US Economy faces soft landing with moderation in key indicators: JP Morgan

Recent macroeconomic data for October has indicated a sequential moderation in the US economy in the early part of the fourth quarter.

According to a JP Morgan report, despite experiencing robust Gross Domestic Product (GDP) growth of nearly 5 per cent in the third quarter, projections suggest a slowdown with expected growth rates of 1-2 per cent in the fourth quarter and 0-1 per cent in the first half of 2024.

This scenario points toward a soft landing expected to occur in early 2024. Against this backdrop, the Federal Open Market Committee (FOMC) opted to maintain the funds rate at 5.25-5.5 per cent, a decision that was widely anticipated and deemed appropriate as it allows for further evaluation of the effectiveness of the significant tightening measures already implemented in curbing inflation.

Labour market conditions appear to be easing, with October witnessing the addition of 150,000 payrolls, marking the lowest monthly gain since 2020.

This figure falls significantly below the average monthly increase of 258,000 over the preceding 12 months. The unemployment rate inched up to 3.9 per cent, which is half a percentage point higher than its earlier low for this year.

A decrease in the average workweek to 34.26 hours and fewer sectors contributing to job growth further support the notion of cooling labour demand.

Interestingly, much of the job growth in October was attributed to the healthcare sector (58,000) and local governments (38,000), while construction employment continues to reach new heights, with an additional 23,000 jobs added.

In contrast, manufacturing employment saw a decline of 35,000, which includes 33,000 autoworker vacancies, potentially subject to reversal in the coming months based on tentative agreements with the United Automobile Workers (UAW).

The moderation in payroll growth aligns with a slowdown in wage gains, which offers a favourable outlook concerning inflation.

The employment cost index, a comprehensive labour cost measure, decreased to 4.3 per cent year over year in the third quarter, compared to 4.5 per cent in the second quarter.

Similarly, the payrolls report indicates a deceleration in average hourly wage growth, dropping to 4.1 per cent in October from 4.3 per cent in September.

Across labour markets, the ISM surveys for both Manufacturing and Services experienced a decline in October. Manufacturing sectors have shown signs of downturn for a significant part of the year.

While conditions have not significantly deteriorated recently, they remain on the lower end of historical ranges. In contrast, International Safety Management (ISM) services reports indicate ongoing healthy activity levels, although signs of a softening trend are emerging compared to previously robust levels of activity.

The housing market has witnessed a decrease 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 uptick to 0.8 per cent (from 0.7 per cent) and 6.6 per cent (from 6.3 per cent), respectively, in the last quarter.

In the financial markets, last week saw a steady uptick in equities with daily gains, culminating in a strong finish on Friday. Notable catalysts for this upturn included a lower-than-expected October payrolls report and a robust rally in Treasuries.

The Volatile Index (VIX) retreated below 20, and commodities such as oil and gold, along with the US dollar, all witnessed declines.

As the third quarter earnings season reaches its concluding stages, an aggregate view reveals mixed results concerning revenues and earnings per share (EPS) relative to expectations, both marking a 2 per cent increase year over year.

The primary contributor to this earnings weakness has been commodity sectors. Excluding energy and materials, third-quarter sales and EPS surged by 4 per cent and 8 per cent, respectively.

Last week also showed favourable developments in credit markets, with tightening of high-grade bond spreads by 2-3 basis points and a 40 basis point rally in high-yield bond spreads.

The combination of the Federal Reserve's ongoing pause, the Treasury's announcement of supply less than expected, and macroeconomic data indicating a growth moderation collectively contributed to a strong rally in Treasuries.

Notably, 10-year treasury yields saw their most significant three-day decline since the onset of the pandemic.

In the realm of high-grade bond issuance, October and year-to-date figures are largely in line with prior year volumes. October issuance totalled USD 85 billion, a marginal 3 per cent below the past four-year average of USD 88 billion.

In contrast, high-yield supply experienced moderation in October, particularly in the face of elevated rate volatility. The month witnessed USD 9.4 billion in high-yield bond issuances, excluding refinancing (USD 2.6 billion).

The recent surge in large M&A announcements resulted in October's volumes reaching nearly USD 250 billion, marking the most active month for North American M&A since December 2021.

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

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