News of the week summary - 11/03/2024

Weak jobs report in the US 

In October, the US economy added only 12 000 jobs, the smallest increase since President Joe Biden took office. This was far below forecasts of 100 000 job gains and a sharp drop from September’s revised figure of 223,000. The Bureau of Labor Statistics attributed the slowdown primarily to hurricanes and a strike at Boeing, where 33 000 workers walked out. Despite the weak job growth, the unemployment rate held steady at 4.1%, indicating underlying resilience in the labor market.

This report, released just days before the US election (set to take place next Tuesday), has fueled political commentary. The Trump campaign used the data to criticize the Biden administration's economic policies, while Biden and the White House emphasized the temporary nature of these disruptions and projected a rebound in November as recovery efforts continue.

Financial markets largely took the report in stride. The weak job numbers reinforced expectations for an interest rate cut from the Federal Reserve, anticipated to lower borrowing costs by 0.25% in December. Bond yields initially fell as markets adjusted to these expectations, with the two-year Treasury yield briefly declining before stabilizing at 4.16%. Meanwhile, the stock market reacted positively, with the S&P 500 rising by 1.1% and the Nasdaq Composite up by 1.2%.

Economists believe this shows that the labor market remains stable but is no longer overheated, aligning with the Fed’s goal of achieving a “soft landing” — a gradual economic slowdown without severe job losses or recession. 

Indeed, the US economy grew steady, at an annualized rate of 2.8% in the third quarter, showing American consumers are resilient, even as inflation pressures remain. While growth was slightly below economists' forecast of 3%, it still signals economic strength.

Consumer spending, a major driver of the economy, rose by 3.7%, indicating people are still willing to spend despite inflation. This spending boost helped offset other areas like residential investment, which dropped by 5.1%. 

This data further suggests the economy is performing well and shows fewer signs of a potential recession in the near term.

Eurozone inflation rise suggests modest December rate cut 

In October, Eurozone inflation reached 2%, aligning with the European Central Bank's (ECB) target and suggesting a more restrained approach to interest rate cuts. This increase, slightly above predictions of 1.9%, marks a rise from 1.7% in September. Strong third-quarter economic growth and low unemployment at 6.3% also support the possibility of a smaller, quarter-point reduction.

The ECB’s current deposit rate — the interest rate it pays to banks on their deposits — is 3.25%. Lowering this rate makes borrowing cheaper, which can boost economic activity, but reducing it too quickly could risk inflating prices further. Markets now expect an 80% chance of a modest, 0.25% rate cut in December, compared to a previous 60% likelihood. 

Core inflation, which excludes categories like food and energy to show underlying price trends, held steady at 2.7%, above forecasts. Persistent inflation in services at 3.9% highlights ongoing pressures in specific sectors, despite lower energy prices from a year ago. With inflation likely to stay elevated through year-end, the ECB appears poised to make small, balanced adjustments to support growth while managing inflation.

On the growth end, Eurozone's economy has shown a slight boost, growing by 0.4% in Q3, surprising analysts who predicted lower numbers. The ECB, which had cut interest rates in June due to concerns over economic sluggishness, faces mixed signals. Germany’s economy, while managing 0.2% growth, remains mired in stagnation due to structural issues, particularly in manufacturing. 

In contrast, Spain stands out, with a projected 2.7% annual growth for 2024, attributed to immigration, tourism, and public spending. Despite Spain's reliance on government consumption and low-skilled labor, it is becoming a top performer among advanced economies. Increased foreign investment and strong export performance in sectors beyond tourism contribute to this growth.

China’s factory activity grows

In October, China’s factory activity expanded slightly for the first time in six months, with the purchasing managers’ index (PMI) reaching 50.1. A PMI above 50 signals growth from the previous month, so this uptick is an encouraging sign for policymakers preparing a major fiscal package to boost the economy.

The improvement comes as China’s government implements stimulus measures, starting with interest rate cuts and stock market support in September, which helped lift economic activity. However, the most crucial support is expected from next week’s anticipated fiscal package, which could provide up to 10 trillion yuan (about $1.4 trillion) over three years. Analysts say these funds will aim to restore consumer confidence, impacted by a slow property sector, and support local governments that depend on property sales for revenue.

Despite these positive signs, China faces a challenge: export activity hit an eight-month low, indicating weaker demand for Chinese goods globally. Domestic demand will need to recover to balance potential declines in exports, especially if international trade tensions rise.

With economic growth at 4.6% year-on-year for the third quarter—below the 5% target—the upcoming stimulus package may focus on easing local government debt. However, simply replacing old debt with new debt wouldn’t increase spending, so further measures may be needed to achieve sustained growth.

Argentinian central bank cuts rates to 35%

Argentina's central bank cut its benchmark interest rate to 35%, marking the seventh reduction since President Javier Milei took office in December. When Milei began his term, the rate was at 133%. This surprise move reflects growing confidence in Milei's economic reforms, which have been aimed at combating Argentina's persistently high inflation. Although the annual inflation rate remains above 200%, monthly inflation has notably decreased from over 25% in late 2023 to approximately 3.5% currently.

The central bank cited a more stable liquidity environment and reduced inflation expectations as key drivers for the rate cut. Moreover, Milei’s government has reinforced its fiscal policy, helping to address the country's long-standing fiscal deficit through substantial spending cuts. While these austerity measures have brought down inflation and the country’s risk index, they have also intensified a recession and pushed poverty levels above 50%.

Milei's policies have included ending subsidies for energy and transportation, which has reduced public spending but also contributed to economic hardship. Despite these challenges, Argentina's bond prices rose by an average of 2% following the rate cut, suggesting positive sentiment among investors regarding Milei's strategy to stabilize the economy.

UK Gilts face surge in volatility this week

British government bonds, or "gilts," experienced significant volatility recently following Labour’s tax-and-spend budget announcement, which has raised inflation expectations. Two-year gilt yields rose by 0.26 percentage points over the week, the sharpest weekly increase since June 2023, while 10-year yields increased by 0.21 percentage points, reaching a yearly high of 4.526% on Thursday before stabilizing on Friday. The pound fell against the euro, marking its largest weekly loss in three months, though it edged up slightly later in the week.

Labour's budget plan, projected to add £70 billion annually to public spending, combines higher taxes and increased borrowing, pushing to a revise of next year’s inflation forecast to 2.6%, up from 1.5%. Investors have scaled back their expectations for interest rate cuts, now anticipating about 0.90 percentage points of reductions by the end of 2025, compared to over 1 percentage point before the budget announcement.