Sunday, September 29, 2024 (Week 40)
Welcome to this week's US Macro Report. It's been a wild ride these last two weeks, with the Fed's jumbo rate cut shaking up market sentiment. This report breaks down what's been driving the USD, focusing on those key themes and narratives. We'll dissect the data, from the Fed's dovish tilt to those worrying fiscal anxieties, and see how geopolitics fits into the puzzle.
Dominant Theme: Fed Pivot and Soft Landing Expectations
The Fed's 50 bps rate cut and hints of more to come have ignited hopes of a "soft landing" – taming inflation without tanking the economy. This has certainly boosted equities, with the Dow hitting record highs thanks to a rotation out of tech and into rate-sensitive sectors. But it’s not all rosy. Data like that consumer confidence slump (Week 39) and the mixed bag of PMIs (Week 39) are casting a shadow over this soft-landing dream. This week will be crucial. Keep your eyes on upcoming data to see if it backs up those soft-landing hopes or fuels recessionary anxieties.
Emerging Theme: Fiscal Concerns and Debt Levels
That widening budget deficit – $380 billion in August (Week 37) – can’t be swept under the rug. It's a growing concern, and with additional funding requests and the impact of rate cuts on borrowing costs, it could become a major headwind for the USD. While the Fiscal Responsibility Act aims to tackle the deficit, there are significant counter-pressures.
Geopolitics Related to US and USD
Geopolitics, particularly in the Middle East, is front and centre, and it’s making things choppy, especially for oil. The escalating conflict between Israel and Hezbollah is a major risk factor, and while the USD impact has been muted so far, any further escalation could spark a flight to safety, sending investors piling into USD. The US-China trade war is another spanner in the works, adding to global growth anxieties and indirectly affecting USD sentiment. Next month, these geopolitical hotspots and the US election will be key drivers of market sentiment, so stay tuned.
Fiscal Policies Related to US and USD
The US fiscal situation is, well, let’s just say it’s a work in progress. That growing budget deficit is a headache, but the Fiscal Responsibility Act shows there’s an effort to get things under control. Balancing growth-focused spending with fiscal prudence is a tricky business. Don't forget those emergency supplemental funding requests, which could add to the fiscal burden. However, these fiscal efforts are facing a serious uphill battle. In October, keep an eye on the Monthly Budget Statement (Week 42) and any post-election policy shifts. These could have a ripple effect on macroeconomic conditions and USD valuation.
Economic Fundamentals Related to US and USD
Growth has slowed from 2023's pace, with Q2 GDP at an annualised 3%. Inflation cooled to a three-year low of 2.5% in August, but core inflation ticked up, suggesting underlying pressures remain. The labour market is showing cracks, with rising jobless claims, while consumer confidence tumbled in Week 39. This raises anxieties, but resilient consumer spending and the surge in August housing starts (Housing starts in the United States soared by 9.6%) offer glimmers of hope. This week’s ISM Manufacturing PMI and Non-Farm Payrolls will be crucial, along with the October 17th Retail Sales for a pulse check on the consumer. Remember the upcoming election—it adds another layer of uncertainty, with potential policy changes affecting the economic trajectory.
Monetary Policy Related to US and USD
The Fed’s 50 bps rate cut shook things up, initially sending the USD south. Powell's cautious comments have provided some support, but the path of monetary policy is far from clear. With the benchmark rate at 5% and two more 25 bps cuts projected this year, it’s a cautious easing, not a full-blown dovish pivot. Markets will be scrutinising every word from the Fed, with the FOMC minutes being crucial. Keep a close eye on upcoming inflation (CPI in Week 41) and jobs data (Non-Farm Payrolls in Week 40)—they will dictate the Fed’s next move. USD volatility is likely to remain elevated.
Macroeconomics Related to US and USD
The US macroeconomic picture is a complex one, with slowing growth, easing but sticky inflation, and a weakening labour market. Geopolitical risks, fiscal anxieties, and the Presidential election all add to the uncertainty. The next month will be pivotal, with key data releases like ISM Manufacturing PMI (Week 40), Non-Farm Payrolls (Week 40), and CPI (Week 41) influencing the Fed and impacting USD. Political developments and their potential economic implications could also prove significant market movers. Expect a volatile ride.
Key Economic Indicators Related to US and USD
Tuesday, October 1st (Week 40): ISM Manufacturing PMI (United States). Forecast: 46.5. In line with the forecast: suggests ongoing manufacturing contraction, reinforcing slowdown narrative and potentially increasing rate cut bets, thus weakening USD. (Leading Indicator)
Wednesday, October 2nd (Week 40): ADP Employment Change (United States). Forecast: 110K. In line with the forecast: signals moderating job growth, pointing to a softening labor market and increasing expectations of further Fed easing, potentially weighing on USD. (Leading Indicator)
Thursday, October 3rd (Week 40): Initial Jobless Claims (United States). Forecast: 220K. In line with the forecast: indicates continued softening in the labor market, raising worries about the US economy and fueling rate cut bets, potentially weakening USD. (Lagging Indicator)
Friday, October 4th (Week 40): Non Farm Payrolls (United States). Forecast: 145K. In line with the forecast: confirms moderating job growth trend, strengthening the narrative of a slowing economy and reinforcing rate cut expectations, potentially pushing the USD lower. (Lagging Indicator)
Thursday, October 10th (Week 41): Inflation Rate YoY (United States). Forecast: 2.40%. In line with the forecast: continued easing of inflation may reinforce the “soft landing” narrative, possibly supporting USD and moderating expectations of aggressive rate cuts. However, sticky core inflation could disrupt this. (Lagging Indicator)
Thursday, October 17th (Week 42): Retail Sales MoM (United States). Forecast: 0.50%. In line with the forecast: suggests ongoing consumer resilience and economic strength, possibly bolstering USD and moderating expectations for further rate cuts. (Leading Indicator)
Friday, October 18th (Week 42): Building Permits Prel (United States). Forecast: 1.6M. In line with the forecast: points to housing market strength, possibly supporting USD and indicating underlying economic resilience. Significant deviations could trigger anxieties, impacting USD. (Leading Indicator)
Conclusion
The Fed's shift towards easing, with rate cuts on the table, clashes with a slowing economy and a mixed bag of economic data. Geopolitical risks, fiscal concerns, and the looming Presidential election make the outlook even more complex. This week, keep your eye on the ISM Manufacturing PMI and Non-Farm Payrolls – vital signs for the US economy. These could shift the Fed's trajectory and impact USD valuation. Three key takeaways for the FX trader:
USD Volatility: Expect choppy waters for the USD. Economic data and political noise will likely keep things volatile. Manage risk carefully!
Fed Focus: Watch the Fed like a hawk. Incoming data will be crucial for their decisions, particularly inflation and labour market indicators.
Geopolitical Risks: Stay on top of geopolitical developments. Escalation in the Middle East or US-China trade tensions could send ripples through markets and impact the USD.
Sources
Federal Reserve
U.S. Bureau of Economic Analysis (BEA)
U.S. Census Bureau
S&P Global
Institute for Supply Management (ISM)
National Association of Realtors
National Association of Home Builders
Standard & Poor's
University of Michigan
Trading Economics