- Granted, there are several corners of incipient weakness in the US economy.
- Signals from hiring, retail sales, and PMI are negative.
- Sharp curve steepening and equity market selloff are harbingers for slowdown ahead.
- It is crucial to maintain perspective. GDP, trade, and labour force figures are not alarming.
- We are not joining the herd in pricing in 75-100 bps in rate cuts in 2H24. 50bps would be adequate.
Commentary: Slowdown cometh?
As far as cycles go, this is not a particularly lengthy one. It has only been three years since Western economies began their process of normalisation after the 2020/21 pandemic. For Asia, the period since the end of the pandemic is even shorter. But markets are becoming concerned that a cyclical slowdown could be around the corner. This is particularly the case for the world’s largest economy.
Recent US data flow is not exactly alarming, but there are several corners of incipient weakness. The labour market (unemployment has risen to 4.3%; it was 3.7% at the beginning of the year), retail sales (less than 2%yoy growth through 1H24), and PMI (see chart of the week) are now softening without much ambiguity. The plethora of such data was compounded by the latest nonfarm payroll data late last week, which made the markets particularly nervous. The clearest reflection of that was the volatility marker VIX, which ended the week with the highest reading since March 2023. The fixed income market, meanwhile, has seen 84bps of steepening at the long end (10-yr) since May.
Rate cut expectations typically buoy the equity markets, but that has not been the case lately for two reasons. First, the markets have been in frothy territory for a while, with the S&P500’s yield gap (treasury yield minus dividends) at comparable levels to the pre-GFC period. Those with substantial capital gains would be trigger-happy to sell at this juncture. Second, an anxiety permeating through the market is that the Federal Reserve, waiting till September to cut for the first time, may turn out to be too late to ensure a soft landing. As a result, we are witnessing the juxtaposition of fixed income rally and equity correction.
It is crucial to maintain perspective. 2Q US GDP surprised on the upside just a few days ago. Rising unemployment rate is largely a function of an expansion of the labour force, with many Americans returning to the work force. Looking at Asia’s data, July has the making of a good month, with South Korea and Vietnam’s exports up comfortably, in double-digit terms, year-on-year. We are therefore not joining the herd in pricing in 75, or even 100, bps in rate cuts. 50bps would be adequate, in our view.
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