US Economy: Weekly Commentary – July 15, 2024.
US Market Review
US bond yields and crude oil prices fell. Small and micro-cap stocks, gold, and Bitcoin rose. The dollar weakened against the euro.
US bond yields declined across the yield curve, with the two-year yield dropping to 4.464% and the ten-year yield decreasing to 4.187%. This decline aligns with easing inflationary pressures and could lead to rate cuts in September.
Equity markets had a mixed performance over the week. Small and micro-cap stocks outperformed large caps, with micro-cap stocks rising over 8% and small caps gaining over 6%, while large caps increased by less than 1%. The Nasdaq 100 faced challenges due to its heavy reliance on the "Magnificent 7" stocks, which fell by 1.94%.
The US dollar weakened against the euro, with the USD/EUR exchange rate at 0.9116. WTI crude oil prices declined, breaking a four-week winning streak. This drop is attributed to decreasing inflation and the increased likelihood of rate cuts, which are expected to stimulate demand. Gold prices increased in anticipation of rate cuts. Bitcoin saw a 2.88% increase over the week in the cryptocurrency market.
US bond yields declined across the yield curve, with the two-year yield dropping to 4.464% and the ten-year yield decreasing to 4.187%. This decline aligns with easing inflationary pressures and could lead to rate cuts in September.
Equity markets had a mixed performance over the week. Small and micro-cap stocks outperformed large caps, with micro-cap stocks rising over 8% and small caps gaining over 6%, while large caps increased by less than 1%. The Nasdaq 100 faced challenges due to its heavy reliance on the "Magnificent 7" stocks, which fell by 1.94%.
The US dollar weakened against the euro, with the USD/EUR exchange rate at 0.9116. WTI crude oil prices declined, breaking a four-week winning streak. This drop is attributed to decreasing inflation and the increased likelihood of rate cuts, which are expected to stimulate demand. Gold prices increased in anticipation of rate cuts. Bitcoin saw a 2.88% increase over the week in the cryptocurrency market.
US Market Views Synopsis
US inflation falls unexpectedly, bolstering Fed confidence in rate cuts; consumer sentiment subdued amid high prices and election uncertainty. Decrease in oil inventories.
Recent inflation data showed unexpected declines, with headline CPI dropping 0.1% against expectations of a 0.1% increase, while core CPI rose by 0.1% versus an anticipated 0.2% rise. This trend, influenced by slowing housing inflation and decreases in sectors like medical care and transportation, has bolstered Federal Reserve confidence in achieving its 2% target. Consequently, markets are pricing in potential rate cuts as early as September. Despite stable long-term inflation expectations at 2.9%, consumer sentiment remains subdued due to concerns over persistent high prices amidst upcoming elections and economic uncertainty. Additionally, the oil sector saw a notable decrease in U.S. crude inventories coupled with increased gasoline demand, suggesting potential volatility in oil market moving forward.
Recent inflation data showed unexpected declines, with headline CPI dropping 0.1% against expectations of a 0.1% increase, while core CPI rose by 0.1% versus an anticipated 0.2% rise. This trend, influenced by slowing housing inflation and decreases in sectors like medical care and transportation, has bolstered Federal Reserve confidence in achieving its 2% target. Consequently, markets are pricing in potential rate cuts as early as September. Despite stable long-term inflation expectations at 2.9%, consumer sentiment remains subdued due to concerns over persistent high prices amidst upcoming elections and economic uncertainty. Additionally, the oil sector saw a notable decrease in U.S. crude inventories coupled with increased gasoline demand, suggesting potential volatility in oil market moving forward.
Inflation
US CPI is lower than expected, boosting Fed confidence in achieving its 2% target and increasing the likelihood of September rate cuts.
The latest US CPI report, which revealed unexpectedly subdued inflation, has significantly bolstered the Federal Reserve's confidence in achieving its sustainable 2% target. This development markedly increases the probability of Federal Reserve rate cuts commencing in September. In June, headline CPI declined by 0.1% MoM, contrasting with expectations of a 0.1% increase, while core CPI showed a modest uptick of 0.1%, compared to an anticipated 0.2% rise. Housing inflation is notably decelerating, with shelter costs increasing by 0.2% MoM, down from the previous trend of 0.4%. Owners’ equivalent rent and primary rent rose by 0.3% MoM, marking their lowest increase in three years, while hotel prices saw a sharp decline. Medical care costs also moderated to 0.2% MoM after several months of 0.4% and 0.5% readings. Both used and new car prices are falling, and airline fares dropped by 5% MoM. This subdued inflationary pressure spans various sectors, particularly housing, where rental expenses have notably slowed.
As the Federal Reserve steers towards a "soft landing" to sustain economic stability without prompting a recession, the upcoming Jackson Hole Conference in late August is expected to offer further insights into future monetary policy. It may potentially signal more explicit indications of interest rate cuts.
The market currently reflects a 54.8% likelihood of a rate cut in November, alongside probabilities of 90% for September and 87.7% for December. Looking ahead to January, market expectations indicate a total of 100 basis points in rate cuts over the next seven months.
Inflation, particularly in the housing sector, may lead to a quicker decline in the headline CPI than anticipated. We maintain our expectation that rate cuts will occur before the year's end.
The latest US CPI report, which revealed unexpectedly subdued inflation, has significantly bolstered the Federal Reserve's confidence in achieving its sustainable 2% target. This development markedly increases the probability of Federal Reserve rate cuts commencing in September. In June, headline CPI declined by 0.1% MoM, contrasting with expectations of a 0.1% increase, while core CPI showed a modest uptick of 0.1%, compared to an anticipated 0.2% rise. Housing inflation is notably decelerating, with shelter costs increasing by 0.2% MoM, down from the previous trend of 0.4%. Owners’ equivalent rent and primary rent rose by 0.3% MoM, marking their lowest increase in three years, while hotel prices saw a sharp decline. Medical care costs also moderated to 0.2% MoM after several months of 0.4% and 0.5% readings. Both used and new car prices are falling, and airline fares dropped by 5% MoM. This subdued inflationary pressure spans various sectors, particularly housing, where rental expenses have notably slowed.
As the Federal Reserve steers towards a "soft landing" to sustain economic stability without prompting a recession, the upcoming Jackson Hole Conference in late August is expected to offer further insights into future monetary policy. It may potentially signal more explicit indications of interest rate cuts.
The market currently reflects a 54.8% likelihood of a rate cut in November, alongside probabilities of 90% for September and 87.7% for December. Looking ahead to January, market expectations indicate a total of 100 basis points in rate cuts over the next seven months.
Inflation, particularly in the housing sector, may lead to a quicker decline in the headline CPI than anticipated. We maintain our expectation that rate cuts will occur before the year's end.
Consumer Sentiment
Consumer sentiment remained subdued with minimal change for the second month, despite inflation concerns and upcoming election uncertainty. Year-ahead inflation expectations declined to 2.9%, reflecting stability in long-term forecasts.
Consumer sentiment showed minimal change for the second consecutive month, with July's reading only 2 index points lower than the previous month, a variance well within the margin of error. Despite being more than 30% higher than its low point in June 2022, sentiment remains persistently subdued. Nearly half of consumers continue to express concern over high prices, even as they anticipate inflation to gradually decrease in the coming years. The approaching election has heightened consumer uncertainty regarding the economy's future trajectory, though the initial presidential debate did not significantly alter their economic outlook. Looking at inflation expectations, forecasts for the next year declined for the second straight month, settling at 2.9%. In contrast, these expectations ranged from 2.3% to 3.0% in the two years preceding the pandemic. Meanwhile, long-term inflation expectations stood at 2.9%, slightly down from 3.0% last month, demonstrating notable stability over the past three years, albeit remaining somewhat elevated compared to the 2.2-2.6% range observed before the pandemic.
We expect increased volatility in consumer sentiment for the remainder of the year, influenced by upcoming elections, persistently high inflation, and ongoing labour market challenges.
Consumer sentiment showed minimal change for the second consecutive month, with July's reading only 2 index points lower than the previous month, a variance well within the margin of error. Despite being more than 30% higher than its low point in June 2022, sentiment remains persistently subdued. Nearly half of consumers continue to express concern over high prices, even as they anticipate inflation to gradually decrease in the coming years. The approaching election has heightened consumer uncertainty regarding the economy's future trajectory, though the initial presidential debate did not significantly alter their economic outlook. Looking at inflation expectations, forecasts for the next year declined for the second straight month, settling at 2.9%. In contrast, these expectations ranged from 2.3% to 3.0% in the two years preceding the pandemic. Meanwhile, long-term inflation expectations stood at 2.9%, slightly down from 3.0% last month, demonstrating notable stability over the past three years, albeit remaining somewhat elevated compared to the 2.2-2.6% range observed before the pandemic.
We expect increased volatility in consumer sentiment for the remainder of the year, influenced by upcoming elections, persistently high inflation, and ongoing labour market challenges.
Oil Inventories
The EIA report shows a significant decline in US crude oil inventories, with higher gasoline demand pushing prices.
A positive EIA inventory report disclosed a larger-than-anticipated decrease in U.S. commercial crude oil inventories, which fell by 3.44 million barrels. This reduction occurred despite declining crude oil exports and increased imports, driven by heightened refinery activity that boosted crude oil inflows. Gasoline inventories also saw a reduction of 2 million barrels, while distillate stocks increased. Although implied demand for refined products decreased, the four-week average implied gasoline demand has been trending upward, surpassing 2023 levels for the first time since March. This trend alleviates concerns about U.S. gasoline demand as the driving season progresses.
We anticipate gasoline prices will maintain a range between 80 and 90 dollars throughout the year, with no anticipated significant movements in the oil sector.
A positive EIA inventory report disclosed a larger-than-anticipated decrease in U.S. commercial crude oil inventories, which fell by 3.44 million barrels. This reduction occurred despite declining crude oil exports and increased imports, driven by heightened refinery activity that boosted crude oil inflows. Gasoline inventories also saw a reduction of 2 million barrels, while distillate stocks increased. Although implied demand for refined products decreased, the four-week average implied gasoline demand has been trending upward, surpassing 2023 levels for the first time since March. This trend alleviates concerns about U.S. gasoline demand as the driving season progresses.
We anticipate gasoline prices will maintain a range between 80 and 90 dollars throughout the year, with no anticipated significant movements in the oil sector.
Disclaimer
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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