Is the US economy showing signs of weakness?
By Kathleen Brooks, research director for XTB.com
The early US labour market data for June suggest that the US labour market could be weakening. The ADP private sector payrolls report was 150k, vs. 165k expected. The ADP report is rarely a good predictor of non-farm payrolls, instead we believe that you can get more information from the latest initial jobless claims and continuing claims data.
The unemployment rate in focus
Initial jobless claims ticked up to 238k last week, from 234k the week prior. However, continuing claims data ticked up sharply to 1.858mn, from 1.832mn. This is the highest level since 2021, as the global economy was emerging from the pandemic. While it is early days, it suggests that workers may not be able to find alternative jobs if they are laid off. This may be a lead indicator that the unemployment rate will continue to tick higher.
We have noted in recent months, that US payrolls have grown by more than expected at the same time as the unemployment rate has moved higher, it has risen from 3.5% in July 2023 to 4% in May, and the market expects it to remain at 4% for June. After the rise in initial and continuing jobless claims, the risk is that the unemployment rate ticks up even more in June. If that happens then we could see bond yields decline sharply, and expectations for a US interest rate cut in September rise to a near certainty, currently expectations are 65%.
This is not the only sign of weakness in the US economic data in recent weeks. The Atlanta Fed GDPNow estimate of Q2 US GDP has also fallen sharply to 1.7%, from 2.2%, the prior estimate. This is one of the lowest forecasts during Q2, and it does not bode well for US growth. The Citi Economic Surprise index for the US economy is at its lowest level since 2021, which is a further sign that US economic data is posting more negative surprises than positive surprises.
Overall, there is a growing body of evidence that the US economic data is turning lower and could point towards a potential recession later this year. It also puts the spotlight firmly on the September Fed meeting, when the market seems to think that the Fed could cut rates.
From a market perspective, there are three implications:
1, The dollar: It has fallen 0.5% in the past 5 trading sessions, and it is falling sharply on Wednesday, as the early labour market data points towards weaker official labour market data that is released on Friday. The dollar is sensitive to weaker economic data this week, so if we do see lower than expected payrolls/ a higher unemployment rate on Friday, the dollar may fall further on a broad basis, and USD/JPY may back away to 160.00.
2, Treasuries: US Treasury market volatility has surged in recent days as political instability makes it hard to predict who will win the US Presidential election and what will happen with the US’s fiscal deficit, which is nearing 7% of US GDP. However, a spate of weak economic data in the coming days could take the upward pressure off yields, which may fall back and erode support for the greenback.
3, Stocks: US stocks have come under the radar for their concentration risk in recent months. There is no doubt that the main US blue chip indices are being driven by a handful of stocks. Less than 200 stocks on the S&P 500 posted a gain in the past month, in a healthy market you would want at least 2/3 of members to register a gain. YTD, 295 members of the S&P 500 have registered a gain, however, only 119 members have registered a gain that matches the YTD gain for the entire S&P 500 index of 15%.
The top performers in the US so far this year are the tech giants with AI exposure. The AI theme is also driving strong gains for electricity companies, who will be needed to provide the power for the AI revolution, General Electric is higher by 58% YTD. Americans are also taking weight loss jabs with gusto. 1 in 6 Americans take some form of weight loss drugs, which has boosted the stock price of Eli Lily this year, it is higher by 55% YTD.
If the economy is slowing, then it is no wonder that investors are gravitating towards companies with strong growth potential and bullet proof balance sheets. Thus, if US economic data continues to slow, we do not think that market breadth in the US stock market will widen, and we expect the same stocks to continue to power the main US blue chip index for the medium term. A slowing economy also puts pressure on the Fed to cut rates before they break something.
XTB CY-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
XTB UK-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with XTB Limited UK. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
XTB is a trademark of XTB Group. XTB Group includes but is not limited to following entities:
X-Trade Brokers DM SA is authorised and regulated by the Komisja Nadzoru Finansowego (KNF) in Poland
XTB Limited (UK) is authorised and regulated by the Financial Conduct Authority in United Kingdom (License No. FRN 522157)
XTB Limited (CY) is authorized and regulated by the Cyprus Securities and Exchange Commission in Cyprus. (License No.169/12)
Clients who opened an account from the 1st of January 2021 and are not residing in the UK, are clients of XTB Limited CY.
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.