Richard Drury
go through James Knightley
Continued strength means June rate cut unlikely
The U.S. economy continues to demonstrate extraordinary resilience in the face of high borrowing costs, tight credit conditions and a weak external backdrop.it appears in the course The annualized growth rate in the first quarter was 2.5%. We already know that 829,000 jobs were added in the first three months of this year.Inflation remains close to 4%, below the 2% target — and Wednesday’s numbers Surprisingly, we have to admit that the possibility of imminent Fed easing seems more remote than previously thought.
Financial markets currently only expect the June FOMC meeting to ease by 5 basis points, which means the possibility of a 25 basis point rate cut is about 20%.In order for the Fed to deliver on its promise, we suspect we need The next two core inflation reports are expected to be 0.2% or lower month-on-month rather than 0.4%, and employment growth to slow significantly, from around 250,000 per month to well below 150,000. It’s possible, but we’re not confident. We now believe that the starting point for the Fed’s third quarter easing policy (either July or, more likely, September) looks more credible than June.
Business surveys show economy weaker than official data
But surveys still suggest a slowdown is coming
That said, the difference between strong official activity data and weaker survey evidence is stark. The ISM index is at historical levels, consistent with an annual economic growth rate of 0.5% – significantly weaker than the 3% year-on-year GDP growth rate in the fourth quarter of 2023. The employment components of these indexes have been in contraction territory for several months.
The National Federation of Independent Business’s hiring intentions series, arguably the most reliable labor market indicator in recent years, suggests job growth will slow sharply to below 50,000 per month over the next three to four months.
We still call for meaningful rate cuts
Meanwhile, manufacturing orders are stagnant, small business optimism is at a 12-year low, real household disposable income is flat and pandemic-era accrued savings are largely depleted, according to San Francisco Fed calculations. We strongly suspect a slowdown is coming, but this may not show up in official data until later this year. Sticky inflation further undermines prospects for near-term rate cuts, so our previous call for a 125 basis point cut this year looks far-fetched. We currently forecast policy easing to be 75 basis points in 2024.
We do expect inflation to be closer to 2% as cooling economic activity and slower labor cost growth help contain price pressures. This should allow the Fed to cut interest rates further in the first half of next year, setting the target rate at 3.5%. For the Fed to cut rates further, it would likely require a systemic shock, most likely through renewed financial concerns among smaller banks triggered by losses in commercial real estate or consumer loans.
