US Economy: Weekly Commentary – October 07, 2024.
US Market Review
US bond yields surged amid robust employment data, with mixed equity performance. Oil and gold gained, while the US dollar strengthened, and bitcoin declined.
US bond yields have shown strong upward momentum over the past week. The 2-year yield has climbed by more than 36 bp, while the 10-year yield is approaching the 4.00% mark. The yield curve is on the verge of reverting to an inverted state, driven by robust employment data and diminishing expectations for rate cuts. Earlier, the market projected a 50bp cut in November, but expectations have now shifted to just 25bp.
Equity markets delivered mixed results. Small-cap stocks declined over the week, whereas large-cap stocks posted gains. The "Magnificent 7" rose over 2%, which buoyed both the S&P 500 and Nasdaq 100 indices. This rally was supported by robust employment data, which paradoxically suggests the Fed may not need to reduce rates as aggressively as previously forecasted.
The US dollar appreciated against the euro, reaching 0.9111, as the market now anticipates a greater likelihood of rate cuts in Europe compared to the US. In the commodities sector, WTI crude oil surged by over 8%, marking its strongest weekly performance in more than a year amid escalating geopolitical tensions in the Middle East, rising inventories, and subdued demand. Meanwhile, gold prices continued their upward trend, registering gains for the fourth consecutive week. In contrast, the cryptocurrency market saw bitcoin decline by just over 2%.
US bond yields have shown strong upward momentum over the past week. The 2-year yield has climbed by more than 36 bp, while the 10-year yield is approaching the 4.00% mark. The yield curve is on the verge of reverting to an inverted state, driven by robust employment data and diminishing expectations for rate cuts. Earlier, the market projected a 50bp cut in November, but expectations have now shifted to just 25bp.
Equity markets delivered mixed results. Small-cap stocks declined over the week, whereas large-cap stocks posted gains. The "Magnificent 7" rose over 2%, which buoyed both the S&P 500 and Nasdaq 100 indices. This rally was supported by robust employment data, which paradoxically suggests the Fed may not need to reduce rates as aggressively as previously forecasted.
The US dollar appreciated against the euro, reaching 0.9111, as the market now anticipates a greater likelihood of rate cuts in Europe compared to the US. In the commodities sector, WTI crude oil surged by over 8%, marking its strongest weekly performance in more than a year amid escalating geopolitical tensions in the Middle East, rising inventories, and subdued demand. Meanwhile, gold prices continued their upward trend, registering gains for the fourth consecutive week. In contrast, the cryptocurrency market saw bitcoin decline by just over 2%.
US Market Views Synopsis
The U.S. job market showed strong growth in September, adding 254k jobs. However, concerns about full-time employment decline persist, alongside mixed signals in manufacturing and rising oil inventories.
The latest U.S. employment report for September revealed robust job growth, with 254k new positions created, surpassing expectations of 150k, alongside a positive revision of 72k jobs for the previous two months. The unemployment rate fell to 4.1%, and wages increased by 0.4%. However, concerns linger regarding the sustainability of this growth, as full-time employment has declined year-on-year for eight consecutive months. In manufacturing, the PMI remained at 47.2, indicating ongoing contraction, while the services sector showed growth with a PMI of 54.9. Meanwhile, U.S. crude oil inventories rose unexpectedly by 3.89 million barrels, attributed to lower refinery utilization and weakening gasoline demand, with no significant price fluctuations anticipated for crude oil this year.
The latest U.S. employment report for September revealed robust job growth, with 254k new positions created, surpassing expectations of 150k, alongside a positive revision of 72k jobs for the previous two months. The unemployment rate fell to 4.1%, and wages increased by 0.4%. However, concerns linger regarding the sustainability of this growth, as full-time employment has declined year-on-year for eight consecutive months. In manufacturing, the PMI remained at 47.2, indicating ongoing contraction, while the services sector showed growth with a PMI of 54.9. Meanwhile, U.S. crude oil inventories rose unexpectedly by 3.89 million barrels, attributed to lower refinery utilization and weakening gasoline demand, with no significant price fluctuations anticipated for crude oil this year.
Labour market
The US employment report showed strong job growth with 254k new positions in September, but concerns linger over the decline in full-time employment and wage sustainability.
The latest U.S. employment report demonstrates robust strength across all key indicators—job creation, unemployment, wages, and hours worked—surpassing expectations. In September, nonfarm payrolls increased by 254k, significantly exceeding the consensus forecast of 150k, alongside a positive revision of 72k jobs for the previous two months. The government continues to play a vital role as a job creator, adding 31k positions in September. The unemployment rate fell to 4.1% from 4.2%, while wages increased by 0.4% MoM, with August’s wage growth also revised upward to 0.5%. Despite these positive indicators, discrepancies with other economic data, such as the ISM surveys, raise concerns about the sustainability of this growth. Full-time employment has declined year-on-year for eight consecutive months, whereas part-time employment has risen. In September, however, full-time employment increased by 414k, while part-time employment decreased by 95k. Although the leisure and hospitality sectors added 78k jobs and private education and healthcare contributed an additional 81k, many of these roles are part-time and lower-paid, complicating the overall employment outlook.
The Fed must navigate a delicate balance, avoiding excessive flexibility or rigidity. While we do not anticipate a significant risk of inflation reaccelerating, it has yet to reach the target level. Therefore, a neutral rate that exceeds the price index should be maintained until that goal is achieved. We continue to assert our position that two rate cuts of 25 bp each will occur in November and December.
The latest U.S. employment report demonstrates robust strength across all key indicators—job creation, unemployment, wages, and hours worked—surpassing expectations. In September, nonfarm payrolls increased by 254k, significantly exceeding the consensus forecast of 150k, alongside a positive revision of 72k jobs for the previous two months. The government continues to play a vital role as a job creator, adding 31k positions in September. The unemployment rate fell to 4.1% from 4.2%, while wages increased by 0.4% MoM, with August’s wage growth also revised upward to 0.5%. Despite these positive indicators, discrepancies with other economic data, such as the ISM surveys, raise concerns about the sustainability of this growth. Full-time employment has declined year-on-year for eight consecutive months, whereas part-time employment has risen. In September, however, full-time employment increased by 414k, while part-time employment decreased by 95k. Although the leisure and hospitality sectors added 78k jobs and private education and healthcare contributed an additional 81k, many of these roles are part-time and lower-paid, complicating the overall employment outlook.
The Fed must navigate a delicate balance, avoiding excessive flexibility or rigidity. While we do not anticipate a significant risk of inflation reaccelerating, it has yet to reach the target level. Therefore, a neutral rate that exceeds the price index should be maintained until that goal is achieved. We continue to assert our position that two rate cuts of 25 bp each will occur in November and December.
Business activity
The Manufacturing PMI remained at 47.2, signalling continued contraction, while the Services PMI rose to 54.9, showing robust growth. Despite stable economic conditions, concerns persist over employment, price pressures, and uncertainties in both sectors.
The Manufacturing PMI remained unchanged at 47.2 in September, indicating continued contraction in the sector for the sixth consecutive month. Despite minor improvements in new orders, production, and order book indices—rising to 46.1, 49.8, and 44.1, respectively—all metrics remain in contractionary territory. The price index fell to 48.3, reflecting lower commodity prices, which has provided some relief. However, employment figures were particularly weak, dropping to 43.9 from 46 in August, far below market expectations of 47, marking one of the lowest levels since the pandemic. Demand remains subdued as manufacturers navigate ongoing economic uncertainties, and only one of the six largest manufacturing industries—Food, Beverages, and Tobacco Products—reported growth. Cautious investment decisions, shaped by federal monetary policy and election uncertainties, further highlight the sector’s vulnerability.
In contrast, the Services PMI rose to 54.9, up from 51.5 in August, marking its strongest expansion since February 2023 and indicating overall economic growth for the third consecutive month. The business activity index surged to 59.9, and the new orders index grew to 59.4. However, employment in the services sector contracted for the first time in three months, falling to 48.1, a 2.1% decrease from August. Price pressures intensified, with the price index climbing to 59.4—the highest since January. This has fuelled concerns over a resurgence of inflation, although historically, ISM prices paid are still at average levels.
Respondents reported stable conditions but expressed caution regarding the labour market, potential port disruptions, and political uncertainty. We anticipate this data will lead the Fed to implement two additional 25 bp rate cuts this year.
The Manufacturing PMI remained unchanged at 47.2 in September, indicating continued contraction in the sector for the sixth consecutive month. Despite minor improvements in new orders, production, and order book indices—rising to 46.1, 49.8, and 44.1, respectively—all metrics remain in contractionary territory. The price index fell to 48.3, reflecting lower commodity prices, which has provided some relief. However, employment figures were particularly weak, dropping to 43.9 from 46 in August, far below market expectations of 47, marking one of the lowest levels since the pandemic. Demand remains subdued as manufacturers navigate ongoing economic uncertainties, and only one of the six largest manufacturing industries—Food, Beverages, and Tobacco Products—reported growth. Cautious investment decisions, shaped by federal monetary policy and election uncertainties, further highlight the sector’s vulnerability.
In contrast, the Services PMI rose to 54.9, up from 51.5 in August, marking its strongest expansion since February 2023 and indicating overall economic growth for the third consecutive month. The business activity index surged to 59.9, and the new orders index grew to 59.4. However, employment in the services sector contracted for the first time in three months, falling to 48.1, a 2.1% decrease from August. Price pressures intensified, with the price index climbing to 59.4—the highest since January. This has fuelled concerns over a resurgence of inflation, although historically, ISM prices paid are still at average levels.
Respondents reported stable conditions but expressed caution regarding the labour market, potential port disruptions, and political uncertainty. We anticipate this data will lead the Fed to implement two additional 25 bp rate cuts this year.
Oil inventories
U.S. crude inventories rose unexpectedly; gasoline demand declined, and we foresee no significant price fluctuations for crude oil this year.
Bearish EIA data indicated that U.S. crude oil inventories increased by 3.89 million barrels last week, contrary to expectations for a decline of approximately 1.5 million barrels. Cushing crude oil stocks also rose by 840k barrels. This uptick in inventories was attributed to lower refinery utilization, which decreased by 3.3 percentage points, leading to a reduction in crude oil inputs by 662k barrels per day. Despite this, gasoline stocks rose by 1.12 million barrels, even as gasoline demand continued to weaken, with implied demand dropping by 684k barrels per day week-over-week. In contrast, distillate stocks experienced a decline of 1.28 million barrels.
We do not anticipate significant fluctuations in crude oil prices for the remainder of the year.
Bearish EIA data indicated that U.S. crude oil inventories increased by 3.89 million barrels last week, contrary to expectations for a decline of approximately 1.5 million barrels. Cushing crude oil stocks also rose by 840k barrels. This uptick in inventories was attributed to lower refinery utilization, which decreased by 3.3 percentage points, leading to a reduction in crude oil inputs by 662k barrels per day. Despite this, gasoline stocks rose by 1.12 million barrels, even as gasoline demand continued to weaken, with implied demand dropping by 684k barrels per day week-over-week. In contrast, distillate stocks experienced a decline of 1.28 million barrels.
We do not anticipate significant fluctuations in crude oil prices for the remainder of the year.
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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