by Hubert Marleau, Market Economist, Palos Management
July 19, 2024
Several Fed officials confirmed that the immaculate disinflation is indeed back on track, pointing to September for their first interest rate cut. Goldman bravely wrote in a note to its readers: āWe may be approaching an inflection, seeing a rationale for cutting as early as the July 30-31 meeting.ā
Interestingly, the shortening horizon toward a looser monetary stance is driven more by an expanding decline in inflation, including the service sector - than by a dour economic outlook. The Atlanta Fedās GDPNow estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 2.7%, while real personal consumption expenditures and gross private investment growth grew at the annual rate of 2.2% and 8.9% respectively.
What is fascinating is that all that exceptional growth has occurred without a meaningful increase in employment. Based on the combination of the Household and Establishment Surveys, total employment for the comparable period rose at an annual 0.8%, leaving roughly 1.9% for productivity in the probable event that hours of work did not increase. Perhaps thatās a crude way to explain what is going on, but it is what it is.
Indeed, this phenomenon will likely continue for a while longer, because employers are hiring less unemployed workers. Weekly claims jumped to 243,000, with continuing claims reaching 1.867 million, the highest since November 2021. And, yet the New York Fed Staff NowCast is predicting another 2.7% increase in real economic activity in Q3.
The Wall Street Journalās latest quarterly survey of business and academic economists reported that forecasters were firmly optimistic about the business outlook, suggesting that the economy is normalising rather than deteriorating and should run at an annual clip of about 2.0% over the next 4 quarters.
The application, meanwhile, of an easier monetary policy at a time when productivity is rising above average and the odds of fiscal expansion, lower taxes and deregulations are high under a Trump presidency, a distinct economic backdrop has emerged, which is definitely supportive of corporate profit growth. As a result, small caps had 6 straight days of relentless attention last week because the expansion of the economy seems to have broadened out to the industrial, real estate, financial, utility, energy, manufacturing and construction sectors. Although the S&P 500
had 3 bad hair days on Wednesday, Thursday and Friday after touching an all-time of 5667 on Tuesday, the rotation out of the Magnificent 7 to the MidCap sector might have the legs to sustain the rally. On every single day since July 11, the highs have eclipsed the lows, while advances have mostly outstripped declines. In fact,UBS lifted its S&P 500 price target to 5900 and doesnāt rule out a move to 6500.
P.S. A few weeks ago, I wrote about the nefarious economic effect of tariffs. I don't like tariffs and Iām not alone on this. According to calculations by Wells Fargo, the imposition of a 60% tariff on Chinese imports and a universal 10% levy on goods from other trading partners would invite retaliation, which would bring about a stagflationary shock to the economy - the Real GDP would contract by 0.4% in 2025 and raise core CPI inflation to 4.3%. I devoutly hope that his regressive tariffs aren't implemented should indeed Trump win the presidency, but that they are used merely as bargaining chips.
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