US Economy: Weekly Commentary – April 29, 2024.
US Market Review
US bond yields rose amid inflation concerns, hinting at prolonged elevated interest rates. Market delays Fed cuts, speculating only one or none this year. Stock markets surged over 2%, driven by 7 Mag except Meta. USD strengthened, WTI oil climbed, gold weakened, Bitcoin dipped.
Financial markets are responding to a complex interplay of factors. The upward movement in US bond yields, driven by concerns about inflation and solid economic growth, implies expectations for sustained higher interest rates. This sentiment is further reinforced by the market's anticipation of delayed Fed rate cuts, with speculation leaning towards either one rate cut or none at all this year.
The stock markets saw a positive week, with significant gains, primarily led by the performance of certain companies (the "7 Mag"), except for Meta, which faced a decline due to unfavourable market reactions to its results. However, Meta's increase in investment guidance for AI could indicate its strategic focus on emerging technologies.
The USD's strength against the euro, reflected in the USD/EUR pair, suggests investor confidence in the US economy compared to the eurozone. WTI oil prices edged up slightly, likely influenced by factors such as geopolitical tensions or supply-demand dynamics. Gold experienced a downturn amid rising inflationary pressures, while Bitcoin encountered a decline, reflecting the broader volatility inherent in the cryptocurrency market.
Overall, these market movements illustrate the ongoing balancing act between inflation concerns, economic growth prospects, and central bank policy decisions.
Financial markets are responding to a complex interplay of factors. The upward movement in US bond yields, driven by concerns about inflation and solid economic growth, implies expectations for sustained higher interest rates. This sentiment is further reinforced by the market's anticipation of delayed Fed rate cuts, with speculation leaning towards either one rate cut or none at all this year.
The stock markets saw a positive week, with significant gains, primarily led by the performance of certain companies (the "7 Mag"), except for Meta, which faced a decline due to unfavourable market reactions to its results. However, Meta's increase in investment guidance for AI could indicate its strategic focus on emerging technologies.
The USD's strength against the euro, reflected in the USD/EUR pair, suggests investor confidence in the US economy compared to the eurozone. WTI oil prices edged up slightly, likely influenced by factors such as geopolitical tensions or supply-demand dynamics. Gold experienced a downturn amid rising inflationary pressures, while Bitcoin encountered a decline, reflecting the broader volatility inherent in the cryptocurrency market.
Overall, these market movements illustrate the ongoing balancing act between inflation concerns, economic growth prospects, and central bank policy decisions.
US Market Views Synopsis
Q1 US GDP rose 1.6%, inflation reached 3.7%. Strong residential investment contrasted with lower consumer spending and business investment. PCE rose by 2.7%. Housing market struggles with high mortgage rates. Fed may delay rate cuts.
In Q1, US GDP grew below expectations at 1.6%, while inflation surpassed forecasts at 3.7%. Despite solid residential investment, lower consumer spending and business investment weigh on the economy. The Fed is not likely to cut rates until December, given strong employment. Inflation remains high, with consumer spending and wage growth accelerating in March. April saw unexpected declines in business activity, with manufacturing contracting and services barely expanding. Housing sales surged in March, but high mortgage rates limit enthusiasm. Further rate cuts are anticipated by year-end to stimulate market recovery.
In Q1, US GDP grew below expectations at 1.6%, while inflation surpassed forecasts at 3.7%. Despite solid residential investment, lower consumer spending and business investment weigh on the economy. The Fed is not likely to cut rates until December, given strong employment. Inflation remains high, with consumer spending and wage growth accelerating in March. April saw unexpected declines in business activity, with manufacturing contracting and services barely expanding. Housing sales surged in March, but high mortgage rates limit enthusiasm. Further rate cuts are anticipated by year-end to stimulate market recovery.
GDP
Lower growth than expected. Rates are putting pressure on consumers and the economy. Domestic demand remains resilient. Inflation rebounded. Fed does not have a rush to cut rates.
In the first quarter of this year, US GDP growth fell short of expectations, recording an annualized rate of 1.6%, significantly below the consensus forecast of 2.5%. Conversely, inflation proved to be stronger than anticipated, with the core PCE deflator rising by 3.7% annually. This divergence underscores the challenges facing the economy, as subdued consumer spending and business investment counterbalance robust residential investment, which was a very firm 13.9%. Furthermore, the increase in Treasury yields reflects growing scepticism towards an imminent Federal Reserve interest rate cut, which is now pushed back by the market until December, as we expected.
Looking ahead, the economic landscape appears subdued, as reflected in business surveys revealing a more cautious sentiment compared to official GDP figures. This apprehension among businesses is expected to manifest in limited hiring, wage growth, and business investment, exerting further pressure on GDP indicators. Employment rates show resilience, indicating no immediate risk of consumption faltering due to elevated interest rates. However, amidst these challenges, the likelihood of a pre-election rate cut remains slim, highlighting policymakers' delicate task of balancing growth stimulation with inflation management.
We do not expect rate cuts until December. The economy is growing at a good pace, inflationary pressures are increasing and the labour market remains strong.
In the first quarter of this year, US GDP growth fell short of expectations, recording an annualized rate of 1.6%, significantly below the consensus forecast of 2.5%. Conversely, inflation proved to be stronger than anticipated, with the core PCE deflator rising by 3.7% annually. This divergence underscores the challenges facing the economy, as subdued consumer spending and business investment counterbalance robust residential investment, which was a very firm 13.9%. Furthermore, the increase in Treasury yields reflects growing scepticism towards an imminent Federal Reserve interest rate cut, which is now pushed back by the market until December, as we expected.
Looking ahead, the economic landscape appears subdued, as reflected in business surveys revealing a more cautious sentiment compared to official GDP figures. This apprehension among businesses is expected to manifest in limited hiring, wage growth, and business investment, exerting further pressure on GDP indicators. Employment rates show resilience, indicating no immediate risk of consumption faltering due to elevated interest rates. However, amidst these challenges, the likelihood of a pre-election rate cut remains slim, highlighting policymakers' delicate task of balancing growth stimulation with inflation management.
We do not expect rate cuts until December. The economy is growing at a good pace, inflationary pressures are increasing and the labour market remains strong.
Inflation
Core PCE index holds at 2.8% YoY, indicating persistent inflation. Headline PCE rises to 2.7% YoY, driven by a 4% service increase. Strong consumer spending, and wage growth, but lower savings rate persists.
The core PCE index, a key indicator of inflation closely monitored by the Fed, remained steady at 2.8% YoY, signalling a sticky inflation beyond initial projections. Headline PCE rose to 2.7% YoY, primarily driven by a 4% annual increase in services. The supercore PCE also increased by 3.5% YoY. Notably, both income and spending experienced monthly growth, which reflects the strength of the consumers. The 0.8% MoM spending surge marked the most significant increase since January 2023.
Wage growth, both public and private, accelerated during the period: Government salaries climbed to 8.5% YoY, reaching the highest level since December 2022, while private sector salaries increased to 5.5% YoY. Additionally, the personal savings rate dipped from 3.6% to 3.2%, marking its lowest level since November 2022.
Market expectations are on the upswing, projecting a one-year inflation rate of 3.2% and a five-year rate of 3%. This bolsters our stance on prolonged high inflation and elevated rates. Our perspective points to the first cut in December as the economy remains strong and inflation is on the rise.
The core PCE index, a key indicator of inflation closely monitored by the Fed, remained steady at 2.8% YoY, signalling a sticky inflation beyond initial projections. Headline PCE rose to 2.7% YoY, primarily driven by a 4% annual increase in services. The supercore PCE also increased by 3.5% YoY. Notably, both income and spending experienced monthly growth, which reflects the strength of the consumers. The 0.8% MoM spending surge marked the most significant increase since January 2023.
Wage growth, both public and private, accelerated during the period: Government salaries climbed to 8.5% YoY, reaching the highest level since December 2022, while private sector salaries increased to 5.5% YoY. Additionally, the personal savings rate dipped from 3.6% to 3.2%, marking its lowest level since November 2022.
Market expectations are on the upswing, projecting a one-year inflation rate of 3.2% and a five-year rate of 3%. This bolsters our stance on prolonged high inflation and elevated rates. Our perspective points to the first cut in December as the economy remains strong and inflation is on the rise.
Business activity
US April composite PMI fell, with manufacturing to contraction at 49.9, and services to 50.9; inflation surged, and Fed rate cuts not expected until December.
The composite PMI for the US in April witnessed an unexpected decline, attributed to decreases in both the services and manufacturing sectors, alongside subdued orders, and a significant drop in employment. April's manufacturing PMI in the US dropped from 51.9 in March to a contractionary figure of 49.9. Employment indicators experienced a slight downturn, decreasing by 0.3 points to 51.9. Additionally, new orders saw a modest decline. The service sector PMI also experienced a decrease from 51.7 to 50.9, although it still indicated expansion. Inflation remains the main actor and increased in both sectors, particularly in manufacturing, where the input costs surged to a one-year high.
We expect more inflation in the coming months, with commodity and energy prices surging sharply. The manufacturing sector will remain at the current level jumping between contraction and expansion until the Fed cuts rates. We do not expect cuts up to the end of the year, our target is December.
The composite PMI for the US in April witnessed an unexpected decline, attributed to decreases in both the services and manufacturing sectors, alongside subdued orders, and a significant drop in employment. April's manufacturing PMI in the US dropped from 51.9 in March to a contractionary figure of 49.9. Employment indicators experienced a slight downturn, decreasing by 0.3 points to 51.9. Additionally, new orders saw a modest decline. The service sector PMI also experienced a decrease from 51.7 to 50.9, although it still indicated expansion. Inflation remains the main actor and increased in both sectors, particularly in manufacturing, where the input costs surged to a one-year high.
We expect more inflation in the coming months, with commodity and energy prices surging sharply. The manufacturing sector will remain at the current level jumping between contraction and expansion until the Fed cuts rates. We do not expect cuts up to the end of the year, our target is December.
Housing market
In March, amidst declining existing sales and starts, new home and pending home sales surged unexpectedly. Mortgage rates above 7%.
In March, sales of new homes saw an unexpected surge of 8.8% MoM, following declines in existing home sales and housing starts. This jump, the largest since December 2022, was particularly notable as it followed a downward revision of February's figures to a 5.1% decrease. This momentum propelled YoY new home sales to a robust 8.3% increase, reaching 693k, the highest level since September 2023. Additionally, the median price of new homes sold during this period was $430,700, with an average sales price of $524,800.
Builders slash home prices and offer sales incentives, but consumers maintain a cautious stance due to elevated mortgage rates. On the investment front, real estate does not offer risk premiums, thus opting for bonds instead.
In March, sales of new homes saw an unexpected surge of 8.8% MoM, following declines in existing home sales and housing starts. This jump, the largest since December 2022, was particularly notable as it followed a downward revision of February's figures to a 5.1% decrease. This momentum propelled YoY new home sales to a robust 8.3% increase, reaching 693k, the highest level since September 2023. Additionally, the median price of new homes sold during this period was $430,700, with an average sales price of $524,800.
Builders slash home prices and offer sales incentives, but consumers maintain a cautious stance due to elevated mortgage rates. On the investment front, real estate does not offer risk premiums, thus opting for bonds instead.
Pending home sales surprised with a notable uptick in March, surpassing expectations with a 3.4% increase. However, on a YoY basis, they fell short, registering a decline of 4.5%. Despite this, extending the streak of YoY declines to twenty-eight months, emphasizing their continued proximity to historic lows. This increase in sales activity in March was unexpected, particularly against the backdrop of 30-year mortgage rates remaining above 7%.
We expect forthcoming data to reflect a downturn, driven by the notable softening of mortgage demand observed in April. A market resurgence is not anticipated until mortgage rates dip below the 6.5% threshold, a scenario likely to unfold following rate cuts by the Fed toward the year's end. As such, the beginnings of a recovery are projected for 2025.
We expect forthcoming data to reflect a downturn, driven by the notable softening of mortgage demand observed in April. A market resurgence is not anticipated until mortgage rates dip below the 6.5% threshold, a scenario likely to unfold following rate cuts by the Fed toward the year's end. As such, the beginnings of a recovery are projected for 2025.
Disclaimer
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Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved
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