Global Economy & Markets, Weekly Roundup 08/04/24

Strong US economic data (labor market, ISM) sent US Treasury yields significantly higher

Global equity markets were in consolidation mode in the past week (MSCI ACWI: -0.9%), following solid gains in Q1 (+8%).  US 10-Year Treasury yields were up by circa +20 bps wow to 4.40%, with the ISM Manufacturing index surprising to the upside, up by +2.5 pts to 50.3 in March, versus consensus estimates for 48.4. The latest reading was above the expansion/contraction threshold of 50.0 for the first time since September 2022. 

US job creation was also robust in March, with non-farm payrolls increasing by +303k, beating consensus expectations of +200k by a wide margin. The unemployment rate fell by -0.1 pp to 3.8%, despite an increase in the labor force participation rate by +0.2 pps to 62.7%.

Healthy gains of +0.3% (mom) were reported for average hourly earnings, with the annual rate decelerating to +4.1% yoy from +4.3% yoy in February. Moreover, the average weekly hours worked by total employees increased by +0.1 to 34.4 in February, suggesting larger gains for workers’ overall compensation.

The latest strong economic data, alongside higher oil prices ($91 per barrel, a 5½ month high) have pushed back market-implied expectations regarding the timing and the sum of Fed rate cuts for 2024. According to futures markets, investors currently assign roughly equal probability for cuts to start on June 12th or July 31st.

Attention turns to March’s US CPI (due on April 10th). The Atlanta Fed Nowcasting model suggests an acceleration by +0.2 pps to +3.4% for the annual growth of the headline CPI index (+0.3% mom), due to an easing of negative base effects for Energy. On the other hand, a mild deceleration by -0.1 pp to +3.7% yoy (+0.3% mom) is suggested for the core index.

Outside the US, the momentum for the global economic activity is improving. The Global Manufacturing PMI has returned to levels exceeding the expansion/contraction threshold of 50.0 in the past two months for the 1st time since August 2022, at 50.6 in March from 50.3 in February. Furthermore, the recovery broadens region-wise, excluding Germany (41.9) and France (46.2).

The ECB is expected to stand pat on April 11th, with the Deposit Facility Rate (DFR) at +4.0%, the interest rate on Main Refinancing Operations (MRO) at +4.5% and the Marginal Lending Facility (MLF) rate at +4.75%. Attention will turn towards hints for possible cuts in the subsequent meeting on June 6th. March’s CPI maintains such an outlook on track, with the core CPI decelerating to +2.9% from +3.1%, the lowest annual rate in more than two years.

Note that following the review of ECB’s operational framework, as of September 18th, 2024, the spread between the MRO and the DFR will be reduced to 0.15% from the current 0.50%, with the MLF-MRO spread remaining unchanged at 0.25%. The ECB intends to continue steering the monetary policy stance through the DFR.

Regarding geoeconomic developments, the Secretary of the US Treasury Yellen cited her intolerance towards Chinese government subsidies impeding a level playing field for prominent internationally traded industrial goods, especially regarding electric vehicles and solar panels.
Global Economy & Markets, Weekly Roundup 08/04/24