Inflation, Jobs, and Growth: A Forex Trader's Guide to the US Economy
US economic outlook uncertain, "Hard Landing" possible due to slowdown. Inflation to ease, but Fed's 2% target remains a challenge.
Friday, August 9, Week 32
US Macroeconomic Outlook: Navigating the Crosscurrents
This report provides a comprehensive analysis of the US macroeconomic landscape, tailored for forex traders seeking insights into the US dollar's potential trajectory. It examines recent fiscal and monetary policy shifts, dissects key economic indicators, and assesses the potential risks and opportunities shaping the US economic outlook.
The US economy is at a crossroads, with signs of a potential slowdown emerging after a period of robust growth. While Q2 2024 GDP exceeded expectations, recent data, including a weaker-than-expected July jobs report and a contraction in the manufacturing sector, suggests that the Federal Reserve's aggressive monetary policy tightening is beginning to take its toll. Inflation has moderated significantly from its peak in 2022, but remains above the Fed's target, keeping the central bank on a hawkish bias. The upcoming FOMC meeting in September will be crucial for gauging the Fed's policy path and its implications for the US dollar.
Fiscal Policy: Deficit Reduction and Election Uncertainty
The US fiscal policy landscape is currently dominated by a substantial budget deficit, reaching 6.30% of GDP in 2023. This has raised concerns about long-term fiscal sustainability and the potential for inflationary pressures. To address this, the government enacted the Fiscal Responsibility Act of 2023 in June, which aims to reduce the deficit through a combination of spending cuts and revenue increases. The Act includes provisions to close tax loopholes, enhance IRS enforcement, and limit discretionary spending growth. However, the effectiveness of these measures in curbing the deficit remains to be seen, and the upcoming presidential election in November could lead to significant shifts in fiscal policy, depending on the outcome of the vote and the priorities of the new administration.
Forex traders should closely monitor the implementation of the Act and its impact on key economic indicators, as well as any potential changes to the government's spending and taxation plans. Additionally, the US fiscal policy stance should be compared to those of its major trading partners, such as China and the Eurozone, to assess the potential impacts on trade balances and currency exchange rates.
US Economy: Slowdown Signals Emerge
The US economy expanded at an annualised rate of 2.8% in Q2 2024, exceeding market expectations. This growth was driven by strong consumer spending, a rebound in private inventory investment, and robust nonresidential fixed investment. However, recent data has painted a more mixed picture, raising concerns about a potential slowdown in the second half of the year.
The July jobs report, released on August 2nd, showed a significant slowdown in job growth, with nonfarm payrolls increasing by only 114,000, well below forecasts of 175,000. The unemployment rate unexpectedly rose to 4.3%, the highest since October 2021, and wage growth slowed. This data solidified market expectations for a Fed rate cut in the near future.
Inflation has moderated significantly from its peak in 2022, with the CPI falling to 3% in June 2024, the lowest since June 2023. However, core inflation, which excludes volatile food and energy prices, remains elevated at 3.3%, indicating persistent underlying price pressures. The Fed's preferred inflation gauge, the core PCE price index, also remained unchanged at 2.6% in June.
Looking ahead, the US economy faces a number of challenges, including slowing global growth, persistent inflationary pressures, and the potential for further interest rate hikes. The manufacturing sector, as measured by the ISM Manufacturing PMI, has contracted for four consecutive months, signalling weakness in this key sector. However, the services sector rebounded in July, with the ISM Services PMI rising to 51.4, indicating continued expansion in this crucial part of the economy. Upcoming economic events and data releases, such as the August CPI report and the September FOMC meeting, will be crucial for gauging the economy's trajectory and the potential impact on the US dollar.
The Fed's Balancing Act: Rate Cut Expectations Intensify
The Federal Reserve is widely expected to cut interest rates at its upcoming meeting in September, with the only question being the magnitude of the cut (25 bps or 50 bps). This shift towards a more dovish stance reflects growing concerns about a potential economic slowdown, fueled by recent weak economic data.
The Fed has maintained its target range for the federal funds rate at 5¼ to 5½ percent since June, after a series of aggressive rate hikes to combat inflation. However, the weaker-than-expected July jobs report and the contraction in the manufacturing sector have solidified market expectations for a rate cut in September. The CME FedWatch Tool currently shows a 54% probability of a 50 bps cut and a 46% probability of a 25 bps cut at the September meeting.
The Fed's decision-making process will be heavily influenced by incoming economic data, particularly inflation and labour market indicators. The central bank will also be closely monitoring global economic developments, as well as financial market conditions. The Fed's communication in the coming weeks will be crucial for forex traders, as it will provide insights into the central bank's assessment of the economy and its outlook for inflation.
Navigating Uncertainty: US Macroeconomic Outlook
The macroeconomic outlook for the US remains uncertain, with a heightened risk of a "Hard Landing" as the economy shows increasing signs of a slowdown. While inflation is projected to moderate further, the Fed's ability to achieve its 2% target without triggering a recession remains a key concern.
Top Three Risks to the Outlook:
Hard Landing: The Fed's aggressive monetary policy tightening could trigger a sharper-than-expected slowdown in economic activity, potentially leading to a recession.
August 2, 2024: July jobs report showed a significant slowdown in job growth and an unexpected increase in the unemployment rate.
July 2024: ISM Manufacturing PMI contracted for the fourth consecutive month.
July 2024: University of Michigan Consumer Sentiment fell to its lowest level in eight months.
Sticky Inflation: Persistent supply chain disruptions, geopolitical tensions, and strong consumer demand could keep inflation elevated for longer than anticipated, forcing the Fed to maintain a hawkish stance and potentially dampening economic growth.
June 2024: Core CPI at 3.3%, above the Fed's target.
June 2024: Core PCE price index unchanged at 2.6%.
July 2024: ISM Services PMI price gauge accelerated to 57.0.
Global Slowdown: A slowdown in global economic growth, particularly in China and Europe, could negatively impact US exports and overall economic activity.
July 2024: Chinese factory activity unexpectedly contracted.
June 2024: Global manufacturing PMIs indicated slowing growth.
Ongoing trade tensions between the United States and China.
Action Points for Forex Traders:
Monitor incoming economic data releases, particularly inflation and labour market indicators, for signs of a potential shift in the Fed's policy stance.
Pay close attention to the upcoming FOMC meeting in September (Week 38) for clues about the Fed's future policy trajectory.
Monitor global economic developments, particularly in China and Europe, for potential spillover effects on the US economy.
Economic Indicators:
Economic Growth:
Q2 2024 GDP Growth Rate: 2.8% annualised (previous: 1.4%, consensus: 2.0%, forecast: 1.2%)
July 2024 Chicago Fed National Activity Index: 0.05 (previous: 0.23 revised, consensus: -0.09, forecast: 0.3)
Outlook: The US economy is expected to continue expanding in the coming months, but at a slower pace than in the first half of 2024. Downside risks remain from slowing global growth and the potential for a Fed policy misstep.
Inflation:
June 2024 CPI: 3.0% (previous: 3.3%, consensus: 3.1%, forecast: 2.8%)
June 2024 Core CPI: 3.3% (previous: 3.4%, consensus: 3.4%, forecast: 2.5%)
June 2024 PCE Price Index: 2.5% (previous: 2.6%, consensus: 2.5%, forecast: 2.5%)
June 2024 Core PCE Price Index: 2.6% (previous: 2.6%, consensus: 2.5%, forecast: -0.1%)
Outlook: Inflation is projected to moderate further in the coming months, but it is likely to remain above the Fed's target, keeping the central bank on a hawkish bias.
Labour Market:
July 2024 Nonfarm Payrolls: 114K (previous: 179K revised, consensus: 175K, forecast: 130K)
July 2024 Unemployment Rate: 4.3% (previous: 4.1%, consensus: 4.1%, forecast: 4.0%)
July 2024 Average Hourly Earnings MoM: 0.2% (previous: 0.3%, consensus: 0.3%, forecast: 0.1%)
Outlook: The labour market is expected to cool further in the coming months, with job growth slowing and the unemployment rate edging higher.
Housing Market:
June 2024 Building Permits: 1.454 million (previous: 1.399 million, consensus: 1.40 million, forecast: 1.65 million)
June 2024 Housing Starts: 1.353 million (previous: 1.314 million, consensus: 1.30 million, forecast: 1.32 million)
June 2024 Existing Home Sales: 3.89 million (previous: 4.11 million, consensus: 4.0 million, forecast: 3.8 million)
Outlook: The housing market is likely to remain subdued in the coming months, with high prices and mortgage rates continuing to weigh on affordability.
Business Confidence:
July 2024 ISM Manufacturing PMI: 46.6 (previous: 48.5, consensus: 48.8, forecast: 53.0)
July 2024 ISM Services PMI: 51.4 (previous: 48.8, consensus: 51.0, forecast: 53.0)
Outlook: Business confidence is expected to remain subdued in the coming months amid concerns about slowing economic growth and persistent inflationary pressures. However, the rebound in the services sector in July offers a glimmer of hope.
Consumer Sentiment:
July 2024 Michigan Consumer Sentiment: 66.4 (previous: 68.2, consensus: 68.5, forecast: 77.0)
August 2024 RCM/TIPP Economic Optimism Index: 44.5 (previous: 44.2, consensus: 45, forecast: 45)
Outlook: Consumer sentiment is likely to remain fragile in the coming months as households grapple with high inflation and rising interest rates.
Trade:
June 2024 Balance of Trade: $-73.1 billion (previous: $-75 billion revised, consensus: $-72.5 billion, forecast: $-72 billion)
June 2024 Exports: $265.9 billion (previous: $262 billion, forecast: $268 billion)
June 2024 Imports: $339 billion (previous: $337 billion, forecast: $340 billion)
Outlook: The US trade deficit is expected to remain elevated in the coming months, reflecting strong domestic demand and a strong US dollar.
Sources:
Bureau of Economic Analysis (BEA)
Bureau of Labor Statistics (BLS)
Federal Reserve
Trading Economics
S&P Global
Institute for Supply Management (ISM)
University of Michigan
Technometrica Market Intelligence/RealClearMarkets
National Association of Home Builders (NAHB)