“U.S. Federal Reserve changes course on monetary policy”
September 17,2024
Topic of the week:
Economic activity in the United States has been showing some signs of cooling for some time now, and the latest data published confirm this idea. The figures and comments published in the Beige Book or in the manufacturing ISM, which came in below expectations (47.2 vs. 47.5), remaining in contraction territory, have caused both the market and the FED to have doubts about the progress of the US economy, although it is true that the services ISM showed a slight improvement to 51.5, surpassing expansion levels. Additionally, in the real economy we find that in the United States, the number of large companies that have declared bankruptcy so far this year has reached the second highest figure in more than a decade, only surpassed by 2020, when we were in the midst of the pandemic.
On the employment front, there has also been a certain change in trend for months. We have already commented in previous notes that the non-farm payrolls data have been revised downwards in recent months, and moreover, the latest data published in August shows that they only increased by 142,000, when 165,000 were expected. For its part, the unemployment rate fell to 4.2% after the rebound we had seen in July. It seems that the U.S. labor market has adjusted after the huge excess demand that occurred during the pandemic: the number of people looking for jobs is practically equal to the vacancies offered by companies, a very different scenario to the one we experienced after the pandemic, where the supply of jobs clearly exceeded the demand for them. However, there is still a clear imbalance between full-time and part-time employment. In the last year, the number of full-time jobs in the U.S. has fallen by 1 million people, while part-time contracts continue to increase.
On the positive side of the balance is inflation, which is getting closer and closer to the 2% target set by the Fed. Last week’s US CPI data was released, with headline CPI down from 2.9% to 2.5%, clearly supported by the decline in fuel prices, while core CPI remained at 3.2%. On a monthly basis, the underlying figure came out 0.1% higher than expected, which could affect the Fed’s monetary policy decision next week.
With all this on the table, the Federal Reserve seems to have finally found arguments to take a new course. In fact, at the end of August, Jerome Powell appeared in Jackson Hole, giving a clear message about the turning point in US monetary policy. He announced that the time had come to tighten monetary policy by lowering interest rates, although he did not want to specify either the time or the intensity with which these changes would be implemented, depending in any case on the macro data to be published. Powell showed some concern about employment, and the evident reduction in inflation, together with the cooling of the U.S. economy, have finally convinced the members of the FED to change policy. One of the consequences of Powell’s statements has been that the market is already discounting more than 100 basis points of interest rate cuts for the remainder of 2024 (a first 50 bp cut at the September meeting is not ruled out) and another 125 bp in 2025, to leave a terminal rate in 2026 of around 3%.
In Europe, estimates for August inflation point to a slight drop in core inflation from 2.9% to 2.8% and a more significant decline in headline inflation (from 2.6% to 2.2%), which would bring it within the European Central Bank’s target, supporting the scenario of further rate cuts expected for the European Union. The European Central Bank continues to maintain a cautious tone in its official statements, but the fact is that these inflation levels, clearly close to the 2% target, and, above all, the economic momentum in the Eurozone, with a special focus on Germany (manufacturing PMI now down to 42.4 from 43.2), have reinforced the decision taken last Thursday to lower the deposit rate for the Eurozone by another 25 basis points.
The beacon of the markets:
Stock markets reacted very positively last week both to the fact that the European Central Bank met expectations for interest rate cuts, and that inflation data in the United States did not disappoint, despite a slight uptick in core inflation. As a result, the S&P 500 rose by +4% and the Nasdaq 100 by +5.93%. In Europe, the Euro Stoxx 50 rose by +2.24% and the Ibex 35 by +3.28%.
It is worth noting that at the close of Friday’s session, the S&P was less than 1% off its all-time high, and this despite significant corrections in early August and September. In contrast, the Nasdaq and the Euro Stoxx are still 6% away from their highs. Regarding the Ibex 35, it closed at levels not seen since 2015 but is still 28% off its 2007 all-time high.
The impact on fixed income markets was much less as a result of both the economic data and the actions taken by the ECB being in line with analysts’ estimates. Thus, the 10-year Treasury yield fell by -6 bps, as did the Bono, with yields at 3.66% and 2.94%, respectively. For its part, the Bund yield fell -2 bps to 2.15%.
As far as the alternative markets are concerned, gold closed at the gates of its all-time high, which it had reached a few hours earlier at $2,614.60/Oz. The more than imminent rate cut by the FED together with a cheaper dollar favored purchases of this safe-haven asset. For its part, crude oil closed the week with increases for the first time in the last month, as the hurricane season is affecting production in the Gulf of Mexico, which, together with a new halt in Libyan exports, has allowed the price of oil to take a breather.
At the macroeconomic level, we highlight the weakness of the data known in China on inflation, industrial production and unemployment rate, which once again call into question the growth targets for 2024 for the world’s second largest economy, while the time is approaching for the Chinese authorities to take greater and more forceful measures to reactivate domestic consumption.
The key reference for this week will be the decision of the U.S. Federal Reserve (Fed), which is expected to cut interest rates for the first time since 2020. However, there are doubts as to whether the size of the adjustment will be 25 or 50 basis points. Additionally, we will know the CPI data in Europe (expected unchanged at 2.2% and 2.8% for overall and core CPI respectively), and retail sales and industrial production in the US.
The phrase:
And we say goodbye with the following phrase from Miguel Delibes Setién, Spanish novelist and member of the Royal Spanish Academy: “Everyone looks too much at their own and forgets that there are things that belong to everyone and that must be taken care of”.
Summary of main financial assets performance (9/16/2024)
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