US Economy: Weekly Commentary – April 22, 2024.
US Market Review
US bond yields surged on inflation fears and strong economic data. Stock markets plummeted, driven by declines in tech sector. USD/EUR fell to 0.9385.

US bond yields surged amid concerns about inflation and bolstered by strong retail sales and manufacturing data, suggesting that interest rates may remain elevated for an extended period. Speculation is rife that the Federal Reserve could opt for only one rate cut this year, or possibly none at all, given the current economic conditions. The 2-year bond rate is nearing 5%, reflecting heightened market expectations.

Stock markets experienced another volatile week, with declines exceeding 3%. The downturn was largely driven by major technology companies, with Nvidia recording a significant 10% drop on Friday, marking its largest decline since March 2020. The USD/EUR pair fell to 0.9385, indicating USD strength against the Euro.

WTI oil prices held steady around $85 per barrel throughout the week, while gold surpassed $2,400 once again. In the cryptocurrency market, Bitcoin saw a slight increase during the week, coinciding with the halving event. However, contrary to previous halving events where the market experienced significant surges, this time saw a more subdued response.
Synopsis of US market sentiments
US consumer spending surged, challenging potential Fed rate cuts. Industrial production rose slightly in March, but a quarterly decline raises concerns. Housing market remains frozen.

Consumer spending in the US showed remarkable strength, with retail sales increasing by 0.7% month-over-month and 4% year-over-year, propelled by a surge in online sales. This robust spending trend poses challenges to potential Federal Reserve rate cuts, as strong consumer activity indicates underlying economic resilience.

However, the industrial sector presented a mixed picture, with industrial production edging up slightly in March. Nonetheless, a concerning 1.8% quarterly decline raises doubts about the sector's overall health and its contribution to economic growth.

In contrast, the housing market experienced a notable downturn, with housing starts plummeting by 14.7% month-over-month and existing home sales declining by 4.3% month-over-month. Despite these declines, housing prices continued to rise, climbing by 4.8%. This disparity between declining sales and rising prices suggests potential challenges in the housing market, such as affordability issues or supply constraints.
Consumer spending
US retail sales surged 0.7% MoM, 4% YoY, driven by online sales. Strong consumer spending challenges the Fed's rate cuts.

Retail sales experienced a notable uptick of 0.7% month-over-month, signalling sustained consumer expenditure. Yearly figures reveal a 4% increase, primarily driven by a significant surge of 2.7% in online sales. Core retail sales, which exclude the automotive and gasoline sectors and are crucial for GDP computation, saw robust growth of 1.1%, surpassing expectations of a mere 0.5% uptick. This marks a significant escalation from January 2023.

The robust consumer spending highlighted by these figures poses a concern for the Federal Reserve, complicating the narrative surrounding potential rate adjustments in 2024. Overall, the data underscores the economy's resilience, buoyed by robust consumer spending despite a relatively sluggish labour market.

We anticipate that consumer spending will remain steady, supported by wages that continue to outpace inflation. Consequently, the Fed may opt to maintain higher interest rates for an extended period rather than resorting to reductions. We expect a single rate cut towards the end of the year, reflecting cautious optimism about the economy's trajectory.
Industrial production
March's industrial production rose slightly, but 1.8% quarterly decline raises concerns. Manufacturing increased, while mining and capacity utilization fell. Uncertain future ahead.

The March industrial production and capacity utilization provides a nuanced perspective on the state of the manufacturing sector. Despite a modest 0.4% increase in industrial production, there are notable concerns regarding the 1.8% annualized decline observed in the first quarter. This uptick in production represents two consecutive months of growth, breaking the previous pattern of alternating ups and downs.

Manufacturing production experienced a marginal 0.5% rise, primarily fuelled by a significant increase in motor vehicle and spare parts manufacturing. The mining sector witnessed a 1.4% decrease in MoM and a substantial 12.3% annual rate decline for the quarter, largely attributable to reduced oil and gas extraction. Conversely, public services production increased by 2%. Manufacturing capacity utilization stood at 77.4 in March, indicating ongoing underutilization of available capacity.

Despite the consecutive months of growth, the sector's trajectory remains uncertain. We anticipate that the escalating prices, particularly in the energy sector, may trigger a contraction once again.
Housing market
Housing starts fell 14.7% MoM, with multifamily down 20.8%. Permits dropped 4.3% MoM. Existing home sales fell 4.3% MoM, while prices surged 4.8%, setting a March record.

Housing starts experienced a notable decline of 14.7% MoM, reflecting a 4.3% decrease compared to March 2023 and a substantial 20.8% drop in multifamily housing projects. Building permits, an important indicator of forthcoming construction, also fell short, declining by 4.3% MoM. Despite these setbacks, single-family home construction initiations persist at a good 21% increase from the previous year and remain over 20% above the pre-pandemic five-year average. This trend offers a glimmer of positivity amidst the ongoing challenges faced by the sector.
Homebuilders face challenges, exacerbated by shifts in the interest rate landscape, which amplify demand constraints and escalate capital expenditures. Labour shortages, limited lot availability, legal intricacies, surging raw material costs, and credit constraints further compound these hurdles. Nevertheless, builder sentiment remains steady as of April. The industry contends with persistent high mortgage rates, surpassing the 7.10% threshold, posing barriers for both builders and potential buyers alike.

Existing home sales saw a significant 4.3% MoM drop, the largest decline since November 2022, with nearly a 10% YoY decrease. Housing inventory increased by 4.7% MoM, resulting in a 3.2-month supply. This rise in inventory presents an opportune time to list properties, amid continued multiple offers on mid-priced homes and rising prices nationwide. The median selling price reached $393,500, marking a 4.8% MoM increase, setting a new March record.

We expect a recovery only upon the Federal Reserve's initiation of interest rate cuts, easing mortgage burdens and reigniting market activity. Escalating prices exacerbate inflationary pressures, which do not help the Fed to cut rates. Additionally, elevated rates discourage investor engagement in real estate, with alternative avenues like bonds offering superior yields. This underscores the importance of rate cuts to stimulate the market.
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