US Economy: Weekly Commentary – February 26, 2024.
Synopsis of US market sentiments
Inflation is on track to the FED target but will take longer than most expect. LEI decrease in on par with that seen during the Lehman Crisis. The housing market remains tight with more price increases expected in the coming months. Manufacturing sector showing signs of recovery.
The FOMC emphasizes caution regarding inflation, anticipating a slower downward trend. Recession signals emerge as the leading economic indicator records a 23-month decline, reminiscent of the 2008 crisis. The housing market faces tight conditions with a surge in mortgage rates. Business activity shows a mixed scenario, with the manufacturing sector improving while services decline. Overall, there is a cautious optimism in businesses, with a dovish stance on inflation expected to impact the US dollar.
The FOMC emphasizes caution regarding inflation, anticipating a slower downward trend. Recession signals emerge as the leading economic indicator records a 23-month decline, reminiscent of the 2008 crisis. The housing market faces tight conditions with a surge in mortgage rates. Business activity shows a mixed scenario, with the manufacturing sector improving while services decline. Overall, there is a cautious optimism in businesses, with a dovish stance on inflation expected to impact the US dollar.
FOMC Meeting Minutes
From within the FOMC, mentioning that inflation remains a concern. It continues to have a downward trend but final move to target will be slow. Right now, taking into account the inflation data, only 2-3 rate cuts (89bp expected) are on the table.
The Federal Open Market Committee (FOMC) emphasized the importance of patience, awaiting solid evidence of a sustainable path toward a 2% inflation rate before considering any adjustments to interest rates. While acknowledging significant progress in addressing inflation and suggesting that the tightening cycle has peaked, most participants highlighted the risks associated with a hasty shift towards a more accommodative policy stance. The focus remains on meticulously evaluating incoming data to determine whether inflation is genuinely moving towards objective, with the consideration of cutting rates contingent on extinguishing inflationary risks and stabilizing, likely close to a neutral level of around 3%.
We think the cuts may start in the second half and just 2 cuts during this year. Rates will be higher for longer than expected. This situation is profitable for short-term bonds and puts more pressure on the equity markets.
The Federal Open Market Committee (FOMC) emphasized the importance of patience, awaiting solid evidence of a sustainable path toward a 2% inflation rate before considering any adjustments to interest rates. While acknowledging significant progress in addressing inflation and suggesting that the tightening cycle has peaked, most participants highlighted the risks associated with a hasty shift towards a more accommodative policy stance. The focus remains on meticulously evaluating incoming data to determine whether inflation is genuinely moving towards objective, with the consideration of cutting rates contingent on extinguishing inflationary risks and stabilizing, likely close to a neutral level of around 3%.
We think the cuts may start in the second half and just 2 cuts during this year. Rates will be higher for longer than expected. This situation is profitable for short-term bonds and puts more pressure on the equity markets.
Leading Indicator
LEI showing a recession signal exhibiting more monthly drops in a row than in the 2008 Lehman Crisis.
The Conference Board's report on the leading economic indicator (LEI) revealed a 0.4% drop in January, following a 0.2% decrease in December 2023. From July 2023 to January 2024, the LEI contracted by 3%, a relatively moderate decline compared to the 4.1% observed in the previous six months.
In the United States, the leading indicators have faced a 23rd consecutive month of decline, marking the longest negative trend since the 2008 Lehman crisis. Year-over-year, the LEI has fallen by 7%, approaching a significant reduction not seen since 2008, excluding the period affected by the COVID lockdown. Traditionally, a LEI decline exceeding 5% signals an impending recession.
Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board, noted, "While the declining LEI continues to indicate challenges for economic activity, six out of its 10 components were positive contributors over the past six-month period for the first time in the last two years."
The Conference Board's report on the leading economic indicator (LEI) revealed a 0.4% drop in January, following a 0.2% decrease in December 2023. From July 2023 to January 2024, the LEI contracted by 3%, a relatively moderate decline compared to the 4.1% observed in the previous six months.
In the United States, the leading indicators have faced a 23rd consecutive month of decline, marking the longest negative trend since the 2008 Lehman crisis. Year-over-year, the LEI has fallen by 7%, approaching a significant reduction not seen since 2008, excluding the period affected by the COVID lockdown. Traditionally, a LEI decline exceeding 5% signals an impending recession.
Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board, noted, "While the declining LEI continues to indicate challenges for economic activity, six out of its 10 components were positive contributors over the past six-month period for the first time in the last two years."
Housing market
The housing market remains tight. Mortgage rates surged above 7% after reports of increased inflation in January. Consequently, mortgage applications experienced a notable decline, particularly in refinance applications. Existing homes increased.
The 7.06% increase in mortgage rates resulted in a 10.6% drop in overall mortgage applications, with refinance applications taking a steeper 11% dip from the previous week. Despite a slight uptick in purchase application activity from the lows in late October 2023, it remains below the lowest levels observed during the housing bust, except for a few weeks last year, making it the lowest level since 1995. The impact on potential homebuyers is significant, as these rate fluctuations and high prices strain affordability.
In January, existing home sales saw a 3.1% increase in MoM. Sales experienced a 1.7% decline compared to the previous year. The inventory of unsold existing homes rose by 2.0% from the previous month, reaching 1.01 million at the end of January. The recovery might face challenges in February as mortgage rates continue their ascent.
Our perspective aligns with previous comments. The housing market may have price increases due to elevated rates and stock shortages. The housing market will put more pressure on inflation.
The 7.06% increase in mortgage rates resulted in a 10.6% drop in overall mortgage applications, with refinance applications taking a steeper 11% dip from the previous week. Despite a slight uptick in purchase application activity from the lows in late October 2023, it remains below the lowest levels observed during the housing bust, except for a few weeks last year, making it the lowest level since 1995. The impact on potential homebuyers is significant, as these rate fluctuations and high prices strain affordability.
In January, existing home sales saw a 3.1% increase in MoM. Sales experienced a 1.7% decline compared to the previous year. The inventory of unsold existing homes rose by 2.0% from the previous month, reaching 1.01 million at the end of January. The recovery might face challenges in February as mortgage rates continue their ascent.
Our perspective aligns with previous comments. The housing market may have price increases due to elevated rates and stock shortages. The housing market will put more pressure on inflation.
Business Activity
Manufacturing sector improved, meanwhile services dropped. Prices are reducing the inflation pressure.
In February, the S&P Global Flash US PMI Composite Output Index experienced a slight decline from 52.0 to 51.4, indicating an expansion in business activity. The manufacturing sector witnessed its most significant upturn since September 2022, boasting a PMI of 51.5. On the other hand, the services sector saw a more modest decrease, registering at 51.3 (vs. 52.5). Despite an overall slowdown in employment growth, both manufacturing and service industries reported an increase in workforce numbers.
Input prices saw their slowest rise since October 2020, resulting in lower output charge inflation. Looking ahead, the outlook remains optimistic, as businesses are proactively building stocks in anticipation of future demand. The dovish stance on inflation is anticipated to exert downward pressure on the US dollar. Overall, these metrics present a positive scenario, with decreasing price trends and businesses cautiously optimistic about the prospects of future demand.
Our perspective indicates being cautious around inflation, as services pressure could increase. The labour market is resilient as well and wages are increasing. The consumer is optimistic, which could end in more spending. The economy leaves a margin for the Fed to hold rates higher for longer.
In February, the S&P Global Flash US PMI Composite Output Index experienced a slight decline from 52.0 to 51.4, indicating an expansion in business activity. The manufacturing sector witnessed its most significant upturn since September 2022, boasting a PMI of 51.5. On the other hand, the services sector saw a more modest decrease, registering at 51.3 (vs. 52.5). Despite an overall slowdown in employment growth, both manufacturing and service industries reported an increase in workforce numbers.
Input prices saw their slowest rise since October 2020, resulting in lower output charge inflation. Looking ahead, the outlook remains optimistic, as businesses are proactively building stocks in anticipation of future demand. The dovish stance on inflation is anticipated to exert downward pressure on the US dollar. Overall, these metrics present a positive scenario, with decreasing price trends and businesses cautiously optimistic about the prospects of future demand.
Our perspective indicates being cautious around inflation, as services pressure could increase. The labour market is resilient as well and wages are increasing. The consumer is optimistic, which could end in more spending. The economy leaves a margin for the Fed to hold rates higher for longer.
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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