You Can’t Hurry Cuts. You Just Have to Wait.

For the week ending 5 April 2024

As of midday Friday, global equities were lower on the week amid rising interest rates and firmer oil prices. The yield on the US 10-year note rose 16 basis points to 4.38% from a week ago while the price of a barrel of West Texas Intermediate crude oil gained rose nearly $5 to $87. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 16.5 from 12.9.

MACRO NEWS

US labor market remains robust

US nonfarm payrolls rose a stronger-than-expected 303,000 in March while the payrolls for the prior two months were revised up 22,000. The unemployment rate dropped 0.1% to 3.8%. Average hourly earnings were in line with forecasts, rising 0.3% month over month and 4.1% year over year. The odds of a US Federal Reserve interest rate cut in June eased after the strong report, with the first cut now fully priced for September after being priced for July ahead of the data. Markets now anticipate fewer 2024 cuts than the three forecast by Fed policymakers. Ten-year Treasury yields rose about 7 bps toward the top end of the recent range near 4.4%.

Subdued US services sector offsets bounce in manufacturing

Surprisingly strong ISM manufacturing data released on Monday revived market fears that the US economy remains too strong for the Fed to cut rates as soon or as much as investors have expected. The manufacturing index rose to 50.3 in March from 48.3 in February, the first expansion in the sector since September 2022. New orders also rose into expansion territory while the prices paid index jumped to 55.8 from 52.5, rekindling inflation concerns. However, Wednesday’s reading on the much larger services sector was more benign, dropping to 51.4 in March from 52.6 in February. The prices paid component fell to 53.4, a four-year low, from 58.6. That combination helped quell fears that rate cuts will be delayed for months, though Friday’s strong employment report revived them.

Powell undeterred by bumpy inflation; Kashkari, Logan not so sure

Fed Chair Jerome Powell helped allay fears that recent bumpy inflation data will alter the trajectory of expected rate cuts. In comments Wednesday, Powell said it is too soon to say whether recent, firmer inflation data is more than a blip. The data do not materially change the overall picture, he said, adding that he doesn’t think inflation is reversing higher. The Fed chair added that based on the current outlook, rate cuts are likely to be appropriate this year and that decisions will be made meeting to meeting. On Thursday afternoon, hawkish comments from Federal Reserve Bank of Minneapolis President Neel Kashkari caused a stir in markets when he questioned the need for the rate cuts given the economy’s resilience and raised the possibility of no cuts this year. Those remarks, along with a spike in oil prices on rising Mideast tensions, helped spark a bout of risk aversion, sending the S&P 500 Index down about 2% from Thursday’s intraday highs. Friday morning, after the employment report, Dallas Fed President Lorie Logan said it is “much too soon” to think about cutting rates.

Mideast tensions escalate

An Israeli airstrike that demolished Iran’s consulate in Syria on Monday killed two Iranian generals and five officers, according to Iranian officials, the Associated Press reported. The strike appeared to signify an escalation of Israel’s targeting of military officials from Iran, which supports militant groups fighting Israel in Gaza and along its border with Lebanon. On Thursday, Israeli defense forces scrambled GPS signals around Tel Aviv and other parts of Israel to make retaliatory air strikes by Iran or its proxies more difficult. Israel also called up reservists for its aerial defense unit and temporarily paused leave for all combat units. Brent crude rose above $90 on Thursday amid the heightened tension. Also on Thursday, US President Joe Biden called for an immediate ceasefire in Gaza. The White House said that Biden made clear to Israeli Prime Minister Benjamin Netanyahu that US policy will be determined by Israeli actions aimed at improving the humanitarian situation in Gaza. 

QUICK HITS

Fed Vice Chair for Supervision Michael Barr said Wednesday that the US banking system remains sound and resilient, though the Fed is looking at banks’ levels of unrealized losses and their exposure to commercial real estate. Issues in the office real estate market will take time to resolve, he said.

According to the Investment Company Institute, assets in US money markets hit a record $6.11 trillion in the week ended 3 April.

Consumer prices in the eurozone rose a less-than-expected 2.4% year over year in March while the core measure beat expectations as well, rising only 2.9%.

President Biden and Chinese President Xi Jinping held talks by phone on Wednesday. Among the issues discussed were AI risks, concerns over China’s support for Russia’s military industrial base and climate change.

In March China’s manufacturing sector expanded for the first time in six months, with the purchasing managers’ index rising to 50.8 from 49.1 in February. The nonmanufacturing measure rose to 53, its highest reading since September. In the eurozone, the composite PMI turned positive in March for the first time since May. In line with positive readings in Japan and the United Kingdom, the global economy itself seems to have reached a positive inflection point. A recent surge in demand for industrial metals backs up this view.

US light vehicle sales rose 5% in the first quarter.

On a visit to China, US Secretary of the Treasury Janet Yellen warned China about using excess industrial capacity to produce goods that the global economy cannot absorb.

According to the Financial Times, European residential property prices fell for the first time in a decade last year, declining 0.3% in in the European Union and 1.1% in the eurozone. Germany’s housing market was one of the worst hit, suffering a decline of 8.4% on an annual basis, second only to Luxembourg’s 9.1% drop.

In an interview with Japan’s Asahi newspaper on Friday, Bank of Japan Governor Kazuo Ueda said the central bank could respond with interest rate hikes if the weak yen and rising wages push up inflation.

The interest rate–sensitive Canadian economy shed 2,200 jobs in March. Canada’s unemployment rate rose to 6.1% from 5.8% in February.

The strongest earthquake to strike Taiwan in 25 years killed at least 12 on Wednesday and temporarily interrupted the island’s production of critical semiconductors. By the end of the week, nearly full production had resumed at chip giant Taiwan Semiconductor Manufacturing Company, the company reported.