Resilient US economy

This week, we examine the latest key US macro data, including employment and inflation, discuss the recent rhetoric from major central banks, and lastly, provide an update on China.

September’s US employment report was unambiguously better-than-expected. Payrolls came in at 254k, (consensus: 150k) and previous months were revised higher. The unemployment rate retraced to 4.1% (and was only a whisker away from rounding down to 4.0%) and wages were higher-than-expected.

As usual, we shouldn’t get too carried away with one report, particularly given the scope for revisions. But this will be extremely well received and will go some way to curbing the negative labour market momentum that the Federal Reserve (Fed) and others have been concerned about.

US government bond yields are now more than 40bps off their recent lows, and not just due to the employment report – downside surprises in broader activity data are becoming less frequent compared to recent months. The US economy looks increasingly resilient.

Add to that US inflation coming in slightly hotter-than-expected, it’s unlikely the Fed will deliver another 50bps cut come November. The market has a 25bps cut at each of the remaining two meetings this year as the most likely outcome. This seems reasonable to us, but the Fed will get a look at another labour report prior to their November meeting, so nothing is set in stone.

Interestingly, the resilience of the US economy is coming at a time when European Central Bank (ECB) and Bank of England (BoE) officials are starting to hint at cutting more aggressively. Governor Bailey recently said in an interview exactly that, provided the news on inflation continued to be good. Sterling’s stellar performance has wobbled slightly as a result, while UK bonds have outperformed their US counterparts. Note that past performance is not a reliable guide to future performance.

The UK economy is faring better than Europe's at the moment though. Europe might see some boost in sentiment from China’s recent stimulus measures, but overall data has been soft recently. Manufacturing survey data, consumer confidence measures, and profit warnings from automakers are just a few examples of bleak data.

ECB officials are beginning to acknowledge these headwinds to growth, including President Lagarde. Given the relative macro backdrops and change in policy rhetoric, German government bonds (known as Bunds) have outperformed US Treasuries in recent weeks, particularly at shorter maturities.

In China, equities gave back some of their enormous gains after a disappointing National Development and Reform Commission (NDRC) press conference. Expectations had become lofty, so simply reiterating the Politburo’s pledge for more policy measures – already anticipated – had markets disappointed.

Further announcements are on the way, though the exact timing and magnitude are unknown. As alluded to above, expectations have become elevated, so investors will be looking to see if the details go far enough to help address China’s structural economic issues – a deep property crisis, deflationary concerns, and rock-bottom consumer confidence.

Investors in China also need to keep an eye on US election risks. There’s barely a favourite at this stage, but it’s worth noting that assessing the market implications of the upcoming US election goes beyond correctly guessing who becomes President.

Though a Trump victory significantly increases the likelihood of a tariff war, there are many other moving parts. For example, who gains control of Congress, how likely it is that a President’s policies can be enacted, and the factors that markets are already expecting.

And, this year, the US election won’t have the markets’ undivided attention. As discussed above, how quickly central banks cut interest rates, whether labour markets continue to soften, and whether China’s economic situation deteriorates even further all need to be considered by investors too.