US Economy: Weekly Commentary – June 24, 2024.
US Market Review
US bond yields rose, with the two-year at 4.743% and the 10-year at 4.257%. Small-caps stocks outperformed. The Nasdaq increased by 0.73%. WTI crude rose 2.68% due to high gasoline demand. Gold prices fell, and Bitcoin dropped 2.92%.

US bond yields rose across the entire yield curve, with the two-year bond yield at 4.743% and the 10-year bond yield climbing to 4.257%. This increase occurred during a week of mixed economic data, which generally continue to indicate that the US economy remains resilient.

Equity markets posted weekly gains, with small-cap stocks outperforming large-caps, except in the value segment. This indicates that "value small-caps" continue to trade at attractive multiples. The Nasdaq rose by 0.73%, despite a 0.30% decline in the "Magnificent 7." Meanwhile, the dollar was broadly unchanged against the euro, with the USD/EUR exchange rate now at 0.9352.

WTI crude oil prices increased by 2.68%, marking the second consecutive week of gains driven by surging gasoline demand. U.S. gasoline consumption rose to 9.4 million barrels per day last week, the highest level for this time of year since the Covid-19 pandemic ended. Gold prices corrected due to rising bond yields and a strong dollar. Meanwhile, Bitcoin posted a 2.92% loss.
US Market Views Synopsis
Modest consumer spending growth in May, potential Fed rate cut. The robust services sector, easing manufacturing. Housing market challenges persist. Industrial production is up, but weak orders signal caution.

Recent economic indicators show nuanced trends across sectors. Consumer spending saw modest growth in May, with retail sales up by 0.1% MoM, below expectations amidst cooling trends and rising unemployment, suggesting a potential Fed rate cut in September. Looking ahead, constrained spending due to stagnant incomes and reduced savings is anticipated. Business activity surged in June, driven by a robust services sector, though manufacturing expansion eased. Improved sentiment and easing inflation supported increased hiring, with mixed future optimism. The housing market faced challenges with declining starts and sales amid record prices and high mortgage rates. Industrial production saw its largest increase in ten months in May, yet weak manufacturing orders hint at ongoing caution. The economy remains resilient but faces uncertainties, influencing potential Fed actions and sectoral performance ahead.
Consumer Spending
May retail sales rose just 0.1%, below the 0.3% forecast. April's sales were revised to a 0.2% drop. Cooling consumer spending and rising unemployment suggest a likely Fed rate cut in September.

Retail sales for May increased by a modest 0.1% MoM, falling short of the anticipated 0.3%. April's figures were revised to show a 0.2% contraction, reinforcing the narrative of cooling consumer spending. The control group data, which excludes volatile items such as autos, building supplies, food services, and gasoline, reported a 0.4% increase, below the 0.5% consensus. April's control group data was also revised down to a 0.5% contraction. These trends, combined with a slight increase in the unemployment rate to 3.7% and moderating inflation pressures, suggest that a Fed rate cut in September is increasingly plausible, as the market expects.

Looking ahead, consumer spending is projected to decelerate further throughout the year. Flat real household disposable incomes, dwindling pandemic-era savings, and high consumer credit costs are expected to constrain spending power. The net contraction in credit card lending by $1.3 billion in April, along with a decline in the consumer confidence Index to 98.4 in May from 101.3 in April, indicate a more cautious consumer sector.

We anticipate low consumer spending throughout the year. Furthermore, we do not foresee a rate cut in September. The Federal Reserve is likely to maintain higher rates for a bit longer to ensure inflation is on track towards the target. We expect rate cuts to start in December.
Business Activity
US business activity surged in June, reaching its highest level in 26 months. The composite output index rose to 54.6, led by a robust services sector at 55.1 and supported by increased domestic orders. Manufacturing expanded for the fifth consecutive month at 51.7, albeit slower. Hiring rebounded, driven by improved sentiment and easing inflation, while future optimism varies between sectors.

US business activity surged to its highest level in 26 months, driven by robust growth in both the service and manufacturing sectors. The composite output index rose to 54.6, up from 54.5 in May, marking a strong acceleration in economic expansion. Services led the charge with a business activity index of 55.1, the highest since April 2022, supported by a sharp increase in new domestic orders. Meanwhile, manufacturing output expanded for the fifth consecutive month but at a slightly reduced pace, registering 51.7, its second-lowest level over this period. Despite this moderation, firms reported renewed hiring activity following declines in previous months, buoyed by improved business sentiment and easing inflation pressures.

Looking ahead, optimism about future output reached a three-month high, driven by the service sector anticipating lower cost pressures and favourable interest rate conditions. However, sentiment in manufacturing dampened, reflecting concerns over future demand dynamics amidst ongoing policy uncertainties. Overall, the data signals a resilient end to the second quarter, with economic growth broadening across sectors despite some moderation in manufacturing momentum and ongoing challenges in supply chain dynamics.

The robust US economy may prompt the Fed to maintain interest rates for an extended period to ensure a sustained decrease in inflation. We anticipate volatility in business activity until the year's end when the Fed is likely to adjust monetary policy.
Housing Market
Housing starts and permits declined; existing home sales slightly dropped with record prices amid high mortgage rates.

Housing starts decreased by 5.5% YoY, while building permits, a gauge of future construction, dropped 3.8% YoY, marking the lowest level since June 2020. Existing home sales in the U.S. saw a slight decline to a seasonally adjusted annual rate of 4.11 million units, down 0.7% from April and showing a 2.8% decrease YoY. Meanwhile, the median sales price reached a record high of $419,300, reflecting a 5.8% increase from the previous year, marking eleven consecutive months of price rises. Housing inventory expanded to 1.28 million units by the end of May, a 6.7% rise from April, with a current sales pace equivalent to a 3.7-month supply.

Persistent high mortgage rates continue to exert pressure on the housing market. The supply shortage is driving prices upward, discouraging potential sellers from trading up due to they have significantly lower mortgage rates compared to current levels. Additionally, real estate investments currently lack appeal to investors (no premium rates) when compared to more attractive fixed-income opportunities.

We anticipate a tight market persisting until next year when the anticipated decline in interest rates is expected to influence the economy positively.
Industrial Production
Industrial production experienced its largest increase in ten months this May. Despite this encouraging data, the sector remains mixed, showing signs of weakness and a distant recovery.

Manufacturing output increased by 0.9%, driven by a 2.3% surge in machinery production. Utilities output grew by 1.6%, while mining output saw a modest increase of 0.3%. Although manufacturing payrolls and hours worked have risen, exceeding forecasts, the YoY output shows only a 0.1% increase. A significant rebound in manufacturing orders is necessary for the current bounce in manufacturing output to continue. However, the ISM manufacturing report has indicated a contraction in orders for the past two months, with May's figures being the weakest in a year. Similarly, durable goods orders are growing at an annualized rate of approximately 1% this year, indicating that a breakout from this stagnant trend is unlikely shortly.

This data indicates positive progress for the sector; however, a full recovery remains challenging. A more substantial recovery is unlikely until the Federal Reserve reduces interest rates.
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