US Economy: Weekly Commentary – April 08, 2024.
US Market Review
US bond yields, pushing the 10-year bond over 4.35%, while stock markets declined by nearly 1%. Meanwhile, WTI oil surpassed $85 per barrel and gold reached historical highs above $2,300 due to central bank demand.

US bond yields surged, influenced by positive employment data and the manufacturing sector, signalling increased inflationary pressure. The 10-year bond yield has exceeded 4.35%. Stock markets experienced a negative week, with indices dropping nearly 1%. The EUR/USD exchange rate remains stable at 1.087. Additionally, WTI oil surpassed $85 per barrel this week, driven by escalating geopolitical tensions, supply constraints, and growing demand in major economies, sustaining its upward trend. Gold reached historic highs, surpassing $2,300, attributed to demand from central banks, geopolitical tensions, and bullish momentum following the earthquake in NY.
Synopsis of US market sentiments
US manufacturing demonstrates growth alongside increasing inflationary pressures, while the service sector experiences a slowdown. Labour market conditions remain stable, with expectations of future rate cuts after July.

US manufacturing shows growth with the ISM index entering expansion territory, while the service sector experiences a slowdown but with reduced inflation pressures. Despite concerns about potential weakness by summer, the labour market adds 303k jobs, maintaining unemployment below 4% for 26 consecutive months. Although a rate cut is unlikely soon, it may be considered later in the year. Our timeframe points to H2.
Business activity
Manufacturing's recovery exerts inflationary pressure, while the service sector's slowdown alleviates price pressures. However, employment remains weak across both sectors.

The recent resurgence of growth in US manufacturing has injected a dose of optimism into the economic landscape. The latest ISM manufacturing index has breached the threshold of 50, marking the first swoop into expansion territory since September 2022. This positive development is underscored by a notable surge in production and a rise in new orders. However, alongside these encouraging signs, inflationary pressures are on the rise, and the persistent contraction in employment remains a concern.

The headline reading of 50.3 has surpassed both consensus forecasts and previous performance. Production has surged from 48.4 to 54.6, while new orders have rebounded from 49.2 to 51.4. Despite softer figures in backlog orders and ongoing employment challenges, market sentiment remains cautiously optimistic, with attention also drawn to the uptick in the price paid component, indicative of escalating energy costs.

The construction sector paints a less favourable picture, with February witnessing a 0.3% decline in spending. This decline underscores the ongoing challenges faced by the sector, including high-interest rates and rising energy prices.

ISM services dropped to 51.4 from 52.6, accompanied by moderation in inflationary pressures to levels not seen in 4 years. Despite employment figures remaining in contraction territory, this report is likely to bolster the argument for interest rate cuts more. However, the divergence from official data suggests that the Fed will exercise caution in making any premature moves.

While service business activity remains relatively stable, new orders dipped below the six-month average, and employment continues to contract as backlogged orders declined noticeably. Of significance, the prices paid component slowed significantly to a four-year low, though respondents still expressed concerns about inflation despite some stabilization in prices.

Looking ahead, we anticipate a gradual resurgence in the manufacturing sector in the latter part of the year, supported by anticipated rate cuts. In construction, we expect a rebound to occur only after the Fed implements rate cuts in the latter half of the year. We foresee the service sector exerting more inflationary pressure in the coming months. Additionally, we anticipate upward pressure on the CPI as producer prices continue to rise. Our timeframe for rate cuts remains in the second half of the year.
Labour market
Despite the robust expansion in the job market, with the addition of 303,000 jobs, concerns have arisen from business surveys suggesting potential weakness in the months ahead.

In March, the healthcare sector spearheaded job gains by adding 72k new positions, while additional 71k government jobs were created, predominantly within the education sector. The statistics reveal a 1.3% decline in full-time employment contrasted with a record-breaking surge of 7.5% in part-time positions, underscoring the weakness within job composition. Notably, full-time job growth has reached a three-year low, while part-time job expansion has peaked at its highest level in recent years. Within just four months, the economy experienced a loss of 1.8 million full-time positions.

The unemployment rate has remained below 4% for an impressive 26 consecutive months, marking the longest period of sustained low unemployment in over five decades. Additionally, wages have consistently outpaced inflation, likely bolstering continued consumer spending and exerting pressure on inflationary trends.

Based on this data, the labour market appears strong, with wages still outpacing inflation, suggesting that the Fed is unlikely to cut rates at the upcoming meeting. However, we still acknowledge the possibility of one or two cuts as we progress into the second half of the year.
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