US Economy: Weekly Commentary – July 8, 2024.
US Market Review
U.S. bond yields fell, equity markets were mixed with large caps outperforming, the dollar weakened, oil and gold prices rose, and Bitcoin saw a weekly loss.

U.S. bond yields declined across the yield curve, with the two-year bond yield dropping to 4.612% and the 10-year bond yield falling to 4.286%. This decline occurred alongside easing inflationary pressures and a cooling labour market.

Equity markets had a mixed week, with small and micro-cap stocks declining, as reflected by the Russell 2000. In contrast, the "Magnificent 7" companies saw an 8.31% rise, boosting the Nasdaq 100 by nearly 3%. Large-cap stocks, particularly those in the growth and blend categories continued to outperform the rest, with increases of 3.5% and 2%, respectively.

The U.S. dollar weakened against the euro, reaching a three-week low with the USD/EUR exchange rate at 0.9225. WTI crude oil prices rose by 2.43%, marking the fourth consecutive week of gains due to robust demand and declining inventories. Gold prices increased as employment data indicated a weakening labour market. In the cryptocurrency market, Bitcoin experienced a 9.72% loss for the week.
US Market Views Synopsis
Economic indicators reveal declining business activity in manufacturing, construction, and services. The ISM indexes dropped, construction spending fell, and unemployment rose to 4.1%, reflecting widespread economic slowdown and potential Fed intervention.

Economic indicators highlight a widespread decline in business activity. The manufacturing and construction sectors experienced shrinking output, orders, and employment, despite easing inflation. The ISM manufacturing index dropped to 48.5, its lowest since February, and construction spending fell due to financial constraints and high borrowing costs. Employment in these sectors also declined. The ISM services index fell to 48.8, the lowest since the pandemic began, raising concerns about economic growth and leading to expectations of Fed intervention. Labour market trends reveal a slowdown, with unemployment rising to 4.1% and wage growth decelerating.
Business Activity
Economic indicators showed widespread decline: manufacturing and construction sectors faltered with shrinking output, orders, and employment. Despite easing inflation, service sector woes compounded worries, prompting expectations of Fed intervention.

The ISM manufacturing index dropped to 48.5, marking the third consecutive month of decline and the lowest level since February. Key indicators such as output and new orders saw declines, reflecting weakening sectoral performance. Concurrently, construction spending unexpectedly decreased in May, driven by financial constraints and subdued demand amid high borrowing costs, affecting both residential and non-residential projects. Employment in the sector also declined, though inflationary pressures moderated, offering a silver lining.

These developments raise concerns about economic growth prospects, exacerbated by a significant drop in the June ISM services index to 48.8, its lowest since the pandemic's onset. Components such as new orders and business activity also contracted, questioning the services sector's resilience. These trends are likely to influence Fed deliberations, heightening expectations of potential interest rate adjustments to stabilize the economy amidst weakening fundamentals.

We anticipate a return to expansion for the services sector by year-end, buoyed by potential rate cuts and increased consumer spending. Manufacturing, however, may experience greater volatility in the near term.
Labour Market
Recent shifts in the US labour market reveal a slowdown with unemployment exceeding 4%, impacting wage growth and fostering a subdued inflationary climate. This has led to mounting expectations of a Fed rate cut in September.

Nonfarm payrolls exceeded expectations with the addition of 206k jobs, substantial downward revisions to previous months' figures highlight a broader slowdown in job creation. Importantly, the three-month moving average has dropped to its lowest level since January 2021. Furthermore, the unemployment rate has risen to 4.1%, up from 3.4% just over a year ago, indicating growing economic slack. It is crucial to note, however, that the slight increase in the unemployment rate, remains historically low compared to the US average of 5.6%.

From a market perspective, recent employment figures show promise, particularly amidst a context where negative macroeconomic news benefits markets by potentially prompting the Fed to consider rate cuts. The latest figures reveal a cooling labour market. Notably, the public sector led job creation with an addition of 70k new positions. The government must reduce its role as the primary or largest job creator within the economy. Furthermore, the growth in part-time employment surpassing full-time roles, which are declining, raises concerns regarding market stability.

Given these employment figures, which indicate some negativity but not significantly so, we continue to anticipate potential rate cuts toward the year's end as the Fed still has room to maintain high rates. Moreover, we believe that this job creation by the government is unsustainable.
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