US Economy: Weekly Commentary – March 11, 2024.
Synopsis of US market sentiments
Labour market resilient. Fed still waiting for more data. Business activity improved.

Anticipates rate cuts later this year but expresses caution about reaching the 2% inflation target. US business activity rebounded in February, marking the 13th consecutive month of growth. Concerns linger over the contracting Employment Index. While the labour market remains resilient with historically low jobless claims, any rate cut could be further away than the market expects. Despite uncertainties, our perspective suggests these factors are unlikely to prompt deviations from the Federal Reserve's established strategy. The Federal Reserve will continue to follow the data (data-dependence). They don't want to rush with the cuts. We expect cuts in the H2 of the year and only 2 times.
No cut rates during the first half of the year. Inflation is still high.

Federal Reserve Chair Jerome Powell conveyed the central bank's caution, stating that the policy-setting committee remains uncertain about achieving the 2% inflation target. Powell emphasized that any consideration of interest rate cuts will only occur when there is a high level of confidence in sustained progress towards the inflation goal. The Committee, as outlined in Powell's statement to the House Committee on Financial Services, does not foresee a reduction until it has gained greater assurance in reaching the 2% target, avoiding premature actions that could undermine progress in inflation.

In parallel discussions, speculations arise regarding a potential delay in interest rate cuts until after the November presidential elections. Analysts, including Stephen Stanley of Santander, suggest that despite the Federal Reserve's independence, political considerations might influence the timing of rate cuts to avoid interference in the electoral landscape. Stanley anticipates that economic conditions and inflation levels could remain higher than expected, supporting a postponement of monetary easing. The November meeting could serve as a strategic point for the initiation of a new easing cycle, particularly if a clear election winner emerges. Apollo's Torsten Slok says the Fed will not cut rates in 2024.

Our perspective points to cuts in the second half of the year and just 2 cuts this year. Inflation remains sticky but the economy is starting to show weakness.
Business activity
Business activity improved. Employment dropped. Manufacturing is suffering.

In February, the composite index reflected continued growth for the 13th consecutive month. The Employment Index, a key component, contracted for the second time in three months, with a reading of 48, indicating a 2.5-point decrease (vs. 50.5 Jan). Concerns about a potential rise in the unemployment rate emerge large, especially with recent layoffs observed in the tech, manufacturing, and now the services sectors. Although prices are increasing, the pace is slower than in January, with noticeable pressure on both services and goods.

Within the service sector in the US, growth has decelerated, marked by a reduction in employment and a notable decline in the ISM employment index, reaching its lowest level since September 2020. Despite most service providers maintaining optimism, lingering concerns persist regarding ongoing conflicts, inflationary pressures, and employment uncertainties.

Shifting the focus to manufacturing, January 2024 witnessed a significant decline in factory orders by 3.6%, marking the most substantial drop since April 2020. This contraction was primarily driven by a sharp decline in orders for transportation equipment, experiencing a staggering 16.2% decrease. Furthermore, primary metals, fabricated metal products, and machinery also recorded declines of 1.9%, 0.9%, and 0.3%, respectively. Even excluding transportation, factory orders fell by 0.8%, emphasizing the challenges faced by the manufacturing sector and raising broader concerns about the economic outlook.
Labour market
Jobless claims remain historically low despite trending slightly higher throughout February.

The initial claims have maintained stability, whereas continuous claims registered an increase of 1.91 million during the previous week, signalling the formidable challenges encountered by individuals grappling with job loss in securing new employment opportunities.
The marginal decline of 0.1% in wage growth notwithstanding, salaries are still above inflation, affording families the capacity to sustain their expenditures. Non-farm payrolls witnessed a notable surge of 265K, surpassing projections and significantly surpassing the revised downward figures (by -167K) of the preceding data. The main drivers of this growth are health care and government. The unemployment rate has increased to 3.9%, although it remains below 4%, and the participation rate has exhibited no alterations.

Our perspective is that these data are unlikely to prompt any deviations from the Federal Reserve's established rates strategy. The labour market remains resilient, characterized by an unemployment rate below 4%, and a wage growth trajectory that outpaces inflationary trends.
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