The ‘Duracell Bunny’ was the epitome of stamina when people still watched linear TV. The US economy of the past few quarters reminded anyone from those generations of the inexhaustible drummer toy. Yet even the US is seemingly past its performance highs, as last week’s data reports suggest. The US employment report indicated some cooling of the labour market on all fronts despite the usual conflicting signals from alternative data sources. And even the core of the battery, the services sectors, is in for a cooler summer in 2024, as the latest leading indicator readings suggest.
On a positive note, any perceivable investor euphoria in financial markets after the end of Q1 2024 has now been washed out. We argued at the time that overconfident investors would not trigger a correction per se absent any fundamental shocks. But then the two hotspots previously mentioned took care of that and pushed sentiment to the basement, with risk assets flashing oversold readings early last week. The textbook pattern from here onwards would be for some sizeable rebound in equities before another major retest proves the resilience of the current bull market.
However, before then, investors may be better off preparing for some shifts in leadership. With this in mind, we upgraded mid-cap stocks, as we see some opportunities in the space. By the by: if you have ever wondered how big a mid-cap stock actually is these days, the short answer is USD 10 billion to USD 20 billion. At the same time, we downgraded consumer defensives and, in emerging markets, we also downgraded the space outside of China.
US labour market: Softening finally enables rate cuts
The US labour market is finally cooling, delivering some evidence that demand and inflation will slow later this year. The probability that the Fed will start to cut interest rates in the upcoming meetings has increased, with more rate cuts than previously expected for 2024 becoming likely. Our confidence in a kick-off of rate cuts in the September meeting has increased.
Last Friday, the April US employment report surprised with weaker nonfarm payroll gains of 175,000 (240,000 were expected by market consensus). The dynamics of job growth had been particularly weak in cyclical sectors, with hiring in leisure and hospitality slowing to 5,000, and information and business services even reporting declines in payrolls. Non-cyclical sectors remained resilient, with strong job gains in health services accounting for roughly half of the total job gains (+87,000). The alternative household survey showed much weaker job gains of 25,000 after a strong increase in March 2024. Unfortunately, the extraordinary volatility of the household survey suggests issues with the seasonality adjustment.
Therefore, the informative value of the household survey remains low. Anyhow, the unemployment rate ticked up to 3.9%, contributing to the overall picture that the US labour market is indeed softening. Accordingly, the latest figures from the Job Openings and Labor Turnover Survey showed a decline, suggesting that the US jobs market continues its rebalancing.
What does this mean for investors?
Fewer job openings and less voluntary quits reduce wage pressure, with lower-reported hourly earnings growth confirming that the risk for inflation from an overheated labour market has continued to decline. These lower inflation risks increase the probability that the Fed will be able to start to cut its policy interest rate at one of the upcoming meetings and make more interest rate cuts for 2024 than previously expected. That given, we continue to expect the Fed to start cutting rates at its 18 September Federal Open Market Committee meeting. The recent labour market data has increased our confidence in our forecast.
Meanwhile, the technical picture points to lower bond yields and lower oil prices in the foreseeable future. Both have had a hell of a ride year to date, so some cooling may be more than welcome. Whether this was the all-clear signal for inflation and rate woes remains to be seen, although it still looks unlikely given the stamina of the trends so far. The recent data reports came as a welcome reality check after bourses had been mostly dealing with the negative fallout of the geopolitical crisis in the Middle East and the ‘higher for longer’ rate fears in the West.