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Haitong Macro | Liang Zhonghua team
Authors of this report:
李俊 S0850521090002
王宇晴 S0850122070054
梁中华 S0850520120001
·Summary ·
Economy: In the United States, the current U.S. economy is in a continuing slowdown. Recently, the U.S. consumption growth rate, employment level, and PMI prosperity index have all weakened; And the Atlanta Fed also lowered the annualized rate of U.S. GDP in the second quarter significantly. However, at present, the growth rate of US residents' income and expenditure is still relatively stable, and the demand side may still have some support; And the job gap in employment has not deteriorated significantly. The probability of a U.S. economic stall in the short term may be relatively low. The Fed still has a window of time to observe the decline in inflation, and it may still have to wait for interest rate cuts.
The market is still pricing in a rate cut in September. As of July 5, the market expects the Fed to maintain a high probability of interest rate cuts in September, and the expected number of interest rate cuts will remain at 2 times during the year, with an annual rate cut of 50BP. The nominal yield on the 10-year Treasury note retreated to 4.28%, mainly due to the fall in real interest rates.
In Europe, inflation in the eurozone eased in June, the unemployment rate in the eurozone remained low in May, and retail sales growth fell slightly.
Policy: Both the Fed's semi-annual monetary policy report and the minutes of the monetary policy meeting showed that Fed officials believe more data is needed to confirm confidence in cutting interest rates; It remains to be seen how the ECB will cut interest rates next, with some officials believing that two more rate cuts may be required in 2024.
Risk warning: overseas monetary policy adjustment exceeded expectations
1
US: Is the economy slowing down significantly?
How is the U.S. economy doing? Since June, the Citi U.S. economic surprise index has continued to fall, and as of July 4, the economic surprise index has fallen to -47.3 from -8.9 on June 3. In addition, the Atlanta Fed's GDPNow model's estimate of the annualized rate of U.S. GDP in the second quarter has also been significantly downgraded, with the latest estimate of 1.6% on July 3, a significant decline of nearly 1.7 percentage points from the high in mid-June (3.2% on June 13).
Has there been a noticeable slowdown in the U.S. economy? Recently, there have been many data in the United States that have been lower than market expectations. For example, from the perspective of consumption, the month-on-month growth rate of US retail sales in April and May was lower than market expectations, and the final annualized month-on-month growth rate of US personal consumption expenditures in the first quarter was also revised down from 2% to 1.5%, which was lower than the market expectation of 2%. From the perspective of real estate, under the pressure of the Fed's interest rate cut expectations repeatedly postponed and housing mortgage rates remain high, the real estate market continues to be under pressure, and data such as new home sales and existing home sales, and new housing that has started construction also continue to be lower than expected.
In addition, the ISM manufacturing PMI also continued to fall more than expected. In June, the U.S. ISM manufacturing PMI fell 0.2 from May to 48.5, lower than the market expectation of 49.1, and has fallen for three consecutive months. The non-manufacturing PMI fell below the boom and bust line, down 5.0 to 48.8 from May, which was also lower than market expectations (52.6).
However, we don't think we should be too concerned about the weakening of the ISM manufacturing PMI. From a structural point of view, the decline in the ISM manufacturing PMI in June may be mainly dragged down by the price sub-item. In June, the ISM manufacturing PMI price sub-item fell by 4.9 significantly compared with May, reflecting that the current U.S. inflationary pressure has eased to a certain extent, and the new orders sub-item has rebounded significantly, and the demand side may still have some support.
The U.S. job market is also slowing down. The U.S. added 206,000 non-farm payrolls in June, close to the May figure, although the April and May figures were revised down sharply by nearly 110,000. At present, the average number of new jobs has fallen to 177,000 for three consecutive months. But it is higher than Powell's belief that the number of new jobs is about 100,000 per month. Unemployment rose more than expected. The unemployment rate was 4.1% in June, up 0.1 percentage points from May and the highest since November 2021, beating market expectations of 4%. Among them, the unemployment rate of adult men was unchanged in May, and the youth unemployment rate fell by 0.2 percentage points, while the unemployment rate of adult women rose by 0.3 percentage points to 3.7%, the highest since February 2022.
Overall, we believe that the U.S. economy is still on a continuing slowing trend. However, the probability of a U.S. economic stall in the short term may be relatively low. On the one hand, the current growth rate of US residents' income and expenditure is still relatively stable, and the demand side may still have some support. On the other hand, in terms of the job market, the current job gap has not deteriorated significantly. The non-farm payrolls data, even though revised downwards continuously, is still above what Powell believes is desirable, the 4% unemployment rate is still within the Fed's acceptable range, and the job market may still be in an orderly moderation. In addition, the weekly economic index (WEI) released by the New York Fed also reflects that the current economic situation in the United States may remain relatively stable. Therefore, until the job market deteriorates significantly, the Fed may still have a window of time to see what happens when inflation falls, and the Fed may still have to wait for interest rate cuts.
Expectations for interest rate cuts remain stable. As of July 5, the market expects the Fed to maintain a high probability of interest rate cuts in September, and the expected number of interest rate cuts will remain at 2 times during the year, with an annual rate cut of 50BP. Treasury yields retreated to 4.28%. As of July 5, the nominal yield on the 10-year Treasury note was 4.28%, down 8bp from the previous week, or mainly due to the slowdown in non-farm payrolls data, the market's interest rate cut expectations have increased. Among them, the real yield on the 10-year US Treasury note fell by 8bp from the previous week to 2.00%, and the 10-year inflation forecast remained unchanged at 2.28%.
2
Europe: The labor market remains stable
Inflation continues to come down. The year-on-year growth rate of HICP in the euro area fell by 0.1 percentage points to 2.5% in June, in line with market expectations. However, the year-on-year decline in core HICP has stalled and remained at 2.9%, higher than the market expectation of 2.8%. The year-on-year growth rate of PPI in the euro area in May rebounded by 1.5 percentage points from April to -4.2%, showing an upward trend from the second half of 2023, but it is still in the negative growth range.
The unemployment rate remains low. The unemployment rate in the EU-27 countries was 6.0% in May, and the unemployment rate in the 20-nation eurozone was 6.4%, both unchanged from April and continuing to be at historic lows. Overall, the job market in the eurozone remains relatively stable, which also provides a window for the ECB to observe the progress of the decline in inflation. Retail sales growth fell slightly. The year-on-year growth rate of retail sales in the euro area in May fell by 0.3 percentage points from April to 0.3%, still in the positive growth range.
3
Policy: It remains to be seen that the US and Europe will cut interest rates
The Fed still has to wait for a rate cut. The Fed's semi-annual monetary policy report noted that inflation has made modest progress this year, but greater confidence is still needed before a rate cut can be made. The minutes also showed that Fed officials are waiting for more evidence of cooling inflation to confirm confidence in rate cuts. However, Fed officials are currently divided on how long high interest rates should last. Some officials stressed the need for patience, while others worried that the unemployment rate could rise if demand weakened. Fed Chairman Jerome Powell said that U.S. inflation is expected to be at the lower end of the 2%-3% range over the next year, and the unemployment rate of 4% is still low. However, Chicago Fed President Goolsbee said that policymakers should be prepared for interest rate cuts, and if US inflation continues to fall back towards the 2% target, policymakers should cut interest rates, leaving rates unchanged is effectively tightening. It remains to be seen how the ECB cuts interest rates next. ECB President Christine Lagarde said that the ECB still needs time to weigh inflation uncertainty, the current strong labor market allows the central bank to collect more data, and the central bank's anti-inflation work is not yet complete, and it must remain vigilant. ECB Governing Council member Simkus believes that the basis for the July rate cut has disappeared. In terms of the number of rate cuts, Simkus believes that if the data is in line with expectations, the ECB may cut rates twice more in 2024, and the rate cut action should not be limited to the meeting at which the ECB releases its forecasts. ECB Governing Council member Stournaras also believes that it is reasonable for the ECB to cut interest rates two more times this year, and even if it cuts interest rates twice, interest rates will still be at a restrictive level. However, ECB Governing Council member Wunsch said that the first two rate cuts were relatively easy, and a convincing case would be needed for the ECB to cut rates more than twice in 2024. ECB Governing Council member Makhlouf believes that the ECB is expected to cut interest rates once in 2024, and the expectation of two rate cuts within the year may not be realistic. Risk warning: overseas monetary policy adjustment exceeded expectations
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