2024-03-31 14:06:00
The trading week on Wall Street will open tomorrow with the unemployment rate in the US to be published on Friday, when according to estimates no change is expected and it will remain at 3.9%. The unemployment rate is an important figure for the Fed, which indicates the resilience of the American economy and the fight against inflation. Lower than expected may indicate fairly stable economic strength even though the interest rate that was raised in recent years is losing its effect. On the other hand, a figure higher than 3.9% will be a kind of calming siren in the corridors of the Fed and indicate the effect of the interest rate.
The Fed is still walking between the drops of rising inflation and is in no rush to lower interest rates before it feels confident enough that this will not lead to rising inflation again. Jerome Powell, the chairman of the Fed, said in the past that he expects 4 interest rate cuts during the year, but in light of the rise in inflation, estimates are increasing that there will finally be 3 interest rate cuts this year.
Important data expected to be published this week:
Second – ISM purchasing managers’ index in industry (March).
Third – industrial orders, the number of job vacancies (JOLTS).
Fourth – the index of purchasing managers in the service industries ISM (March).
Friday – employment data (March).
Yonatan Katz and Leader Capital Markets economists: “There is a debate about the timing of the first interest rate cut in the US, this is due to the time lag between the interest rate cut and the effect of the change in interest rates on the real economy. Now, inflation figures are still above the 2% target and the US real environment is relatively robust. In February, PCE inflation rose 0.3% and 2.5% a year ago (compared to 2.4% in January). The core index rose 0.3% and 2.8 % a year ago (from 2.9% in January, revised from 2.8%). The prices of services increased by 3.8% (which more correctly reflects the local forces that act on the inflation environment) and the prices of products decreased by 0.2%. In short, There are no signs of convergence to the inflation target, so an interest rate cut in June is also in doubt.
“In the background, it is important to remember that although PCE inflation (private consumption prices) is the preferred index by the Fed, core CPI inflation rises at a faster rate of 3.8%. The difference between the methods: CPI measures prices according to fixed weights (as is customary in the world, also in Israel) compared to PCE prices which measure the composition of actual consumption (therefore, the weights change every month). The housing weight is also much lower in the PCE index (about 15%) than the weight in the CPI (36%). To summarize: Generally, the widening gap between the improvement in the current situation and the assessment of future expectations does not bode well for economic activity in the future. At the same time, it is difficult to know when the moderation will come. In addition, an increase in inflation expectations among households will make it difficult for the Fed to cut interest rates soon. Bottom line: There is a risk of rising yields in the US, even in the long-term“.
Yoni Penning, chief transaction strategist in the trading room of Bank Mizrahi Tefahot It is stated that “the inflationary end figures continue to suffer from the increase in energy prices. On the other hand, the inflationary tail in the prices of services is showing signs that it is exhausting itself, or at least getting close to it. The core figure of the PCE received a significant upward revision in January, so that it now points to Inflation of 2.9%. On the other hand, the February index is rather moderate in relation to this, and it actually continues along the original 2.8% line of the January index. This level, we will recall, was prominently framed in the Fed’s latest interest rate announcement, when Chairman Powell mentioned the index This month’s CPI as “high, higher than expected, but right now the core PCE is 30 bps lower, which is not terribly high.” In other words, in the bottom line, there is something here that should be adjusted quite easily to the expected interest rate cut in June.
“We would add that at the current stage, services inflation pretty much makes up the entire PCE, while the other components tend to neutralize each other. Of this, the rent components continue to be the most prominent, and they contribute 0.9% to overall inflation, compared to 0.5 %, on average, in 2019. That is, without this gap we would already be quite close to the Fed’s target. And probably a lot of Powell’s statement comes from that. In addition to that, the health care components continue to stand out, of course, with a contribution of 0.5% to overall inflation. But other service components , manpower variables, such as food services, are showing a slight moderation. And despite the continued increases in fuel prices, and the trend in recent months, there is also a moderation in transportation inflation.”
Ronan Menachem, Chief Markets Economist, Bank Mizrahi Tefahot: “The Federal Bank headed by Jerome Powell makes sure to make it clear to investors that, looking at the coming months, its policy will be based on cautious optimism and therefore will not rush anywhere. On the one hand, recognition that inflation in the United States is indeed “in a good place” and on the right path to achieving the target level of two percent and consolidation over time. On the other hand, an understanding that core inflation, which is also falling, is still higher and the problem of its “stickiness” still exists. This is especially true of the prices of services, which reflect the improved purchasing power of consumers, which stems, to a large extent, from both the good state of the labor market and from the increases in the capital markets. As a result, the market must understand that the Fed does see room for lower interest rates than those prevailing today, but the dynamics of the adjustment process should be careful, while the Fed utilizes the room for maneuver it has to do so based on the data received from time to time It is important to note that I will not rush to the Federal Reserve and this is because of the benign state of the American economy, which is reflected in the indicators of output, employment, consumption and sentiment in the various markets.
“It is also important to note that the Fed focuses on the stability of prices and employment and will not let issues related to fiscal policy and the upcoming elections for the presidency of the United States influence its decisions. All of this boils down to a scenario of measured interest rate reductions, caution and margins. They will be re-examined once and for all. The Fed will not hesitate to stop if Inflation will change direction. The chance of returning to the level of interest that preceded Corona is nil, in my estimation. Therefore, the route of reductions may indeed be beneficial to the yield returns (although these expectations have existed for several months and therefore some of them are already priced), but in view of the continuation of a data-dependent policy, one should expect the feature, Vigilance and volatility of the markets around key data such as the consumer price indices, the employment and GDP reports as well as the expectations surveys that will be published in the coming months.”
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