Payden & Rygel: The US Economy

Payden & Rygel: The US Economy

3 oktober 2024

Verenigde Staten
Amerikaanse vlag.jpg

We still see a 'soft landing' scenario as the most likely (65% probability) on a 6-12 month horizon. Here’s why, based on the data released in the last week:

Inflation is dead

Yes, we said it. The core PCE price index clocked in at 0.13% month over month in August, much softer than the monthly reading required to reach the Fed’s 2% inflation target. If the core inflation trend continues, year-over-year inflation will dip below 2% by the spring of 2025, and we’ll indeed be hearing talk that 'inflation is below the Fed’s target'!

The labor market is in 'better balance' but not rolling over

Although total job openings registered higher than expected, our preferred measure of labor market imbalance, the vacancy-to-unemployed (v/u) ratio, remained near 1.1, close to its average level in 2018 and 2019. And near the “Beveridge Threshold” of 1, which at or below 1 indicates labor market conditions no longer pose an upside risk to inflation. Elsewhere, we know layoffs are low, and we expect job growth in the 140-150k range in Friday’s jobs report, which is fast enough hiring to keep downward pressure on the unemployment rate.

Powell isn’t in a rush, but the Fed is headed to 3% on the fed funds

We heard from Powell on Monday, and he indicated that two more 25 bps cuts this year would be consistent with the 'dots' presented at the September FOMC meeting. The 'direction of travel' is clear: the Fed will get near 'neutral', 3-3.5% on fed funds. How quickly neutral is reached will depend on payroll growth and the unemployment rate, but it will probably be in the second half of 2025.

Buy The Dips

Regarding market implications, we expect the U.S. Treasury yield curve to stay flat (a la the 1990s), but bond yields should move lower across the curve. Only a more rapid pace of cuts due to recession fears would spark a strong yield curve steepening. A soft landing means a weaker USD. And a Fed cutting WITHOUT evidence of a recession? Risk on!

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