What’s Behind The US Economy’s Resilience?

Economic

Summary:

US economy is still sizzling, outperforming other regions.Several factors behind this strength, such as heavy public spending.

Why is the US economy still so strong?

One of the most striking developments over the past year has been the extraordinary resilience of the US economy, despite the highest interest rates in a generation. The United States grew 2.5% last year, much faster than any other advanced economy, and by all indications continues to outperform in early 2024.

Several elements lie behind this strength. First and foremost, the US government is running an astronomical budget deficit, which amounted to more than 6% of GDP last year. This enormous public spending has shielded economic growth, but has also raised concerns about debt sustainability.

In contrast, most European nations are running much smaller deficits, which helps explain why growth in the euro area has been so anemic lately. What’s Behind The US Economy’s Resilience?_1

What’s Behind The US Economy’s Resilience?_1

Immigration flows have powered the US economic machine too. With an influx of migrant workers coming in, the labor market continues to boom, cushioning consumer spending. And with wage growth finally surpassing inflation, the cost of living crisis has started to ease.

How the loan market is structured played a huge role as well. In the US, most mortgages are given at a fixed rate for 30 years. As such, many people locked in extremely low borrowing costs during the pandemic, insulating them from the sharp increase in interest rates that ensued.

Most other countries operate with adjustable rate mortgages, where payments reset every few years depending on interest rates. Therefore, many homeowners in Europe have started to pay higher monthly costs on their loans, squeezing spending even further.

Beyond all of this, America’s energy independence also helped safeguard consumers from the worst effects of soaring oil and gas prices following the invasion of Ukraine.

So why hasn’t the dollar skyrocketed?

With the US economy being stronger than other regions, this begs the question of why the dollar hasn’t mounted a tremendous rally. If the market was purely trading economic fundamentals, the dollar seems like the most attractive G10 currency at this stage.

What’s Behind The US Economy’s Resilience?_2

It appears that developments in other financial markets have been holding the dollar back. The dollar often acts like a safe haven asset, since it is the world’s reserve currency. As such, the recent euphoria in stock markets has probably curbed demand for the greenback, preventing it from staging a fierce rally.

Another ‘problem’ for the dollar has been the collapse in natural gas prices, mostly because that is bullish for the euro. The Eurozone imports nearly all its gas, so when prices drop so dramatically, the euro receives a boost through the trade channel. This has allowed the euro to remain above water despite a deteriorating economy, in turn limiting the dollar’s advances.

What’s next?

Looking ahead, we seem to be entering a period where the resilience of the US economy translates into persistently hot inflationary pressures, which might delay any rate cuts by the Federal Reserve.

The latest readings on inflation and the labor market certainly pointed in this direction, boosting the dollar in the process as traders dialed back on their rate-cut bets. What’s Behind The US Economy’s Resilience?_3

What’s Behind The US Economy’s Resilience?_3

But if the price action over the last few months is any guide, economic fundamentals alone might not be enough to turbocharge the dollar. Instead, a full-blown rally might also require a period of risk aversion in the markets that fuels demand for safe havens like the dollar.

The stock market has looked bulletproof so far this year, as hopes of a soft economic landing joined forces with a rush to gain exposure to artificial intelligence shares. That said, equity valuations seem overstretched and a sustained unwinding of Fed rate cut bets that pushes bond yields even higher might be enough to trigger a sizable correction in riskier assets.

That might be the missing ingredient for the dollar to stage a fierce rally, especially if it happens during a period when foreign central banks begin to slash their rates.

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Warren Takunda

Economic

Stocks

U.S. stock index futures slipped on Thursday as Treasury yields remained elevated a day after a hot inflation reading triggered a bruising Wall Street sell-off, diminishing hopes of a June rate cut by the Federal Reserve.

Wall Street sold off sharply in the last session after data showed U.S. consumer prices increased more than expected in March, leading financial markets to deduce that the central bank might delay cutting interest rates until September this year.

Further fueling concerns, minutes of the central bank's March meeting showed officials were worried progress on inflation could have stalled and a longer period of tight monetary policy might be needed to tame the pace of price increases.

"The unexpectedly strong expansion in underlying inflation so far this year has been disappointing. This is likely to lead the Fed to raise the bar regarding the evidence it wants to see before easing policy this year," strategists at TD Securities said in a note.

Several brokerages have shifted their rate-cut outlooks, with UBS Global Wealth Management now expecting the Fed to start cutting interest rates in September, compared to June earlier, while BNP Paribas anticipates the first cut in July.

Traders currently see a 41% chance of the first rate cut in July, according to the CME's FedWatch Tool.

Yields across government bonds remained elevated after Wednesday's spike, with the 10-year note last at 4.5579%, hovering near its highest level since November.

The focus now shifts to the March reading of producer prices, along with weekly jobless claims data, both due at 8:30 a.m. ET, to gauge the strength of the world's biggest economy.

Traders pared back enthusiasm for monetary policy easing this year, with bets now showing only about 40 basis points of cuts expected in 2024, according to LSEG data. This is down from about 150 bps seen at the start of the year.

Investors will also watch for comments from New York Fed President John Williams, Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic for hints on the central bank's rate trajectory.

The first-quarter earnings season will pick up pace on Friday, when a trio of big banks - JPMorgan Chase & Co (JPM.N), opens new tab, Citigroup (C.N), opens new tab and Wells Fargo (WFC.N), opens new tab - is slated to post quarterly results.

At 7:10 a.m. ET, Dow e-minis were down 107 points, or 0.28%, S&P 500 e-minis were down 14.5 points, or 0.28%, and Nasdaq 100 e-minis were down 35.25 points, or 0.19%.

Biotech firm Alpine Immune Sciences (ALPN.O), opens new tab is set to be acquired by Vertex Pharmaceuticals (VRTX.O), opens new tab for about $4.9 billion in cash, both companies said. Alpine surged 36.4% in premarket trading.

Clothing rental subscription service Rent the Runway (RENT.O), opens new tab jumped 32.8% after a positive full-year forecast.

Albemarle (ALB.N), opens new tab gained 1.4% after Berenberg upgraded the lithium miner's rating to "buy" from "hold".

CarMax(KMX.N), opens new tab shed 6.2% after the pre-owned vehicle retailer posted a nearly 27% drop in fourth-quarter profit, hurt by decreased profitability from units sold.

Source: Reuters

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Warren Takunda

Economic

Bond

A measure of wholesale prices increased less than expected in March, providing some potential relief from worries that inflation will hold higher for longer than many economists had expected.

The producer price index rose 0.2% for the month, less than the 0.3% estimate from the Dow Jones consensus and not as much as the 0.6% increase in February, according to a release Thursday from the Labor Department’s Bureau of Labor Statistics.

However, on a 12-month basis, the PPI climbed 2.1%, the biggest gain since April 2023, indicating pipeline pressures that could keep inflation elevated.

Excluding food and energy, the core PPI also rose 0.2%, meeting expectations. Excluding trade services from the core level, the increase was 0.2% monthly but 2.8% from a year ago.

The release comes a day after the BLS reported that consumer prices again rose more than expected in March, raising concerns that the Federal Reserve will be unable to lower interest rates anytime soon.

On the producer price side, March’s gain was pushed by services, which saw a 0.3% increase on the month. Within that category, the index for securities brokerage and other investment-related fees jumped 3.1%.

Conversely, goods prices decreased 0.1%, flipping a 1.2% increase in February. Final demand costs for energy, which have been on the rise lately, actually fell 1.6% on the month. However, wholesale prices for final demand food and goods less food and energy climbed 0.8% and 0.1%, respectively.

Though prices have been rising at the pump, the final demand index for gasoline fell 3.6%. That contrasted with the consumer price index, which showed gasoline up 1.7% on the month.

Markets showed little reaction to the data, with futures tied to major stock indexes slightly higher though Treasury yields declined.

In other economic news Thursday, initial filings for jobless benefits fell to 211,000, a decline of 11,000 from the previous week’s upwardly revised level and below the 217,000 estimate from Dow Jones.

Continuing claims, which run a week behind, increased to 1.82 million, up 28,000 for the period, according to the Labor Department release.

The economic data points are being watched closely as the Federal Reserve contemplates its next moves on monetary policy.

Wednesday’s CPI release jolted markets, which had been anticipating an aggressive series of interest rate cuts this year. The report showed annual inflation running at 3.5%, well above the Fed’s 2% target.

The market now is pricing in the possibility of just two cuts this year, likely not starting until September, according to CME Group data.

Source: CNBC

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Alex

Economic

Prime Minister Anthony Albanese will unveil the "Future Made in Australia Act" to help compete with global partners who are providing massive subsidies to new industries, according to an advance copy of his speech.

The act, to be passed this year, would mark a departure from Australia's decades-old free market policies on trade and investment.

"We need to be willing to break with old orthodoxies and pull new levers to advance the national interest," the centre-left Labor Party prime minister will say.

Though no figures are given, the taxpayer-funded incentive scheme aims to compete with other nations' efforts, such as US President Joe Biden's massive investments through the US Inflation Reduction Act.

Other trading partners, including China, the European Union, Canada and Japan have also invested in their industrial base and manufacturing capabilities.

"Australia can't afford to sit on the sidelines. Being in the race does not guarantee our success – but sitting it out guarantees failure," Albanese will say, according to the advance copy of his speech.

Albanese will describe the climatic and economic changes underway as "every bit as significant as the industrial revolution or the information revolution – and more rapid and wide-ranging than both".

"We have to think differently about what government can -- and must -- do to work alongside the private sector to grow the economy, boost productivity, improve competition and secure our future prosperity."

Albanese will deliver the speech in the northeast state of Queensland, a key electoral battleground and the heartland of the country's gas and coal industries.

'Sharper elbows'

Australia could not match the United States' investment dollar for dollar, he will say, but the country would be able to compete for international investment.

A world-leading exporter of minerals such as iron ore and coal, resource-rich Australia will not just play to its "traditional strengths", he said, but also offer new products and services to new markets.

"We need this change in thinking and approach because the global economic circumstances are changing in ways far more profound than the consequences of the pandemic or conflict alone," Albanese will say.

"We need sharper elbows when it comes to marking out our national interest."

The act would boost investment in Australia's renewable energy resources, including battery production, like green hydrogen, green metals, create more jobs and ensure a competitive economy, he will say.

Tim Buckley, director of independent public interest think tank Climate Energy Finance, said the act would lay the foundations to make Australia a zero-emissions trade and investment leader and global clean energy "superpower".

About 27 percent of the Australian economic output came from exports to international partners and this new act would have flow-on effects and help them decarbonise as well, Buckley told AFP.

"State intervention is the new competition. We can't afford to 'sit it out'. The Future Made In Australia Act puts Australia into the global race. It is the investment signal and de-risking private capital needs," he said.

But he said greater details were needed to ensure that local, state and federal governments worked together on ensuring the act was rolled out smoothly.

Source：france24

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Ukadike Micheal

Forex

Economic

In the week ending April 6, there was a notable decrease in initial claims for unemployment benefits, with a total of 211,000 claims, reflecting a decrease of 11,000 from the previous week. The 4-week moving average also showed a decline to 214,250, down 250 from the previous week. Conversely, the insured unemployment rate remained steady at 1.2 percent for the week ending March 30, with an increase in the number of insured unemployment claims.

The advance number of actual initial claims under state programs saw a significant increase to 214,386, marking an 8.6 percent rise from the previous week. However, this figure was lower than the expected increase based on seasonal factors. The unadjusted insured unemployment rate held at 1.3 percent, with a slight decrease in the number of insured unemployment claims in state programs.

Looking at the broader picture, the total number of continued weeks claimed for benefits across all programs decreased to 1,965,545 for the week ending March 23. This indicates a downward trend in the overall volume of unemployment claims. Additionally, specific details regarding initial claims for UI benefits filed by former Federal civilian employees and newly discharged veterans were provided, showing fluctuations in these numbers from week to week.

Examining the states with the highest insured unemployment rates, New Jersey, California, Rhode Island, and others stood out with rates ranging from 1.8 to 2.6 percent. These numbers provide insight into the regional variations in unemployment trends across the country.

From a technical standpoint, these fluctuations in unemployment claims can have a significant impact on the market. Investors and analysts closely monitor these figures as they provide valuable insights into the overall health of the economy. A decrease in initial claims and continued weeks claimed for benefits may indicate a strengthening job market and increased consumer confidence. On the other hand, a sudden spike in unemployment claims could signal economic instability and potential challenges for businesses.

The latest data on initial claims for unemployment benefits and insured unemployment rates offer a snapshot of the current labor market conditions. While certain regions are experiencing higher rates of unemployment, overall trends suggest a gradual improvement in the job market. Investors should keep a close eye on these indicators as they navigate the ever-changing economic landscape.

Source: U.S. Department of Labour

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Ukadike Micheal

Economic

Forex

The Producer Price Index (PPI) for final demand in the United States registered a 0.2 percent increase in March, as reported by the U.S. Bureau of Labor Statistics. This modest uptick follows a more substantial 0.6 percent rise in February and a 0.4 percent increase in January. Over the 12-month period ending in March, the index saw a 2.1 percent advance, marking the most significant gain since April 2023.

March's rise in the index for final demand was primarily driven by a 0.3 percent increase in prices for final demand services, while the index for final demand goods experienced a marginal decline of 0.1 percent. Specifically, the index for final demand excluding foods, energy, and trade services saw a modest increase of 0.2 percent in March, continuing the upward trend observed in February.

Within the final demand services category, several subsectors experienced notable price movements. Prices for final demand services excluding trade, transportation, and warehousing rose by 0.2 percent, while the indexes for final demand trade services and transportation and warehousing services increased by 0.3 percent and 0.8 percent, respectively. However, the index for traveler accommodation services saw a significant decrease of 3.8 percent, indicating a decline in demand for such services.

On the other hand, the final demand goods category witnessed a slight contraction of 0.1 percent in March, primarily attributed to a 1.6 percent decline in energy prices. In contrast, prices for final demand foods and final demand goods excluding foods and energy recorded increases of 0.8 percent and 0.1 percent, respectively.

Detailed analysis of specific product categories reveals interesting trends. For instance, the decline in final demand goods was largely driven by a substantial decrease in gasoline prices by 3.6 percent. Conversely, prices for processed poultry experienced a significant surge of 10.7 percent, highlighting the variability in price movements across different sectors of the economy.

Overall, the March PPI data underscores the nuanced nature of inflationary pressures within the economy. While prices for final demand services continued to climb, albeit modestly, prices for final demand goods showed signs of moderation. These dynamics have implications for policymakers and market participants, influencing decisions regarding monetary policy adjustments and investment strategies. Understanding the underlying factors driving these price movements is crucial for navigating the evolving economic landscape effectively.

Source: U.S. Bureau of Labour Statistics

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Ukadike Micheal

Economic

Forex

The European Central Bank has decided to keep interest rates unchanged for the fifth consecutive meeting. While the deposit rate remains at a record-high of 4%, there are indications that a rate cut could be on the horizon. The Governing Council's statement hinted at a possible reduction in the future, depending on updated economic forecasts in June.

The ECB emphasized that any decision to cut rates would be contingent on factors such as the inflation outlook, underlying inflation dynamics, and the effectiveness of monetary policy transmission. The central bank maintained a data-dependent approach and refrained from committing to a specific rate path.

Market expectations for monetary easing in 2024 have remained relatively stable, with three quarter-point rate cuts already priced in. The euro depreciated following the news, reaching its lowest level since February. The ECB is eyeing a potential rate cut in June, as inflation in the euro area has been showing signs of cooling.

In contrast to the ECB's stance, uncertainty looms over other central banks, particularly the Federal Reserve, amid concerns about rising consumer prices in the United States. However, the ECB appears less worried about inflationary pressures, with recent figures showing inflation slightly below estimates at 2.4%. While service costs continue to rise, there are indications of a slowdown in wage growth, which could alleviate some inflationary concerns.

The ECB's President is expected to provide further insights during a news conference following the recent decisions. Christine Lagarde has previously suggested that if core inflation behaves as anticipated, the ECB may consider adjusting its policy stance to be less restrictive.

The potential easing of monetary policy by the ECB could provide a boost to the struggling eurozone economy, which has been experiencing minimal growth for an extended period. Recent data, including a decline in corporate loan demand and expectations of subdued wage growth, underscore the challenges facing the region's economic recovery.

Looking ahead, there is a divergence of opinions within the Governing Council regarding the timing and pace of rate cuts. While some members advocate for swift action, others prefer a more gradual approach, with quarterly adjustments tied to economic projections.

Analysts surveyed before the ECB's decision anticipate three rate cuts this year, scheduled for June, September, and December. However, there are concerns that such a timeline may be overly optimistic. The potential impact of energy market dynamics on growth forecasts adds another layer of complexity to the ECB's decision-making process.

From a technical perspective, the ECB's monetary policy decisions have significant implications for the financial markets. A potential rate cut could influence borrowing costs, investment decisions, and currency valuations, impacting various asset classes and market participants. Investors will closely monitor the ECB's upcoming meetings for further clues on the central bank's policy direction and its potential effects on the broader economy.

The European Central Bank's deliberations on interest rates and monetary policy adjustments reflect a delicate balancing act between supporting economic recovery and addressing inflationary pressures. The evolving economic landscape and market dynamics will shape the ECB's decisions in the coming months, with implications for both domestic and international markets.