 2024 or early 2025.
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