U.S layoffs Speaks Loudly 50 to 75 bps rate Cut

 

The U.S. market has been in a slowdown phase for a longer time but it was hiding. The corporate has been struggling and the same is evident from the number of layoffs in CY-2024. Numerous companies have announced layoffs in 2024, including significant cuts at firms like Tesla, Amazon, and Microsoft, among others. These layoffs span various industries and highlight broader economic challenges.

 When people stop consuming McDonald's and shift to some other foodstuff then it's well clear that the U.S inflation is choking the households, furthermore, customer traffic at US fast-food restaurants fell 2% in the first half of the year compared to the same period a year ago, according to Circana.

Looking at the number of companies cutting down jobs in 2024 its expected that in September 2024 we will witness a 0.5 to 0.75 rate cut from the U.S.

Overall, the report highlights a challenging economic environment characterized by weaker job growth, rising unemployment, persistent inflation, and significant market volatility. The anticipation of interest rate cuts and widespread layoffs further underscores the concerns about a potential economic slowdown or recession.

 The U.S. July Jobs Report presents a concerning picture of the economy. Here's a summary of the key points:

Job Growth: The economy added only 114,000 jobs in July, the lowest since January 2021, following a significant downward revision for June from 206,000 to 179,000 jobs. This marks a downward revision of 27,000 jobs.

Unemployment Rate: The U.S. unemployment rate rose from 4.1% to 4.3%, reaching the highest level since October 2021.

Inflation Concerns: The 3-month annualized core Producer Price Index (PPI) inflation rose to 5.0% in June, the highest since 2022, and more than doubled in six months. Core PPI inflation increased to 3.0% in June and has risen in four out of the last five months, signalling that inflation is still elevated.

Mortgage Rates: The average rate on a 30-year mortgage fell 22 basis points to 6.40%, the lowest since April 2023. The recent high was 7.52% in late April 2024. The average interest rate on personal loans is 12.36 per cent, as of July 24. In 2021, the average rate was just 9.38 per cent, when the fed funds rate was near zero.

Market Reaction and Rate Cut Expectations: Prediction markets are now anticipating four interest rate cuts in 2024, with a 50 basis point to 75 basis points cut expected at the September meeting. There's even a 31% chance of five or more rate cuts in 2024, suggesting growing concerns about an economic recession.

Stock Market Performance: The S&P 500 has lost $3 trillion in market capitalization since July 16th, indicating significant market turmoil. The Nasdaq 100 index has entered correction territory, down over 10% from its all-time high.

 Revisions in Job Reports: Revisions have consistently lowered job growth figures, with 5 out of the last 6 and 10 out of the last 14 jobs reports being revised downward, reflecting weaker-than-expected employment growth.

 Federal Reserve Actions: The Fed's balance sheet has decreased by $1.71 trillion since April 2022 but remains $3.1 trillion higher than pre-COVID levels. The pace of balance sheet reduction slowed from $95 billion to $60 billion per month in June. The govt is on pace for spending $1.5 trillion for interest payments on the debt during the next 12 months.

The govt collects about $5 trillion in revenue annually, so that means 30% of all revenue is going to interest payments. By late 2026 we will have $40 trillion in debt. If rates stay at 5% that will be about $2 trillion per year in interest payments. Our debt is out of control and swallowing the govt budget.

Market Dominance and Volatility: The U.S. stock market remains dominant, accounting for nearly 50% of global market capitalization. Historical data shows that the Volatility Index (VIX) typically rises during election years, leading to market corrections.

 Conclusion:

The weaker-than-expected job growth and rising unemployment rate highlight potential challenges for the U.S. economy. Inflationary pressures remain concerning despite a decline in CPI inflation, as core PPI continues to rise. The expectation of multiple rate cuts indicates market anticipation of economic slowdown or recession. The stock market's recent performance suggests investor caution and potential volatility ahead.

The rate cut is now expected to be 0.75 but there is nothing to bet now since the Fed will not take action based don one-month data. Hence more data is required to firm up the rate cut for next month. Further, if the rate cuts are being delayed further then equity markets will react negatively since the current optimism for rate cuts is so high that every bad economic news is being discounted. This discounting might take a reverse hit. The biggest advantage of the rate cut would be that funds will flow to India and emerging markets as we have seen historically.