US Economy: Weekly Commentary – September 9, 2024.
US Market Review
US bond yields declined as the yield curve disinverted, while equity markets and major commodities, including crude oil and gold, saw significant losses. Bitcoin dropped 5.26%, and the US dollar weakened.
US bond yields broadly declined over the past week as the yield curve began to flatten, fuelled by weak employment data that raised expectations for a Fed rate cut. The record-breaking yield curve inversion has now concluded, with the 10-year Treasury yield increasing to 3.713%, 5.9 bps above the 2-year yield at 3.654%. Historically, a return to a positive slope after a prolonged inversion has often preceded recessions. However, we anticipate that a recession may be avoided this time, with the economy on track for a “soft landing”.
Equity markets saw significant losses last week, with both large-cap and small-cap stocks closing sharply lower. The “Magnificent 7” group of stocks dropped more than 5%. It is important to note that September has historically been a challenging month for equities, with the S&P 500 declining an average of 2.3% over the past decade.
The US dollar depreciated against the euro, with the exchange rate reaching 0.9022. WTI crude oil prices declined despite reduced US stockpiles and delays in OPEC+ production, primarily due to weakening demand in both the US and China, the prospect of increased Libyan supply, and expectations of a surplus in 2025. Gold prices also experienced a decline over the week. In the cryptocurrency market, bitcoin fell by 5.26%.
US bond yields broadly declined over the past week as the yield curve began to flatten, fuelled by weak employment data that raised expectations for a Fed rate cut. The record-breaking yield curve inversion has now concluded, with the 10-year Treasury yield increasing to 3.713%, 5.9 bps above the 2-year yield at 3.654%. Historically, a return to a positive slope after a prolonged inversion has often preceded recessions. However, we anticipate that a recession may be avoided this time, with the economy on track for a “soft landing”.
Equity markets saw significant losses last week, with both large-cap and small-cap stocks closing sharply lower. The “Magnificent 7” group of stocks dropped more than 5%. It is important to note that September has historically been a challenging month for equities, with the S&P 500 declining an average of 2.3% over the past decade.
The US dollar depreciated against the euro, with the exchange rate reaching 0.9022. WTI crude oil prices declined despite reduced US stockpiles and delays in OPEC+ production, primarily due to weakening demand in both the US and China, the prospect of increased Libyan supply, and expectations of a surplus in 2025. Gold prices also experienced a decline over the week. In the cryptocurrency market, bitcoin fell by 5.26%.
US Market Views Synopsis
August job growth missed expectations, with rising underemployment and key sector declines, while oil prices face downward pressure from weaker demand and surplus forecasts.
The August jobs report revealed 142,000 new jobs, below the expected 164,000, with substantial downward revisions indicating deeper labour market weakening. The unemployment rate fell to 4.2%, but underemployment rose, and key sectors like manufacturing and IT saw declines. There was a notable reduction in full-time jobs by 438,000 and an increase in part-time positions by 527,000, highlighting deteriorating job quality. The ISM Manufacturing Index improved slightly to 47.2, reflecting ongoing contraction and inflation concerns, while the ISM Services PMI remained steady at 51.5. In oil markets, weaker US and Chinese demand, potential Libyan supply increases, and a 2025 surplus outlook overshadowed inventory reductions and OPEC+ delays, suggesting moderated price growth through late 2024 and early 2025.
The August jobs report revealed 142,000 new jobs, below the expected 164,000, with substantial downward revisions indicating deeper labour market weakening. The unemployment rate fell to 4.2%, but underemployment rose, and key sectors like manufacturing and IT saw declines. There was a notable reduction in full-time jobs by 438,000 and an increase in part-time positions by 527,000, highlighting deteriorating job quality. The ISM Manufacturing Index improved slightly to 47.2, reflecting ongoing contraction and inflation concerns, while the ISM Services PMI remained steady at 51.5. In oil markets, weaker US and Chinese demand, potential Libyan supply increases, and a 2025 surplus outlook overshadowed inventory reductions and OPEC+ delays, suggesting moderated price growth through late 2024 and early 2025.
Labour Market
The August jobs report highlighted a deceleration in job growth, alongside shifts in the labour market and a reduction in full-time employment. Nevertheless, wage increases provided some relief amid concerns about a potential recession.
The most recent US payrolls report indicated an increase of 142,000 jobs in August, falling short of the anticipated 164,000. This development adds complexity to the ongoing discussion regarding whether the Federal Reserve will implement a 25 bp or 50 bp rate cut on September 18. Despite the lower-than-expected headline job growth, the report also reflects substantial downward revisions to previous months' data. This suggests a more significant weakening in the labour market than initially reported. Additionally, the average number of private sector hires has declined, raising concerns.
The unemployment rate has slightly decreased to 4.2%, yet this is accompanied by an increase in underemployment and a downturn in traditionally strong sectors such as manufacturing and IT. The government has mitigated the loss of 24,000 manufacturing jobs by creating an equivalent number of public sector positions. However, a significant concern is the deterioration in job quality, as evidenced by a decline of 438,000 in full-time positions and an increase of 527,000 in part-time jobs. This shift suggests greater instability within the labour market, with a potential move toward lower-wage part-time employment and a possible erosion of job quality.
Given these indicators and the Federal Reserve's apprehensions regarding further labour market cooling, we continue to project a 25 bp rate cut. A 50 bp cut could imply deeper economic weakness, which would have adverse implications for the markets.
The most recent US payrolls report indicated an increase of 142,000 jobs in August, falling short of the anticipated 164,000. This development adds complexity to the ongoing discussion regarding whether the Federal Reserve will implement a 25 bp or 50 bp rate cut on September 18. Despite the lower-than-expected headline job growth, the report also reflects substantial downward revisions to previous months' data. This suggests a more significant weakening in the labour market than initially reported. Additionally, the average number of private sector hires has declined, raising concerns.
The unemployment rate has slightly decreased to 4.2%, yet this is accompanied by an increase in underemployment and a downturn in traditionally strong sectors such as manufacturing and IT. The government has mitigated the loss of 24,000 manufacturing jobs by creating an equivalent number of public sector positions. However, a significant concern is the deterioration in job quality, as evidenced by a decline of 438,000 in full-time positions and an increase of 527,000 in part-time jobs. This shift suggests greater instability within the labour market, with a potential move toward lower-wage part-time employment and a possible erosion of job quality.
Given these indicators and the Federal Reserve's apprehensions regarding further labour market cooling, we continue to project a 25 bp rate cut. A 50 bp cut could imply deeper economic weakness, which would have adverse implications for the markets.
Business Activity
The ISM Manufacturing Index rose slightly to 47.2, while the ISM Services PMI held steady at 51.5. Both sectors showed mixed signals with ongoing inflation concerns.
The ISM Manufacturing Index improved to 47.2 in August from 46.8 in July, marking the fifth consecutive month in contractionary territory. This figure highlights ongoing weaknesses in the manufacturing sector, which constitutes approximately 25% of the US economy. Notably, excluding the pandemic period, the ISM production index reached its lowest level since April 2009. Employment saw a modest increase to 46 from 43.4, offering a positive development following the lowest reading in July since the pandemic began. Additionally, prices paid rose to 54 from 52.9, aligning with pre-pandemic levels and indicating that inflation has not yet been fully controlled. Besides, new orders declined to 44.6 from 47.4, which remains a primary concern.
The ISM Services PMI remained steady at 51.5 in August, a marginal increase from July’s 51.4. New orders continued their recovery from the previous month, reaching 53 compared to July’s 52.4, signalling robust customer demand. However, output growth moderated to 53.3 from 54.5, despite a recent reduction in the order backlog, which decreased to 43.7 from 50.6. Employment levels declined slightly to 50.2 from 51.1 yet marked a positive shift with 2 consecutive months of growth, breaking the previous contraction trend. Furthermore, the ISM Prices Index rose to 57.3 from 57, surpassing market expectations for a slowdown, driven by increased costs in construction services, electrical equipment, food, and labour.
Currently, we are observing rising costs of goods sold alongside declining new orders and revenues. In the service sector, price increases are also notable. We anticipate further increases in unemployment across both sectors.
The ISM Manufacturing Index improved to 47.2 in August from 46.8 in July, marking the fifth consecutive month in contractionary territory. This figure highlights ongoing weaknesses in the manufacturing sector, which constitutes approximately 25% of the US economy. Notably, excluding the pandemic period, the ISM production index reached its lowest level since April 2009. Employment saw a modest increase to 46 from 43.4, offering a positive development following the lowest reading in July since the pandemic began. Additionally, prices paid rose to 54 from 52.9, aligning with pre-pandemic levels and indicating that inflation has not yet been fully controlled. Besides, new orders declined to 44.6 from 47.4, which remains a primary concern.
The ISM Services PMI remained steady at 51.5 in August, a marginal increase from July’s 51.4. New orders continued their recovery from the previous month, reaching 53 compared to July’s 52.4, signalling robust customer demand. However, output growth moderated to 53.3 from 54.5, despite a recent reduction in the order backlog, which decreased to 43.7 from 50.6. Employment levels declined slightly to 50.2 from 51.1 yet marked a positive shift with 2 consecutive months of growth, breaking the previous contraction trend. Furthermore, the ISM Prices Index rose to 57.3 from 57, surpassing market expectations for a slowdown, driven by increased costs in construction services, electrical equipment, food, and labour.
Currently, we are observing rising costs of goods sold alongside declining new orders and revenues. In the service sector, price increases are also notable. We anticipate further increases in unemployment across both sectors.
Crude Oil Inventories
Weaker U.S. and Chinese demand, potential Libyan supply increases, and a 2025 surplus outlook overshadow crude inventory reductions and OPEC+ actions.
Concerns surrounding U.S. and Chinese demand, potential supply increases from Libya, and expectations of a surplus by 2025 have overshadowed a drawdown in U.S. crude inventories and OPEC+'s decision to postpone planned output increases. August saw heightened oil market volatility due to temporary supply disruptions, but persistent demand concerns, particularly driven by weakening Chinese consumption, have continued to exert downward pressure on prices. The U.S. Energy Information Administration reported a larger-than-expected reduction of 6.9 million barrels in crude stockpiles, while OPEC+ discussions resulted in a delay of planned production hikes for October and November.
We expect that economic weakness will moderate oil price growth through the rest of 2024 and into early 2025.
Concerns surrounding U.S. and Chinese demand, potential supply increases from Libya, and expectations of a surplus by 2025 have overshadowed a drawdown in U.S. crude inventories and OPEC+'s decision to postpone planned output increases. August saw heightened oil market volatility due to temporary supply disruptions, but persistent demand concerns, particularly driven by weakening Chinese consumption, have continued to exert downward pressure on prices. The U.S. Energy Information Administration reported a larger-than-expected reduction of 6.9 million barrels in crude stockpiles, while OPEC+ discussions resulted in a delay of planned production hikes for October and November.
We expect that economic weakness will moderate oil price growth through the rest of 2024 and into early 2025.
Disclaimer
This commentary is for information purposes only and does not take into account the specific circumstances of any recipient. The information contained in this commentary does not constitute the provision of investment advice nor a recommendation, offer or solicitation to acquire (or dispose of) any financial instruments and/or services. Prior to making any investment decision investors should seek independent professional advice and draw their own conclusions regarding suitability of any transaction including the economic benefits and risks and legal, regulatory, credit, accounting and tax implications. The past performance of financial instruments is not indicative of future results and you may get back less than the amount you invested.
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
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