US Services Growth Cools as Price Gauge Drops to Four-Year Low

Federal Reserve Chair Jerome Powell signaled policymakers will wait for clearer signs of lower inflation before cutting interest rates, even though a recent bump in prices didn’t alter their broader trajectory.

Powell said recent inflation figures — though higher than expected — did not “materially change” the overall picture. He reiterated his expectation that it will likely be appropriate to begin lowering rates “at some point this year.”

“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Powell said Wednesday in the text of a speech at Stanford University in California. “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%.”

The Federal Open Market Committee held interest rates steady last month. Officials narrowly maintained their outlook for three interest-rate cuts this year, even as key inflation metrics have picked up in 2024. Powell and other Fed officials have repeatedly said they are in no hurry to cut rates, and that their moves will depend on incoming data.

Following the release of Powell’s prepared remarks, Treasury yields remained higher as did the S&P 500. Investors are putting roughly even odds on an initial cut in June, and pricing suggests they see a chance of fewer than three reductions this year, according to futures.

“Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy,” Powell said in the opening remarks ahead of a fireside chat. “If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.”

Powell’s prepared remarks reinforce those he’s made following the March meeting. They also suggest that the Fed is unlikely to reduce rates at their next gathering taking place April 30-May 1.

Labor markets across most of the developed world just keep on beating expectations, pushing back bets on interest-rate cuts as hopes grow that central banks can pull off a soft landing after all.

The reasons for the high demand for workers — an aging workforce, lack of skilled labor and companies hoarding staff — are holding firm even as economies start to slow.

In all, the unemployment rate in developed economies remains near a record-low, according to quarterly data from the OECD. The consequences of that resilience for borrowing costs triggered a selloff in stocks and bonds this week.

While demand for workers may have waned from the initial post-pandemic surge, it’s still much higher than experts forecast it would be by now. In the US, for instance, the Congressional Budget Office last year forecast the US unemployment rate would hit 5.1% by now; it remains at 3.9% today.

Data due Friday is set to show the US economy added more than 200,000 payrolls in March, double the level that Federal Reserve Chair Jerome Powell has said is sustainable.

As a result, markets continue to recast their pricing for Fed rate cuts — the odds for a move in June have slipped to around 59% — and those forecasts could be pushed out again. They slipped below 50% briefly this week after strong US factory data.

The S&P 500 saw its worst day in almost a month on Tuesday and the US 10-year yield touched its highest level since November as investors started to come to terms with that shift.

Economists at Goldman Sachs Group Inc. estimate it would take an increase of 0.2 to 0.3 percentage points to the US unemployment rate to justify three consecutive Fed cuts this year.

It’s a similar story elsewhere, even in economies that are slowing.

In Europe, where inflation has cooled in recent months, European Central Bank President Christine Lagarde has cited pay increases as one of three main factors officials are watching. Investors have pushed back expectations for a first interest rate cut to June, while at the end of 2023 their bets pointed to a 50% chance of a move in March and certainty the ECB would have eased by its April meeting.

In Canada, where the population soared by the most in more than 60 years in 2023, the jobless rate has barely budged as employers soaked up the new workers. In New Zealand — which entered a double-dip recession — unemployment has only just reached 4% and in Australia, a surprise surge in employment in February pushed the unemployment rate back down to 3.7%.

Central banks have consistently cited tight labor markets as an inflationary force and one of their top considerations when deciding interest rates. Powell last week said the strong job conditions give officials more time to consider when to cut.

“The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates,” Powell said at an event at the San Francisco Fed.

To be clear, inflation remains the north star for central banks and the primary driver of policy. Powell has also said recently that strong hiring on its own wouldn’t be a reason to avoid cutting rates.

To be sure, jobs tend to be a lagging indicator with monetary policy taking about 18 months to filter through into the economy, so higher rates may yet take a toll. The UK in January registered its first increase in unemployment since July, but the rate remained below 4%.

As consumer price pressures moderate back toward central banks’ comfort zones, forecasts that mass unemployment would be needed to get inflation down now look misplaced.

Usually during an extended period of high interest rates, companies cut back on expansions. Not so this time. If anything, the jobs picture could remain tighter for longer as business sentiment and planned investment remain healthy.

“Many firms are likely engaged in labor hoarding,” said Citigroup Inc. senior global economist Robert Sockin. “Firms know how difficult it is to find and train workers, and likely do not want to go through the same process in several quarters time when demand is stronger.”

The JPMorgan/S&P Global manufacturing index expanded again in March with the highest reading since July 2022 as companies worldwide broadly saw higher orders and output. Business Roundtable’s CEO Index rose to the highest level since 2022 in the first quarter on higher capital spending, employment and sales expectations.

“Higher interest rates appear only to have destroyed demand for jobs that never existed, i.e. vacancies,” said Freya Beamish, chief economist at TS Lombard.

Euro-area inflation slowed more than expected, cementing prospects for an interest-rate cut by the European Central Bank in June.

Consumer prices rose an annual 2.4% last month, down from 2.6% in February, in line with a Bloomberg Economics Nowcast model. Analysts predicted an increase of 2.5%. A measure excluding volatile items such as food and energy also eased more than anticipated, to 2.9%.

The report adds to evidence that policymakers are on track to return inflation to the 2% target, allowing them to soon dial back some of the restriction needed after price gains surged into double digits. President Christine Lagarde has signaled a first cut in June — informed by fresh forecasts and an update on wage growth in the early months of the year.

Most of the Governing Council — including officials from Germany, France and Spain — have signed up to that timeline, with few clinging to hopes of an earlier move. Economists and money markets are equally aligned, suggesting it would take a big shock to change course.

Traders held wagers on the scope for rate cuts this year after the report, pricing three quarter-point reductions starting in June with the chance of a fourth at around 60%. That compares to as many as four cuts priced ahead of last month’s monetary-policy decision.

While shipping disruptions in the Middle East haven’t affected inflation in Europe much and last week’s collapse of a bridge in Baltimore — a key port for carmakers and other manufacturers — is also unlikely to do so, rising pay within the 20-nation euro zone may yet stoke prices.

Chief Economist Philip Lane insists wage increases must continue to retreat for him to consider reversing some of the ECB’s past hikes.

While a key compensation gauge showed some moderation at the end of 2023, salaries continue to expand by more than 4%. That’s sustaining price pressures in services, where labor has an outsized impact on final costs.

Inflation in that sector remained at 4% in March, while the rate for non-energy industrial goods fell to 1.1%.

Across the region, trends also diverge. Spanish inflation accelerated after the government removed some of the support put in place to keep a lid on energy costs, and Italy also saw an uptick. Meanwhile, German and French readings both showed that inflation eased for a third month.

Such trends make it harder to determine the optimal path following the ECB’s initial cut. Policymakers have already shifted some attention to discussing the pace of later steps, though insist that ultimately economic data will decide.

Lagarde, too, says the ECB will respond to new information as it comes in. “This implies,” she said last month, “that, even after the first rate cut, we cannot pre-commit to a particular rate path.”

Oil prices extended gains on Wednesday, as investors mulled supply risks stemming from Ukrainian attacks on Russian refineries and the potential for escalation in the Middle East conflict, while OPEC+ ministers made no changes to current output cuts in a meeting.

Brent crude futures for June rose 75 cents, or 0.84%, to $89.67 per barrel at 1130 GMT, while U.S. West Texas Intermediate crude futures for May gained 73 cents, or 0.86%, to $85.88 a barrel.

OPEC+ ministers made no fresh policy recommendations in a meeting on Wednesday, two sources said, after the group already decided to extend current production cuts until June last month.

Oil futures compounded Tuesday's gains, when both Brent and WTI climbed 1.7% to their highest since October.

Prices jumped higher on Tuesday after a fresh round of Ukrainian drone attacks on Russian refineries threatened to take even more of the country's processing capacity offline.

Investors were also concerned that conflict in the Middle East could spread, after Iran vowed revenge against Israel for an attack on Monday that killed high-ranking military personnel.

A wider conflict in the Middle East involving more oil-producing nations could cause supply disruptions. Iran, which provides support for the Hamas militia fighting Israel in Gaza, is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC).

"The rise in hostilities in both hotspots pushed the price of the two crude oil futures contracts to their highest levels this year," PVM analyst Tamas Varga said of Tuesday's rise.

Bank of America Global Research raised its 2024 Brent and WTI forecasts to $86 and $81 a barrel respectively, it said in a note on Wednesday, on firming demand and escalating political tensions.

"Geopolitical turmoil has also boosted oil demand via longer trade routes and impacted supply by reducing refining capacity via attacks on Russian energy infrastructure." the bank said.

Elsewhere on Wednesday, Taiwan's strongest earthquake in at least 25 years briefly caused Formosa Petrochemical to halt operations at its Mailiao refinery as a precautionary measure, but works have since restarted.

The U.S. Energy Information Administration (EIA) will also release oil inventory data later on Wednesday. Data from the American Petroleum Institute reported crude inventories fell by 2.3 million barrels last week, traders said on Tuesday.

The Indian economy is projected to grow at a robust 7.5 per cent in 2024, stated the World Bank, that credited India for a bulk of the growth in the South Asian economy. The report stated that South Asia’s prospects remain bright in the short term but there still are concerns in the horizon.

“In India, which accounts for the bulk of the region’s economy, output growth is expected to reach 7.5 per cent in FY23/24 before returning to 6.6 per cent over the medium term, with activity in services and industry expected to remain robust,” state the World Bank report. “In India, output growth is projected to reach 7.5 per cent in FY2023/24 on the back of robust growth in Q3 of FY2023/24. Growth is expected to moderate to 6.6 per cent in FY2024/25 before picking up in subsequent years as a decade of robust public investment yields growth dividends. +e expected slowdown in growth between FY2023/24 and FY2024/25 mainly reflects a deceleration in investment from its elevated pace in the previous year. Growth in services and industry is expected to remain robust, the latter aided by strong construction and real estate activity. Inflationary pressures are expected to subside, creating more policy space for easing financial conditions. Over the medium term, the fiscal deficit and government debt are projected to decline, supported by robust output growth and consolidation efforts by the central government,” the World Bank report stated.

This comes after India’s manufacturing PMI for the month of March was reported to have reached a 16-year high at 59.1, according to HSBC final India Manufacturing Purchasing Managers' Index, compiled by S&P Global. Hiring increased at the strongest rate in six months, new order exports increased to the highest since May 2020, and manufacturing output rose for the 33rd month in March. As per S&P, the outlook for the upcoming year was optimistic.

“South Asia is expected to continue to be the fastest-growing emerging market and developing economy (EMDE) region over the next two years. This is largely thanks to robust growth in India, but growth is also expected to pick up in most other South Asian economies. However, growth in the near term is more reliant on the public sector than elsewhere, whereas private investment, in particular, continues to be weak,” the report stated.

The World Bank, in its report added that overall in South Asia, the growth is expected to be strong at 6.0-6.1 per cent in 2024. This growth is driven by the recoveries of Pakistan and Sri Lanka economies, and the strong growth in India.

The bank said that while the rest of the region is picking up, it is expected to remain below pre-pandemic averages.

“South Asia’s growth outlook is somewhat stronger than in the previous edition of this report, by 0.4 percentage points for 2024 and 0.3 percentage points for 2025. +is primarily reflects upward revisions to investment growth in India and somewhat faster-than-anticipated rebounds from last year’s recessions in Pakistan and Sri Lanka,” it added.

India’s inflation remained within the Reserve Bank of India’s 2-6 per cent target range since a spike in the mid-2023, stated the report. The policy rate has remained unchanged since February 2023. Food price inflation has been elevated, partly reflecting a weak harvest due to El Niño, the bank said.

According to a recent State Bank of India report, RBI is not likely to alter the rates this upcoming Monetary Policy Committee meeting, scheduled from April 3-5. According to the SBI, RBI is expected to cut rates only in the third quarter of FY25.

Net portfolio rebounded in India, the World Bank report added. Government revenues are expected to increase on the back of continued efforts to broaden the tax base and improve tax administration, and current expenditures are likely to decrease as pandemic-related measures are wound down, it said.

“South Asia’s growth prospects remain bright in the short run, but fragile fiscal positions and increasing climate shocks are dark clouds on the horizon. To make growth more resilient, countries need to adopt policies to boost private investment and strengthen employment growth,” said Martin Raiser, World Bank Vice President for South Asia.