A series of positive data led the market to cut expectations for a rate cut this year by 25bps
The US economy has released a series of positive indicators recently, and the market is pricing in (aggressive) rate cuts.
Ten days ago, the market was pricing in an 80 bps rate cut this year (graph below, orange dotted line). It is currently 55 bps (red dotted line), which is roughly in line with the Fed’s plan. 50bps With a cut.
So what has changed?
Unemployment rate fell to 4.1%, with more than 254,000 jobs added in September
Topping the list is today’s employment report, which exceeded expectations on every front.
- of Unemployment rate drops to 4.1% Contrary to expectations that there would be no change from 4.2%.
- of Economy added +254,000 jobs – that’s all 100k On top of that expectations (Figure below)
- The last two months (low) have been revised upwards with a total of +72,000 jobs added
- Wage growth rate increased +0.4% month on monthslightly above expectations for an increase of +0.3%.
Of course, one month won’t set the trend, but it will help allay concerns about further deterioration in the labor market.
While manufacturing is in decline, the service sector is recovering.
Yesterday’s survey of service business activity showed that the sector remains the driving force of the economy.
ISM Services PMI rose to 54.9 (graph below, green line), steadily expanding (above 50) and reaching its highest level in 17 months. Furthermore, this strength is also supported by the S&P Services PMI of 55.2.
On the downside, the manufacturing revival seen earlier this year has faded (red line). However, manufacturing is only a small part of the economy (~10% of GDP) and services (~75%).
Given its much larger scale, services can continue to expand the overall economy even if manufacturing is shrinking (which is what will be the case in 2023).
Revised results show that personal consumption is increasing at a sustainable pace as income increases
Another driver of the economy is the consumer. And recent revisions have helped us understand its amazing strength.
Two months ago, we highlighted how consumer spending growth was supported by rising real incomes. However, this situation is changing because expenses (+3% y/y, graph below, orange line) are increasing (red arrow) faster than income (+1% y/y, light green area). It’s not sustainable.”
After the correction, spending growth looks more sustainable. Now, the income (dark green part) and expenditure are both Approximately +3% growth compared to the previous year.
Real GDP will grow at +2.5% in the third quarter of 2024, after an average of +2.3% in the first half of 2024
With the service sector on the rise (approximately 75% of GDP by industry) and personal consumption growing at a steady pace (approximately 70% of GDP by expenditure), steady GDP growth is expected to continue.
After growing at a pace of +2.3% in the first half of this year, the current estimate for real GDP growth in the third quarter is +2.5% (graph below, green line). in front Considering today’s employment statistics.
So the overall economy looks pretty healthy.
Key PCE inflation fell to 2.2% year over year, slightly above the Fed’s 2% target
Of course, another area of concern for the Fed is inflation, which could give the Fed the green light to cut rates.
The headline PCE inflation rate has fallen to 2.2% year-on-year (graph below, orange line) from a peak of 7.2% year-on-year in August. This is almost back to the Fed’s 2% inflation target (dashed line).
Recent data supports Fed desire for 25bps rate cut
Overall, the economy appears to be strong and the labor market is holding up. At the same time, inflation is almost back on target.
All of this supports the Fed’s plan to cut interest rates by 25 bps at a time. And the market appears to be changing its view. Of course, there is one more report each on inflation and employment before the Fed’s next meeting, so things could change.
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