Ear to the Ground

05 April 2024

Eyes were focussed on US economic data releases this week, with little coming out of the UK.  There was positive news for the US economy with the release of manufacturing data to March.  The ISM Purchasing Managers Index (PMI) moved above a reading of 50, indicating expansion in the sector, the first time that this has been seen for 16 months.  Helping drive the sector was a further expansion in new orders.

Expansion also continued in the services sector through March, albeit at a slower rate than that seen over the previous two months.  Whilst the sector continues to grow, it does appear noticeable that this appears to be at a lower rate than that which was seen pre-Covid.  Between mid-2014 and February 2020 the index typically fell between the 55-60 range.  Since the third quarter of 2022 to date however consolidation is in the 50-55 range.  Expansion nonetheless, but something to watch all the same.

Whilst a lagging indicator, it was US labour market data which undoubtedly stole the show.  Non-farm payrolls in March grew by 303,000.  This was not only higher than the number of jobs added the previous month but was also way above consensus expectations of 200,000 new jobs.  As a consequence the unemployment rate now stands at 3.8% compared to an expected 3.9%.  Jobs were added across many sectors including healthcare, government and construction. 

The strength of the data coming through perhaps brings back into question when we will see that first interest rate cut in the US.  At their last meeting the US Federal Reserve indicated that June was the likely month and markets priced accordingly.  Is this data strong enough to bring this into question?  Can the economy continue to handle the current level of rates without cuts being seen at all?  Chair Powell will be very aware that with a Presidential election pending, the number of opportunities to cut rates in 2024 is likely reduced, but nor will he want to damage the economy.

In the Euro area, however, there is perhaps more scope for interest cuts, particularly after the release of flash inflation data for March.  Year on year, the rate stood at 2.4%, below the previous reading and consensus forecast of 2.6%.  Whilst inflation still exists, its pace is clearly slowing and it is getting closer to the 2% target set for the European Central Bank.  Could they be next in line to follow the Swiss, or do they dare not move before the US do?

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