Many Jobs and No Rate Cuts in the U.S.

By Hightower Omaha on June 11, 2024

Week of June 10, 2024

1. Payrolls and Unemployment Above Expectations. The labor market strength remains a clear bright spot for the U.S. economy; this was confirmed last Friday by the above-expectation non-farm payroll report. The U.S. economy added 272,000 jobs in May, compared to expectations for 180,000. The unemployment rate ticked up to 4.0%, and remains tight, well-below the 30-year median 5.3% and 10-year median 4.6%. Treasury yields spiked following the jobs data.

A growing focus remains on households with higher income and wealth from the overall strong job and investment markets. U.S. consumers are earning from higher income on their investments and higher wages from jobs. Top income earners are seeing a risk-free 5% return on their cash, which some have highlighted as a reason behind stickier inflation. Federal data indicates that this dynamic spans every income bracket.[1]

Chart 1: Rising Household Wealth Increases Propensity to Spend[2]

2. Don’t Hold Breath for Rate Cuts. The labor market strength and underlying inflationary pressures in the form of wages will extend the Fed’s “higher-for-longer” narrative. Last week included strong ISM Services data, which further highlights economic strength. Services are 70% of consumption, and the consumer is 75% of the U.S. economy – this is why we pay so much attention to these data points. In addition, ISM figures are leading indicators, and this data showed strong business activity and new orders, along with a continuation in higher pricing.

The Fed hosts its June FOMC meeting this week, and this data will be of significant focus. The latest core PCE deflator is 2.8%, which is the Fed’s preferred inflation measure – among a spectrum of data that the Fed tracks. There has been significant progress in getting inflation down from the peak levels, but it is because of stronger GDP growth (in the U.S. and globally) that it is sticky and will likely remain so. This is a key reason we do not believe the Fed will do much on the rate cutting initiative this year. 

Last week, the European Central Bank (ECB) issued its first rate cut, cutting 25 bps for the first time since 2019, lowering its policy rate from 4% to 3.75%. In Europe, inflation and wage growth remain above its 2% target – similar to the U.S. – so the cut was viewed more as a hawkish move and investors do not believe they are on the cusp of multiple cuts in the near future.

3. Shipping Data Highlights Higher Rates, Demand Strength. Major shipping companies like Maersk are raising their outlook on higher freight rates, in large part due to the conflicts around the Red Sea that impact shipping lanes.[3] Fighting in the region and attacks on vessels force ship operators to divert and increase congestion. Meanwhile in China, there is a low supply of empty containers to load goods onto the ships. This container shortage is also tied to the Red Sea disruptions – both ultimately lifting shipping rates higher. Higher consumer confidence, durable orders and leading PMI data underscore the demand strength, both in the U.S. and overseas.

Chart 2: Shipping Container Rates Reflect Limited Supply and Congestion at Sea[4]

4. Remaining Bullish on India. The conclusion of India’s general election resulted in Prime Minister Narendra Modi claiming victory for a third term. The National Democratic Alliance (NDA) secured 294 seats, more than the 272 seats needed for a majority, but below Modi’s expectation of 370. We do not expect any change to fiscal policy from the NDA’s less-than-expected seats – we remain bullish and still see 7-8% GDP growth for 2024. EPS are expected to grow 10-15%, new exports are at a 13-year high and PMIs remain near all-time highs. Boasting a population of 1.4 billion, we believe the Indian economy is still well suited to be the fastest growing in the world.

5. Fixed Income. Varied U.S. economic data drove a volatile U.S. Treasury week, with softer jobs data to begin the week followed by a hotter-than-expected payrolls print on Friday, driving yields up 11-15 bps across the curve. Wednesday will be key this week, with both a CPI release and the June FOMC meeting. High yield spreads remained flat at +351 bps. Muni yields decreased by 10-15 bps across the curve.

6. The Week Ahead.

Earnings – Tuesday: ORCL; Wednesday: AVGO, CASY, PLAY; Thursday: ADBE.

Economics – Tuesday: NFIB Small Business Index; Wednesday: May CPI, Hourly Earnings, FOMC Meeting; Thursday: May PPI; Friday: UMich Consumer Sentiment.

[1] Source: The Wall Street Journal. As of June 5, 2024.

[2] Source: The Wall Street Journal. As of June 5, 2024.

[3] Source: The Wall Street Journal. As of June 3, 2024.

[4] Source: Bloomberg. As of June 4, 2024.