Payden & Rygel: US looks strong

June 10, 2024

'I was not surprised by the employment surge. I think this is consistent with the other data we’ve been seeing the last couple years. I think the nationwide economy is solid. 272,000 on payrolls. You can’t complain too much about that.

Has this labor number and the consistent trend we see in labor, removed any rate cuts from 2024?

We only have one in our call at the end of the year in December; that’s all we have. I know there are others out there touting multiple rate cuts, but I think the reaction in two-year yields this morning tells you the bond market is disappointed and it’s rethinking the probability of  rate cuts - pushing them out. I think it’s entirely plausible we’ll go through the whole year without getting rate cuts. When you have 272,000 jobs added, you’re near all-time highs on equities, inflation is still a problem, what’s the case for a rate cut here?

The bond bulls tell me that a slowdown is underway in the economy. I don’t see that in payrolls. We definitely see that in labor demand. You see that with the jolts report (job openings and labour turnover survey) earlier in the week.

In terms of GDP, we were running way hot at 4%. Now, we’re using 2%; we think that’s a reasonable guess for the quarter, and I think that’s a reasonable guess for the year. Looking at Q4 to Q4, I think we could top 2% this year.

We have got the unemployment rate at below 4% at year end. So, with that backdrop, it’s hard to really have rate cuts in your forecast.

Looking at consumers, we believe the death of the US consumer has been greatly exaggerated once again. We’ve been hearing about consumer weakness for a while.

In fact, consumer spending is still holding up quite well. I’m actually pretty impressed with how it’s held up. I think you have to look at income, which is still growing. Some of the lower income cohorts are still seeing income gains. As inflation has come down, those are real income gains, so that’s good.

But I think you also have to think about the consumer in terms of their debt obligations. So, we like to look at financial obligation ratios for households. Those look very manageable, relative to history, so we haven’t seen a big rise in the debt obligation ratio. So that’s good.
People’s asset values have gone up, so that helps. I still think people have savings, so that could help as well. So, on all those fronts, I think the consumer is still in pretty good shape.

Vis-à-vis Europe and Asia – particularly China:
Europe, in Asia, particularly China. It just feels like the U.S. economy, when you look at the U.S. compared to major peers, since 2019, U.S. real GDP growth has outpaced virtually all of them, with the exception of Australia, I think Australia’s outpaced the U.S., so kudos to them!

So, the U.S. looks strong.

Rate cuts?
The big question a lot of clients and internal colleagues are asking this week is well the ECB has cut rates, the Bank of Canada has cut rates, is the Fed next? And we’ve just been saying, those central banks can go their own way. I think the argument that the U.S. economy is much stronger is sound, and the case for rate cuts here is much less compelling, in our opinion.

I also think the argument that there’s going to be a string of rate cuts by some of these other global central banks might be premature as well. Just look at underlying global core inflation. It’s still above the pre-Covid trend globally. I think that’s still something people need to consider.'