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US Economic Growth

Market Update

23.09.2024

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What happened last week?

US

  • The Fed initiated its rate-cutting cycle with a jumbo 0.5 percentage point cut
  • More US borrowers fell behind on their credit card and car loan bills

Global

  • Central banks in Japan and the UK kept rates where they were
  • BlackRock and Microsoft formed a fund to invest in AI infrastructure

    Why It Matters

    The Fed’s bold 0.5 percentage point cut was a sign of confidence the inflation’s tamed, freeing them up to focus on protecting jobs and, as a result, the economy. Naturally, some have taken the jumbo cut as a sign of trouble. But most investors aren’t sweating it: they see this as a return to normal rate levels, not a rescue mission. So confident that the Fed is focused on economic growth, and with lower rates increasing the current value of companies’ future cash flows, investors pushed stocks higher after the news.


    Credit card and car loan delinquencies – late or missed payments, essentially – hit their highest levels in a decade this year. After all, rising interest rates and a higher cost of living have made it tougher for Americans to keep up with their payments. That’s especially true for lower-income borrowers who haven’t reaped the rewards of rising asset prices or higher rates on savings accounts. That’s piling pressure on companies that lend to consumers, rather than other firms – a reminder that despite the positive headline stats, some financial stress is bubbling under the surface.

    The Bank of England let the Fed hold the limelight, keeping the UK’s own rates at 5% this week. It makes sense to hold rates a little higher for now: inflation in the UK, especially in the services sector, is still stubborn, while wage growth – a key driver of inflation – is higher than hoped. The European Central Bank is taking the slow and steady route, too, keeping the region’s rates where they were for now. On the other end of the spectrum, the Bank of Japan – the only major central bank that’s still in hiking mode – hit pause this month, playing it safe after its last hike sent shockwaves through global markets.


    BlackRock, Microsoft, and Abu Dhabi’s MGX have formed a fund to invest in AI infrastructure investments like data centres and energy projects. And to line its coffers, the trio are looking to raise $30 billion from private equity investors. Nvidia will also bring its AI expertise to the table, helping build out the necessary data centres and factories. That’s a hot pocket of the market right now. Demand for AI is on a tear, and those super-smart systems burn through a ton of energy. So investments like these are designed to pad out the power infrastructure that fuels the tech, with the hopes of benefiting financially from the AI trend without being directly exposed to the tech companies themselves.

    This week’s focus: US Economic Growth

    The Federal Reserve (the Fed) slashed US interest rates by 0.5 percentage points, which would usually be a sign that the economy’s in hot water. After all, the standard cut is 0.25 percentage points. But alarm signals haven’t been sounded this time – not yet, anyway. The unemployment rate has ticked up slightly, sure, but the US hasn’t seen widespread layoffs and the economy still appears surprisingly robust. In fact, after five rollercoaster years, the US is celebrating a rare trifecta of low inflation, low unemployment, and steady economic growth.

    The big question, of course, is how long that can last. Interest rates have been high enough for long enough to cause damage, a lot of which would only reveal itself after a lag. So the Fed's chunky cut made it clear that the central bank’s top priority is no longer laser-focused on inflation, but on preventing the economy from losing steam and falling into a recession. That means a new era for investors, too, one spent focusing more on the strength of the economy than regular inflation readings.


    Next week’s data should provide insight into whether the US economy is still holding firm. The numbers should confirm that the economy has picked up over the last quarter, after two estimates suggesting the same. That said, there are some worrying undercurrents, like weak manufacturing activity and mounting financial pressure on lower and middle-income consumers. So keep an eye out for next week’s manufacturing data, orders for long-lasting items like cars and appliances, and consumer confidence reports for hints about the manufacturing industry’s activity levels. Watch out for the annual consumer expenditure survey too: that will shed light on how American households have handled high rates and rising costs recently.


    In any case, the biggest risk might not be the economy itself, but investors’ moods. Stock valuations are touching the ceiling, and investors expect S&P 500 companies to post double-digit earnings growth this year and next. Meanwhile, credit markets aren't showing any signs of concern over defaults. In other words, investors aren't just predicting the end of high inflation without a recession – they're expecting the economy to pick up, and for companies to outpace the economy at a faster rate than normal. That’s possible, of course, but it might only take one serious slip-up to make investors question their forecasts.

    The Week Ahead

    On The Calendar

    • Monday: US global and manufacturing purchasing managers’ index (PMI) (September), Eurozone manufacturing estimated PMI (September).
    • Tuesday: US consumer confidence (August), US house prices (July), Germany IFO business climate index, Reserve Bank of Australian interest rate decision.
    • Wednesday: US annual consumer expenditure survey, US new home sales (August), Australian inflation (August). Earnings: Micron Technology.
    • Thursday: US economic growth final number (second quarter), US durable good orders (August), Switzerland’s rate decision. Earnings: Accenture, Costco.
    • Friday: Eurozone economic sentiment (September), France inflation, Germany unemployment rate, Canada economic growth (second quarter), US personal income and outlays survey (August).

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