Different risk assets are currently discounting different outlooks for the US economy, for the second half of 2023.
The rates market is expecting aggressive rate cuts, which point to a more dramatic slowdown in growth, while the US equity market and corporate earnings outlook seem to retain the expectations of an earnings rebound in the second half and a moderate slowdown for 2023 as a whole.
So, whose forecast is right?
Tune in to our latest podcast with Bank of Singapore’s investment strategist, Neo Bee Leng, as she shares more about the latest updates for the US economy and what’s next for investors.
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[ Podcast Transcript - Excerpt]
In the past two weeks, we received two pieces of hard data about the US economy that are important for the Federal Reserve, as they head into their deliberations for the May FOMC.
First, the US labour market added 236,000 jobs in March. This was a noticeable slowdown from the average pace of around 400,000 jobs in the first two months of 2023, but continued to represent a robust, above average level of job
creation. Strong job creation in the healthcare and leisure sectors continue to offset the weakness in the information sector, as well as manufacturing and construction.
The momentum for wage growth remained positive as well, with average hourly earnings increasing by 0.3% month-on-month, compared to 0.2% in February.
The health of the labour market was also reflected in core inflation figures: the Fed’s preferred measure of “super-core” services inflation, which excludes housing and rental costs, continued to show steady MoM increases of 0.4%, similar to the past 6 months. Overall core inflation came in line with expectations at 5.6% YoY in March compared to 5.5% for February.
Other data we have seen over coming out recently, such as retail sales, industrial production and the Empire State manufacturing survey, showed upticks in the month-on-month trend for March. We have seen this up-down patten across many economic indicators since late 2022.
On balance, we believe that the Federal Reserve will proceed with one more 25 basis points rate hike in the May meeting and then pause. This is also based off indications that the acute banking stress in March is calming down, with a gradual steady decline in the amount of bank borrowing from the Fed.
The decision for the May FOMC itself arguably may be of a lesser concern to markets, as investors are rightly more concerned with the overall rate trajectory from this point on, after the events in March showed that the increase in rates to-date is having a very tangible impact on the US economy.
The minutes of the March FOMC meeting released last week revealed that the Fed took into account the banking stress in March and calibrated their decision accordingly. Also interesting was the fact that the staff at the Federal Reserve had updated the likelihood of a recession sometime this year as a quote “plausible alternative”.
The markets will be laser-focused on the narrative that the Fed will present post the May FOMC decision, which will continue to be highly data dependent.
