News of the week summary - 04/07/2024

US labor market shows impressive growth

The latest employment data from the US Labor Department has exceeded expectations, with employers adding 300 000 jobs in March, surpassing the forecast of 200 000. This job growth has driven down the unemployment rate to 3.8%, lower than the predicted 3.9%.

Investors reacted to this positive news by scaling back their expectations of imminent rate cuts by the Federal Reserve. Bond yields rose, indicating reduced bets on multiple rate cuts this year (lower future rates mean the bonds issued at current high interest become more valuable as they generate higher payments). The two-year Treasury yield increased to 4.71%, while stock markets rallied, with the S&P 500 (an index composed of the 500 biggest American companies traded on the stock market) rising by 1.3%.

Previously, there were expectations of three rate cuts this year, but now futures markets suggest a lower probability of a rate cut by June, approximately 60% compared to over 70% before the release of the employment data.

With such strong job numbers and expectations of continued high inflation, the Fed is unlikely to cut rates soon. Fed Chair Jay Powell emphasized the need for greater confidence in falling inflation rates before considering rate cuts. These positive employment figures also serve as a boost to President Joe Biden's reelection campaign, highlighting his administration's strong record on job creation. However, public sentiment regarding the economy remains mixed, with concerns over inflation persisting despite the robust job market.

Food prices fall in OECD countries

Data from the OECD reveals a 5.3% decline in food inflation across 38 industrialized countries, marking its lowest level since October 2021. This decline comes after a period of heightened inflation triggered by various factors, including Russia's invasion of Ukraine, energy cost spikes, supply chain disruptions due to Covid-19, and droughts. Agricultural commodity prices have dropped notably over the past two years, serving as a disinflationary force even at the retail level. Factors contributing to this decline include normalized supply chains, lower gas prices, and the resumption of Ukraine's grain exports via the Black Sea corridor.

Recent data from the UN Food and Agriculture Organization also indicates a general decrease in the prices of food staples such as cereals, sugar, and meat, although prices for vegetable oils like soy, sunflower, and rapeseed have risen.

This easing of food price inflation is observed across various industrialized countries. In the US, annual food price inflation dropped to 2.2% in February, down from its peak of 11.4% in August 2022. Similarly, in the eurozone, the annual rate of food and non-alcoholic beverage price increases eased to 2.7% in March, the first reading below 3% since November 2021.

German inflation slowdown fuels rate cut expectations

A recent decrease in inflation in Germany has sparked optimism that the European Central Bank (ECB) might soon consider cutting interest rates amidst the current cost of living crisis. In March, consumer prices in Germany rose by 2.3%, down from 2.7% in the previous month, marking the lowest level of inflation since June 2021, and a figure closer to the traditionally sought-after 2% inflation. This decline was primarily driven by falling energy and food costs, as well as a slower increase in goods prices, which offset the acceleration in services prices.

Core inflation, which excludes energy and food, also decreased from 3.4% to 3.3%. Similar trends of lower-than-expected inflation rises have been observed in France, Italy, and Spain, increasing hopes for a continued decrease in eurozone-wide inflation when the data is released.

Despite these developments, the ECB is expected to maintain its benchmark deposit rate at a record high of 4% for the seventh consecutive month in its upcoming meeting, as policymakers previously hinted that June might be the earliest they would consider cutting borrowing costs. They expressed the need to monitor wage pressures, which are expected to be released between the upcoming meeting and the subsequent one in June, before making any decisions.

Christine Lagarde, president of the ECB, emphasized the significance of first-quarter wage data and the bank's new forecasts in June as crucial factors influencing any policy adjustments. However, some members of the ECB's governing council have suggested the possibility of advocating for a rate cut if inflation continues to decline faster than expected and if the eurozone's economic activity remains stagnant.

World Bank warns South Asian countries of structural challenges they face

The World Bank has issued a warning that India and its neighboring countries in South Asia are facing a challenge in creating sufficient employment opportunities to support their young and growing populations. Despite enjoying the world's fastest economic growth, the region is struggling to generate enough jobs, putting its demographic dividend at risk.

South Asia, which includes countries like Pakistan, Bangladesh, and Sri Lanka, is projected to experience strong economic growth, with a forecast of 6% growth in 2024 and 6.1% in 2025. India, now the most populated country globally with 1.4 billion people, is expected to have grown by 7.5% in the fiscal year ending in March.

However, the World Bank highlights that the employment ratio in the region, indicating the share of the working-age population in jobs, is declining. This trend suggests a failure to create adequate roles for the region's young workforce. 

In South Asia, the employment ratio stood at 59% last year, considerably lower than the 70% observed in other emerging markets. Notably, South Asia is the only region where the share of working-age men employed has decreased over the past two decades. Private sector growth, particularly in manufacturing and services, has not been sufficient to absorb workers leaving the agricultural sector. The challenge is exacerbated by low female employment rates in many South Asian countries, including India, where less than 40% of women are employed. Job creation is also important for social cohesion at the macroeconomic level.

In India, unemployment remains a pressing issue despite rapid economic growth, as the youth unemployment rate stood at a concerning 45.4% in 2023. Ahead of the country's general elections, Prime Minister Modi's opponents have criticized the government's handling of joblessness, accusing it of attempting to conceal the problem. The leader's administration argues that it has implemented significant reforms to promote job creation, including initiatives to bolster manufacturing and heavy investments in infrastructure development. However, without further reforms to enhance job opportunities, such as increasing trade and easing access to land for private businesses, South Asian countries are at risk of falling short of their development targets.

House prices decline in Europe

House prices in Europe experienced a decline for the first time in a decade, according to data from the EU statistics agency Eurostat. In the Eurozone, residential property prices fell by 0.7% in the fourth quarter compared to the previous quarter, and by 1.1% over the entire year. 

The decline in house prices was particularly pronounced in Germany and Luxembourg, which experienced a 8.4% and 9.1& annual drop, while Finland and Sweden saw a more than 5% decline. However, some countries experienced significant price surges, including Croatia, Poland, and Portugal, where prices rose by around 10%.

Economists attribute the divergent trends in housing markets to varying economic growth rates across different European regions. Southern and eastern European countries, experiencing stronger economic growth, saw their housing markets continue to rise, while core countries like Germany and France faced stagnant or weak growth.

Factors such as supply dynamics and country-specific incentives also played a role. For instance, Croatia benefited from increased investment following its adoption of the euro in January 2023, while Portugal saw a boost from tax incentives for second home buyers. Additionally, some countries experienced more significant corrections in house prices due to previous overvaluation, while others, like Spain, had not fully recovered from previous housing market downturns.