US Economy: Weekly Commentary – June 10, 2024.
US Market Review
US bond yields were mixed, with two-year bonds up to 4.897% and 10-year bonds down to 4.439%. Stock markets saw large caps outperform small caps, and the Nasdaq rebounded 1.79%. Oil and gold prices fell, while Bitcoin gained 1.57%.

US bond yields experienced a mixed week. The curve inversion continued with sub-2-year bond yield increasing (two-year bond at 4.897%), while 10-year bonds fell to 4.439%. This increase reflects the market's reaction to evolving economic conditions, particularly employment data and wage growth, which continues to outpace inflation. Inflation data remains crucial in shaping the trajectory of the yield curve.

Stock markets also had a mixed week, with large-cap stocks outperforming small-caps. The Nasdaq notably rebounded by 1.79%, driven mainly by the strong performance of the Magnificent 7. The dollar strengthened against the euro, and the USD/EUR exchange rate now stands at 0.9258.

WTI oil prices fell by 2.31%, marking their third consecutive weekly decline. This drop reflects investors’ reactions to OPEC+ assurances alongside the latest US employment data, which diminished expectations of an imminent interest rate cut by the Federal Reserve. Gold prices also declined, attributed to strong employment data and China halting its purchases of the metal. Meanwhile, Bitcoin recorded a gain of 1.57%, amid news suggesting that the leading cryptocurrency may soar.
US Market Views Synopsis
In May, manufacturing contracted, construction spending declined, and the labour market showed mixed signals. Oil inventories rose, impacting prices, while European gas surged due to supply issues.

The ISM Manufacturing Index fell to 48.7, indicating ongoing contraction, driven by weak demand despite increased employment. Construction spending declined for the second consecutive month due to high borrowing costs. The labour market remained resilient with nonfarm payroll employment rising by 272k, although household employment dropped significantly. Oil and gas inventories unexpectedly increased in the U.S., while oil prices fell following the OPEC+ supply cuts extension. European gas prices surged due to supply issues in Norway. These trends highlight the challenges inflation and monetary policy poses on economic growth.
Business activity
May saw the ISM manufacturing index fall unexpectedly to 48.7, indicating continued contraction. Employment rose, but doubts linger about sustainability. Construction spending declined for the second month, reflecting economic constraints.

The ISM manufacturing index took an unexpected dip to 48.7 in May 2024, down from April's 49.2. This indicates a sustained downturn in manufacturing operations. The drop is linked to subdued demand, steady output, and accommodating input conditions. Despite this, the index remained above the critical recession mark of 45. Although new orders, inventories, and backlogs saw declines, employment surged significantly, hitting its peak since September 2023. Nevertheless, the data suggests that the manufacturing sector won't significantly boost economic activity this year. The prices paid aspect saw a slight decrease to 57.0 from 60.9 but remained higher than the six-month average of 54.1, indicating persistent inflationary pressures. Employment showed promising signs by surpassing the equilibrium level of 50, reaching its highest point since March 2022. However, with output and orders slowing, doubts arise regarding the sustainability of this employment recovery. It's plausible that firms are merely filling existing positions rather than expanding their workforce.

In addition, construction spending decreased for the second consecutive month by 0.1%, emphasizing the ongoing impact of high borrowing costs and restricted credit conditions. Residential construction is particularly affected due to affordability concerns, leading to reduced housing starts and building permits.

This downturn in both manufacturing and construction highlights the constraining effects of current monetary policy, which continues to restrain economic activity. We do not expect improvements until rates are lowered, suggesting a stagnant year in both sectors, as our analysis indicates no anticipated rate cuts until December.
Oil and gas
Unexpected rises in U.S. crude, gasoline, and distillate stockpiles, fuelled by increased refining activity. Despite the summer driving season, demand weakened. Oil prices fell as OPEC+ extended cuts, while European gas surged due to supply issues in Norway.

The Energy Information Administration (EIA) attributed unexpected rises in U.S. crude oil, gasoline, and distillate reserves to heightened refining operations, despite the onset of the summer driving season. Crude stockpiles increased by 1.2 million barrels, reaching 455.9 million barrels, as refinery crude processing hit a peak at 17.1 million barrels per day (bpd), the highest level since December 2019. Refinery utilization rates surged to 95.4% of total capacity, marking the strongest performance in a year. Gasoline inventories jumped by 2.1 million barrels to 230.9 million barrels, surpassing predictions, while gasoline supplied dropped to 8.9 million bpd, signalling weakened demand. Distillate reserves expanded by 3.2 million barrels to 122.5 million barrels, exceeding market expectations. At the Cushing, Oklahoma delivery hub, crude stocks saw a significant increase of 854,000 barrels. Despite OPEC+ prolonging supply cuts, oil prices dipped below $79 per barrel, a level not seen since February. Concerns arose regarding compliance with cuts, as preliminary May OPEC production figures showed a slight rise, with both Iraqi and UAE outputs surpassing targets.

Meanwhile, European gas prices witnessed substantial fluctuations, with TTF prices soaring due to supply worries stemming from a pipeline fracture at Norway's Sleipner gas field. This led to a notable decrease in daily Norwegian gas flows, with uncertainty prevailing throughout the outage.

We anticipate minimal fluctuations in oil prices shortly. However, should tensions escalate, particularly in regions like Israel and Russia, there is a possibility of unexpected shifts in crude oil prices.
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