Week of June 10, 2024

Dec Mullarkey, CFA, Managing Director, Investment Strategy and Asset Allocation

This week, we received two prominent data points in the U.S. on the same day. On Wednesday morning it was a very tame May Consumer Price Index print, which continued to bolster the market’s faith that disinflation was back on track. In the afternoon, the U.S. Federal Reserve announced it would keep rates where they are but updated its outlook, the Summary of Economic Projections (SEP). 

The previous SEP had suggested the Fed would cut rates three times this year. The new release suggested it was more likely one. Fed chair Jerome Powell continued to remind markets that he and his team needed to see a reliable disinflationary trend to feel confident that cuts are in order. For the most part markets are in line with that and have priced in 1–2 cuts this year. 

The Fed also upped its view of the eventual Federal Funds Rate, the short-term rate needed to keep the economy humming at a stable pace. In the past, 2.5% seemed about right. But recently the Fed has been nudging up its estimate and has it now close to 2.8%.

Persistent U.S. fiscal deficits, secular demand for capital and financial conditions that seem less sensitive to Fed rates have led to a rethink of that target. Varying research suggests something in the 3%–3.5% range may be needed. Powell has also commented that “rates will not go back down to the very low levels that we saw” over the last cycle. So, beyond the rate cuts, the ultimate landing point is this other big piece of the Fed picture. 

Dec Mullarkey, Managing Director, Investment Strategy and Asset Allocation

Sources: Bloomberg, Financial Times, 2024.      

Linda Kong Ting, Senior Director and Credit Analyst, Asset Management

U.S. economic statistics remain relatively mixed, but we have become incrementally less positive on the economic trajectory past the November 2024 election. The unemployment rate has moved marginally higher to 4.0% – a level last seen in January 2022, just prior to the hiking cycle that began that March. The related Sahm Rule, which is based mainly on the trajectory of the unemployment rate and has accurately predicted recessions in prior cycles, is indicating that we may be only a few short months from recessionary conditions. This also dovetails with the general principle that there is 12–18 months of lag in the transmission of monetary policy. Additionally, both new and continuing jobless claims came in somewhat higher than expected.

We are also somewhat concerned that the main positive metric, the high nonfarm payroll number, may be being bolstered by inconsistent factors such as immigration and the net birth/death adjustment. There are also some signals from inflation metrics that the very beginning of a cyclical downturn may be in the offing, such as greater declines in used car prices and airfares. We also see more anecdotal signs that the economy may be topping out, as we see more uneven sales results from luxury brands, increasing cancellations of arena concerts due to underwhelming sales and more marketing emphasis by both retailers and fast food purveyors on lower-priced items. In conclusion, although we believe corporations are well-prepared for a potential downturn and will continue to benefit from strong federal spending through at least the end of the year, we see the potential for substantially more headwinds in 2025 regardless of the results in November.

Linda Kong Ting, Senior Director and Credit Analyst, Asset Management

Sources: Bloomberg, Bureau of Labor Statistics, 2024.

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