US economy faces soft landing with moderation in key indicators: JPMorgan

US economy faces soft landing with moderation in key indicators: JPMorgan

Recent macroeconomic data for October pointed to a sequential moderation in the US economy in the first part of the fourth quarter.

According to a JP Morgan report, despite strong GDP growth of around 5 percent in the third quarter, forecasts point to a slowdown with expected growth rates ranging between 1-2 percent in the fourth quarter and 0-1 percent. 100 in the first half of 2024.

This scenario suggests a soft landing expected to occur in early 2024. Against this background, the Federal Open Market Committee (FOMC) chose to maintain the funds rate at 5.25-5.5 percent, a decision that was widely expected and considered appropriate. Because it allows for further evaluation of the effectiveness of the important tightening measures that have already been implemented to reduce inflation.

Labor market conditions appear to be improving, as October saw the addition of 150,000 jobs, representing the lowest monthly gain since 2020.

This figure is significantly lower than the average monthly increase of 258,000 over the previous 12 months. The unemployment rate rose to 3.9 percent, half a percentage point higher than its lowest level earlier this year.

The decline in the average workweek to 34.26 hours and fewer sectors contributing to job growth supports the idea of ​​cooling labor demand.

Interestingly, most of October’s job growth was attributable to the health care sector (58,000) and local governments (38,000), while employment in the construction sector continues to reach new heights, with an additional 23,000 jobs added.

In contrast, manufacturing employment saw a decline of 35,000, including 33,000 job openings in the auto industry, and are likely at risk of reversal in the coming months based on tentative agreements with the United Auto Workers (UAW).

The moderation in salary growth corresponds with a slowdown in wage gains, providing a positive outlook regarding inflation.

The Labor Cost Index, a comprehensive measure of labor cost, fell to 4.3 percent year-on-year in the third quarter, compared to 4.5 percent in the second quarter.

Likewise, the jobs report indicates a slowdown in average hourly wage growth, falling to 4.1 percent in October from 4.3 percent in September.

Across labor markets, ISM surveys for both manufacturing and services saw declines in October. Manufacturing sectors have shown signs of contraction for much of the year.

Although conditions have not deteriorated significantly recently, they remain at the lower end of historical ranges. In contrast, ISM reports continuing healthy activity levels, although there are signs of a declining trend compared to previous strong activity levels.

The housing market has seen a decline in affordability over the past year due to a sharp increase in mortgage rates coupled with historically high home prices resulting from limited supply and low vacancy rates.

However, there is some potential relief on the horizon as single-family and multifamily housing vacancies saw a slight rise to 0.8 percent (from 0.7 percent) and 6.6 percent (from 6.3 percent), respectively, in the latest quarter.

In financial markets, the past week has seen stocks steadily rise with daily gains, culminating in a strong finish on Friday. Notable catalysts for the rise included a lower-than-expected October payrolls report and a strong rise in Treasuries.

The volatile index (VIX) fell below 20, and commodities such as oil and gold, along with the US dollar, saw declines.

As the third-quarter earnings season reaches its closing stages, the overall presentation reveals mixed results in terms of revenue and earnings per share (EPS) compared to expectations, both of which represent increases of 2 percent year over year.

The main contributor to this earnings weakness was the commodity sectors. Excluding energy and materials, third-quarter sales and earnings per share increased 4 percent and 8 percent, respectively.

Last week also showed positive developments in credit markets, with high-quality bond spreads tightening by 2-3 basis points and a 40 basis point rise in high-yield bond spreads.

The combination of the Federal Reserve’s continued pause, the Treasury’s lower-than-expected supply announcement, and macroeconomic data indicating moderating growth have collectively contributed to a strong rally in Treasuries.

It is worth noting that 10-year Treasury bond yields witnessed their largest decline in three days since the beginning of the pandemic.

In the area of ​​high-quality bond issuance, the October and year-to-date numbers are largely in line with the prior year’s volumes. October issuances totaled US$85 billion, 3 percent below the previous four-year average of US$88 billion.

In contrast, high yield supply moderated in October, particularly in the face of high price volatility. The month saw $9.4 billion in high-yield bond issuances, excluding refinancing ($2.6 billion).

The recent increase in large M&A announcements brought October volumes to nearly $250 billion, the most active month for North American M&A since December 2021.

This week, financial markets anticipate ongoing developments and are adjusting strategies in response to the evolving economic landscape.

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(Tags for translation) US economy

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