Weekly Update 08/09/2024: US Weekly Jobless Claims Provide Some Reassurance as Earnings Season Rolls On
- Zoetis releases earnings beating profit and revenue expectations while raising guidance
- Disney releases earnings beating profit and revenue expectations as streaming business turns profitable
- Amgen releases earnings beating revenue expectations on strong sales of legacy drugs
- RTX wins another European Patriot Missile contract
- McKesson releases earnings beating profit expectations; also announces a $4 billion increase to share buyback program and a 15% dividend increase
- CACI International releases earnings beating profit and revenue expectations on strong contract wins
Domestic Economic News
Initial applications for US fell last week by the most in nearly a year, potentially alleviating some concerns that the labor market is cooling too fast following last week’s disappointing jobs report. Initial claims decreased by 17,000 to 233,000 in the week ended Aug. 3, according to Labor Department data released Thursday. That was helped by fewer applications in states that had registered large increases in recent weeks, such as Michigan, Missouri and Texas. Continuing claims, a proxy for the number of people receiving unemployment benefits, edged up to 1.88 million in the week ended July 27, according to Labor Department data released Thursday. While both initial and continuing applications for unemployment benefits have trended higher this year, they’re still hovering around 2019 levels. The decline in initial applications may help reassure markets that the workforce is simply reverting to its pre-pandemic trend rather than rapidly deteriorating. That was the consensus until last week, when the jobs report showed employers substantially scaled back hiring in July and the unemployment rate rose for a fourth month, triggering a key recession indicator.
That contributed to a global market selloff and prompted calls for the Federal Reserve to start lowering interest rates before its next scheduled policy meeting in September — which economists say would be highly unlikely. Instead, several expect a 50-basis-point rate cut next month as opposed to the typical 25, though officials are likely to push back on such a move. Stock futures and Treasury yields rose after the report. Since Friday’s jobs report, central bankers have said they won’t overreact to one month of data, but acknowledge that the employment side of their dual mandate is in greater focus since inflation has largely eased. Chair Jerome Powell said before the jobs report that the labor market is slowly getting back to its pre-pandemic levels. Other figures support that notion, given still-elevated job openings and few layoffs — though some high-profile companies like Dell Technologies Inc. and Intel Corp. have let workers go recently. Jobless claims data can be noisy from week to week, especially at this time of year when they’re prone to swings due to school closures for summer break and retooling at auto factories. The four-week moving average, a closely-watched metric that helps smooth out the data, moved up to 240,750, the highest in a year. Initial claims, before adjustment for seasonal factors, dropped by around 13,600 to 203,054, the lowest since May. Claims in Texas have subsided recently after spiking when Hurricane Beryl made landfall in early July, but the effects of Hurricane Debby on the Southeast may surface in next week’s data.
US consumer borrowing increased in June by less than forecast, reflecting smaller credit-card balances. Total credit outstanding rose $8.9 billion after an upwardly revised $13.9 billion advance in May, according to Federal Reserve data released Wednesday. The median forecast in a Bloomberg survey of economists called for a $10 billion increase. The figures aren’t adjusted for inflation. Revolving credit, which includes credit cards, declined by nearly $1.7 billion, the most since early 2021. Non-revolving credit, such as loans for vehicle purchases and school tuition, rose $10.6 billion, the most in a year. Despite the decline in revolving credit, Americans have been increasingly relying on credit cards and other forms of financing to support spending as wage growth slows, pandemic savings fade and higher prices continue to bite. With interest rates still at a two-decade high, economists worry that consumers tapping credit — especially lower-income ones — may not be able to sustain spending for much longer. A recent Philadelphia Fed report showed the share of credit-card balances past due reached a record high at the start of the year in data back to 2012. Separate data from credit-score provider VantageScore found that delinquency rates for auto loans and credit cards were above pre-pandemic levels in June. Consumer spending is the biggest driver of US economic growth, so Fed officials will consider the health of household finances as they decide whether to start lowering borrowing costs at their next policy meeting in September. As mentioned in the prior paragraph, after worse-than-expected labor data last week triggered a market selloff, traders and many economists now anticipate central bankers to lower rates by half a percentage point next month — as opposed to their typical quarter-point moves. Our view is that such a move is likely justified given the restrictive nature of where the Fed currently has positioned rates.
Interest Rate Insight and the Fed
We wanted to share this interesting take on the forecast for the Fed’s interest rate path this year from Bloomberg: “Bloomberg Economics has updated its outlook for the Fed’s rate path. We now see the Fed cutting policy rates by 50 basis points in September, followed by 25-bp cuts at each of the following two meetings, for a total of 100 bps in rate reductions this year. The recent rise in the unemployment rate likely came as a surprise for the Fed, but it has evolved according to our forecasts. Still, two recent market developments prompt us to revise our rates outlook: First, the sudden, sharp appreciation in the yen has driven a wave of global deleveraging of risk assets in recent days; second, many market players have quickly abandoned the soft-landing narrative. We think both developments will contribute to tighter global credit conditions over the rest of the year, prompting the Fed to rethink the restrictiveness of policy rates ultimately to prioritize economic growth over its inflation mandate. It’s now widely agreed by markets and economists that the Fed is behind the curve in cutting rates, given its dual mandates of price stability and full employment. But by how much? Recent economic data have evolved very close to what Bloomberg Economics forecast earlier this year — that core PCE inflation would stabilize in the 2.7%-2.8% range in 2H, and unemployment would touch 4.5% by year-end.”
They continued, “We started the year forecasting 125 bps in Fed rate cuts this year, a forecast we revised down as the year went on to 50 bps — as we noted that policy seemed to suggest the FOMC believed the neutral real interest rate (“r-star”) had risen since the pandemic began. The recent deterioration in labor-market data and the sharp market correction have led many market participants – and, most likely, several FOMC officials — to rethink the restrictiveness of policy. That may sow doubts about the idea that the neutral rate is substantially higher than 2.5%. To be clear, two leading members of the FOMC — Fed Governor Christopher Waller and New York Fed President John Williams — have been outspokenly skeptical that the neutral rate has risen much. The recent deterioration in the labor market appears to vindicate their views, and likely will bring more FOMC members to their side. That likely shift in perception is the key reason we’re changing our Fed outlook. If the majority of the committee come to believe r-star didn’t rise much above 2.5%, then the FOMC will more quickly come to the conclusion that current policy is too restrictive — and will move to cut rates more quickly. Assuming the FOMC reverts back to the view that the longer- term neutral rate is 2.5% — and assuming our forecast of a 4.5% unemployment rate for 4Q is correct — our estimated reaction function suggests the Fed should have cut by 37 bps by the time of the June 11-12 meeting, and by 70 bps by the time of the Sept. 17-18 meeting. The policy rule says the Fed should cut by a total of 100 bps this year.”
They added, “To get back in front of the curve, ideally the committee should go immediately for a 25-bp intermeeting cut, followed by 25-bp cuts at the September, November, and December FOMC meetings — for a total of 100 bps in cuts this year. But the FOMC decision-making process is not agile. Furthermore, unfavorable base effects for the core PCE deflator will likely push up the 12-month change – the Fed’s target — to 2.8% by end-2024, from 2.6% in June. Even though our baseline forecast is for the unemployment rate to reach 4.5% by October, we think stalling progress on disinflation in the core PCE deflator may limit how quickly the Fed can cut this autumn. For those reasons, we expect a 50-bp catch-up cut in September, followed by 25-bp cuts at the November and December FOMC meetings. The risks tilt toward more cuts. We think the bar for intermeeting cuts is high – a stock market decline of 15%-20% won’t be enough to prompt emergency cuts. For that, the Fed likely would need to see a meaningful widening in credit spreads, and evidence of trouble in global dollar funding. The current situation is far from that.”
Impactful International News
In positive international economic news, German factory orders rose in June — snapping a five-month slump for Europe’s largest economy. Demand increased 3.9% from May, when it dropped a revised 1.7%, data Tuesday showed. That advance topped all economist estimates in a Bloomberg survey, which predicted a more moderate gain of 0.5%. Driving factors included the automotive industry, while sectors manufacturing fabricated metal products and other transport equipment also contributed. Domestic orders were particularly strong. The reading may offer some comfort for Germany’s long- suffering manufacturing sector. It comes, though, after data last week showed the economy unexpectedly shrank in the second quarter, while business sentiment also dipped. The Bundesbank warned in its July report that “temporary hopes that industrial activity would soon pick up were distinctly dampened when data for May were published.” It nevertheless predicted slightly firmer economic activity in the third quarter. Services are outperforming manufacturers, with historic early-year wage rises boosting consumers’ mood. Pay gains are moderating, however, and inflation is proving sticky. The economy’s struggles are proving a headache for the country’s coalition government, whose term has been dominated by stagnating or shrinking output. In another potential headwind, Finance Minister Christian Lindner suggested last week that more fiscal tightening may be necessary, despite a recent hard-won compromise over the budget.
Company Events
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