Is US Economy on Track for Soft Landing Amid Stable Jobs Data?

2024-10-10 150 Comments

Last Friday, the U.S. Department of Labor released the employment market conditions for September. The number of new jobs added in September was 2.54 million, higher than the expected 1.47 million, and the unemployment rate dropped from 4.2% in August to 4.1%. The report once again proves that the Federal Reserve may have made a misjudgment, and the interest rate cut of 50 basis points last month was somewhat hasty.

Driven by the triple benefits of the artificial intelligence investment boom, cooling inflation, and expectations of interest rate cuts, as of October 4th, the S&P 500 index has risen by 20.57% this year, the Dow Jones Industrial Average, which is mainly composed of blue-chip stocks, has increased by 12.37%, and the Nasdaq index, which is primarily focused on technology stocks, has risen by 20.83%. The U.S. dollar index closed at 102.275, up 0.52% from the previous trading day; the yield on ten-year Treasury bonds closed at 3.969%, up 3.21% from the previous trading day, indicating that the market believes the Federal Reserve will cut interest rates by 25 basis points on November 7th.

Stable Employment Data - The Federal Reserve's Concerns May Be Excessive

Federal Reserve Chairman Powell has repeatedly stated that there will be a conventional move (a 25 basis point cut) on November 7th, and emphasized that the Federal Reserve's 50 basis point cut in September was to maintain the good momentum of the job market. In fact, Powell and the Open Market Operations Committee misjudged the employment situation at the time, were frightened by the July employment report, and lost their composure, hastily deciding on a significant interest rate cut based on only two months of data. As shown in the figure, the current employment situation in the United States is the same as in the previous quarters, after all, many companies are preparing for the Christmas shopping season, and layoffs are limited to certain industries, which are not enough to affect the entire economy.

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The employment report shows that the number of new jobs added in the industry in September is also exactly the same as before. In the goods production sector, only the construction industry added 25,000 jobs, while the manufacturing industry laid off 7,000 people; the service industry added 202,000 jobs, of which the retail industry added 15,600, health and social work 72,000, and accommodation and catering 76,000; the government sector added 31,000. However, most of them are low-paying jobs, and there are fewer high-paying jobs.

U.S. Stock Financing Lacks Activity, While Bond Financing Performs Normally

The U.S. stock market has been active in trading this year, but the issuance market has been lukewarm. In the first three quarters of this year, the amount of stock financing by U.S. companies was $155.3 billion, higher than the $107.7 billion in the same period last year, but it is likely to be below the level of a normal year. Among them, the issuance of new shares was $25.8 billion, higher than the $17.5 billion in the same period last year; the amount of additional stock financing was $109.8 billion, also higher than last year's $79 billion.

The U.S. corporate bond issuance market has been quite active this year. In the first three quarters, the issuance amount of U.S. corporate bonds was $1.57 trillion (exceeding the level of the whole year last year), compared with $1.18 trillion in the same period last year. The impact of the Federal Reserve's interest rate cut on short-term interest rates is immediate, but the impact on medium and long-term interest rates is smaller, and the interest rate inversion is being repaired.Financial markets have reached a fundamental consensus: inflation has become a thing of the past, and a soft economic landing may become a reality. However, this does not mean that inflation will not rebound. On September 27th, the core Personal Consumption Expenditure (PCE) index, which the Federal Reserve refers to in its decision-making, was announced by the U.S. Department of Commerce to have risen by 2.7%, slightly higher than the 2.6% in August. If the situation in the Middle East continues to deteriorate and the Israel-Iran conflict escalates, oil prices will inevitably rise, putting pressure on prices. Additionally, the recently concluded dockworkers' strike will affect wage costs across the United States, all of which are potential risks for a rebound in inflation.

After more than three years of inflation, ordinary people have suffered greatly. High prices have weakened the purchasing power of household incomes, contradicting the situation reflected in statistical data. According to Federal Reserve data, the median price of a U.S. home was $221,000 in 2009 and rose to $412,000 by 2024. According to the U.S. Department of Energy, the average price of a new car was $23,276 in 2009 and has now risen to $48,000. If calculated based on CPI increases, housing prices should be $322,000, and new cars should be $34,000.

Furthermore, the total debt of the U.S. federal government is out of control and is about to reach $36 trillion. At the beginning of August this year, the total debt of the U.S. federal government just exceeded $35 trillion, and in just over two months, it has now reached $36.68 trillion, equivalent to the economic scale of a moderately wealthy country.

Although the price increase has slowed, the high price level has left ordinary families feeling financially drained. The indiscriminate issuance of various subsidies by the U.S. government is bound to cause the debt scale to spiral out of control. High debt levels are likely the deepest contradiction facing the U.S. economy and will severely limit future economic growth and continuously weaken U.S. national strength.

The future monetary policy of the United States is clear, but there are many variables in the financial market.

The most significant event in the near term is the outcome of the U.S. election on November 5th: who will enter the White House? Which party will control the House of Representatives? Which party will take charge of the Senate? The election results will bring new uncertainties. For example, will U.S. foreign policy change? How will domestic economic policies be adjusted? Because the U.S. President has the highest decision-making power in foreign affairs, changes in foreign policy will have a significant impact on international affairs, while the President is more constrained in domestic policy, and policy adjustments take longer.

In terms of macroeconomics, the CPI data to be announced by the U.S. Department of Labor on October 10th is quite important, and the preliminary estimate of third-quarter GDP growth to be announced by the U.S. Department of Commerce on October 30th is very important. These macroeconomic indicators will have a certain impact on the financial market, but the most important information comes from the quarterly financial reports of U.S. companies. Among them, the performance of technology stocks will determine the direction of the stock market, and the market most wants to know whether the application of artificial intelligence has improved business efficiency. Have the cloud revenues of Microsoft, Google, Amazon, and META (Facebook) increased significantly? Have Apple's operational indicators improved?

After the release of the non-farm employment report, the financial market has formed a strong expectation: the Federal Reserve will cut interest rates by 25 basis points on November 7th, and will continue to cut rates on December 28th. Changes in the bond market are worth paying attention to. Will U.S. medium and long-term bond interest rates continue to rise? Will the interest rate inversion continue to improve? Does it predict an economic recession? Although the market unanimously believes that the U.S. economy may achieve a soft landing, many people disagree, believing that the U.S. economy is strong and inflation has not been completely controlled. Considering various domestic and international factors, inflation is very likely to "reignite," and the U.S. economy may "not land" (no landing).

The Federal Reserve's possible 25 basis point interest rate cut on November 7th has already been reflected in the foreign exchange market, with the U.S. dollar appreciating against almost all non-U.S. currencies. Among them, the exchange rate of the U.S. dollar against the Japanese yen has fluctuated more dramatically, with the U.S. dollar appreciating by 1.22% against the Japanese yen on October 4th (which is quite rare in the foreign exchange market).

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