US Economy: Weekly Commentary – May 06, 2024.
US Market Review
US bond yields declined as employment data disappointed, raising expectations for a September rate cut despite inflationary pressures. Equities saw gains driven by Powell's statements, robust earnings, and Apple's buyback, with small caps showing positive trends. WTI oil prices fell to $82.83, gold continued its decline, and Bitcoin struggled. The IBIT ETF ended a notable streak of inflows.

Bond yields in the US decreased throughout the week, spurred by employment data that fell below expectations, leading the market to expect a rate cut in September once again. Nevertheless, with inflationary pressures on the rise, especially in services and the housing sector, it's challenging for us to envision rate cuts in September. The rates for both 10-year and 2-year bonds dropped by more than 3%, increasing their prices.

The equity markets had a favourable week, marked by noteworthy advancements attributed to key factors such as Fed Chair Jerome Powell's statements, employment data, and strong corporate earnings. The Mag7 demonstrated impressive performance (+2.70%), propelled by Apple's substantial $110 billion buyback initiative, with Tesla and Amazon also delivering noteworthy results. Furthermore, small-cap equities exhibited a positive YTD trend. The USD/EUR pair depreciated to 0.929, signalling the USD's strength relative to the euro.

WTI crude oil prices dipped below $80, while gold experienced a consecutive week of decline amidst mounting inflationary concerns. Concurrently, Bitcoin faced a downturn in the cryptocurrency market. Notably, the primary ETF IBIT (Blackrock) concluded a long streak of consecutive inflows.
US Market Views Synopsis
The Federal Reserve ensures stability amidst stagnant inflation and monitors increasing costs. Chairman Powell seeks further economic data points while markets anticipate rate cuts, with declining consumer confidence attributed to inflation and high interest rates.

The Federal Reserve maintains rates amidst stagnant inflation, prioritizing stability. Chairman Powell insists on requiring more data before considering changes. Market speculates potential rate cuts by year-end, influenced by economic data. Labour market shows weaker job creation, raising expectations for a September rate cut. Inflation pressures persist, with rising employee costs and home prices. Consumer confidence declines due to economic worries, while manufacturing and services sectors show signs of weakening, prompting concerns about stagflation. We do not expect cuts until December.
Fed meeting
The Fed maintains rates amid persistent inflation, emphasizing stability. Chairman Powell stresses the need for more economic data before making any decisions, with market now anticipating possible rate cuts by year-end, influenced by upcoming data and the Fed's signals.

The Federal Reserve's decision to maintain the policy rate between 5.25% and 5.50% underscores its confidence in the current stance despite concerns surrounding stagnant inflation. With inflation levels remaining elevated and persistent inflationary pressures, the Fed exercises caution in considering rate hikes, emphasizing a commitment to stability until significant progress is achieved in curbing inflation or unless there is a notable deterioration in the labour market.

Chairman Jerome Powell reaffirmed the Fed's position during the press conference, stressing the necessity for "more evidence" before contemplating any shifts in monetary policy. Market sentiment reflects this cautious approach, with minimal expectations for immediate action at the upcoming FOMC meeting. However, projections suggest a leaning towards anticipating rate cuts by September and December, indicating the uncertain trajectory of economic forecasts. The reduction in the monthly drawdown of Treasuries from $60 billion to $25 billion, coupled with Powell's dovish remarks, has notable implications for the bond market, while also exerting downward pressure on the dollar. These developments highlight the pivotal role of economic data in shaping market sentiment and future monetary policy decisions.

Despite the execution of rate hikes and the enduring presence of high-interest rates, financial conditions have displayed relaxation. Coupled with ongoing inflationary pressures and robust employment figures, uncertainties persist concerning the Federal Reserve's position on potential rate cuts. While we anticipate a single cut in December, the risk remains that there will be no rate adjustments this year.
Labour market
The April employment report unveiled a scenario of weaker-than-anticipated job creation, elevated unemployment rates, and restrained wage progression. This has reignited discussions about a possible rate cut by the Federal Reserve come September.

According to non-farm payroll data, the US economy expanded its workforce by 175,000 positions in April. This deceleration signifies a significant slowdown compared to the robust expansion witnessed in the previous quarter, falling short of the average monthly increase of 242,000 jobs over the past year. While not overwhelmingly negative, the report's indication of a softening trend raises concerns, particularly as labour surveys hint at potential further weakness in job creation. Consequently, market sentiment has shifted, anticipating a 25 bp reduction in interest rates by September, with the chance of additional cuts by year-end, marking a notable departure from previous expectations.

Looking forward, uncertainties linger, especially as sectors like leisure & hospitality and government show weaker performance compared to recent trends. Additionally, indicators such as the household survey suggest minimal employment gains and a rise in the number of unemployed individuals, leading to a cautious outlook for the job market. Given this scenario, the anticipation of a September rate cut by the Federal Reserve remains, contingent upon sustained evidence of subdued inflation and softening consumer spending. However, the possibility of subsequent rate cuts in November and December is also considered, reflecting a proactive approach aimed at mitigating economic risks and fostering sustainable growth.

We expect that there will be just one rate cut this year, expected for December.
US labour costs surged 1.2% in Q1 2024; private industry wages rose by 1.1%. Housing prices climbed 7.3% annually with inflationary pressures persist.

During the first quarter of 2024, civilian worker compensation costs in the United States experienced a notable acceleration, increasing by 1.2% (vs 0.9% the previous quarter). The surge in labour costs, which saw wages and salaries climb by 1.1% and benefits by 1.1%, respectively, represents the most substantial increase in a year. Notably, wage costs for private industry workers advanced by 1.1%, while those for state and local government employees rose by 1.3%.

In a year-over-year comparison spanning January to March, labour costs exhibited a 4.2% increase, consistent with the growth rate recorded in the preceding quarter. Concurrently, the S&P CoreLogic Case-Shiller index, tracking home prices across 20 major US cities, demonstrated a robust ascent of 7.3% in February 2024 compared to the previous year. This surge, the most significant since October 2022, surpassed market projections of a 6.7% advance. The national composite surged by 6.4% in February, reflecting the swiftest annual growth rate since November 2022.

We expect more inflationary pressure on both the housing and labour markets in the foreseeable future. With immigration on the rise, there will be heightened demand for housing, particularly in the rental sector. Consequently, the market is expected to remain tight until supply aligns with this increased demand. It is unlikely that we will see a decrease in housing prices until 2025, given the current dynamics.
Consumer confidence
Consumer Confidence Index dropped for the third consecutive month to 97.0 from March's 103.1, with the Present Situation Index at 142.9 and the Expectations Index at 66.4, signalling economic concerns. Confidence hit its lowest since July 2022 due to worries about future job availability and income.

In April, the Conference Board Consumer Confidence Index experienced its third consecutive monthly decline, decreasing to 97.0 from a revised 103.1 in March. Despite this prolonged weakness over the past three months, the index has maintained a relatively stable trajectory within a narrow range, a pattern persisting for over two years. The Present Situation Index, reflecting consumers' assessments of current business and labour market conditions, dropped to 142.9 in April from a revised 146.8 in March. Similarly, the Expectations Index, measuring consumers' short-term outlook for income, business, and labour market conditions, fell to 66.4 from a slightly revised 74.0 the previous month. Notably, an Expectations Index reading below 80 often signals an impending recession.

Confidence further declined to its lowest level since July 2022, attributed to consumers' less favourable perceptions of the current labour market and heightened concerns about future business conditions, job availability, and income prospects. Despite the overall decline in confidence, optimism about the present situation has consistently outweighed concerns about the future since mid-2022.

We expect a further decline in consumer confidence amidst escalating inflationary pressures and prolonged high-interest rates.
Manufacturing sector
US economy shows softening, manufacturing and construction stagnate. ISM index drops to 49.2, below 50, signalling contraction. Construction spending declines. ISM Prices Index climbs, indicating raw material price hikes.

Recent indicators point to a slight softening in various sectors of the US economy, with manufacturing and construction activities showing signs of stagnation. The ISM manufacturing index dropped to 49.2 in April, falling below the consensus of 50.0, indicating a contraction in the sector. New orders decreased to 49.1, reaching the lowest level since December, while employment figures remained subdued with a reading of 48.6, marking the 7th consecutive month below 50. Additionally, construction spending experienced a 0.2% decline in April, contrary to the anticipated 0.3% increase. Although February's growth rate was revised upward to 0%, this marks the third consecutive month of either flat or negative output.

April saw the ISM Prices Index climb to 60.9, marking the fourth straight month of raw material price hikes. Industries like chemical products and fabricated metal products reported increases. Commodity prices, including crude oil and steel, continue to rise, with 31% of companies reporting higher prices.

We expect the manufacturing sector to fluctuate around the breakeven and prices to experience a slight increase amid tensions and conflicts.
Services sector
The sudden drop of the ISM Services Index to 49.4 comes as a shock and casts doubt on the prevailing notion that everything is going smoothly.

ISM Services PMI registered a sharp decline to 49.4, marking the first contraction in service sector activity since December 2022. This downturn, alongside an unexpected contraction in the manufacturing sector, represents only the second decline in activity since the pandemic-induced collapse in the second quarter of 2020. New orders increased at a slower pace, production eased significantly, and companies cut jobs at a faster rate, indicating a third period of declining employment. Additionally, prices surged sharply due to rising costs of chemicals, metals, fuels, and food, highlighting widespread inflationary pressures in the US economy.

We anticipate a surge in inflation within the services sector. Wage increases remain above the inflation rate, indicating a resilient labour market.
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