US rate cut seems distant as inflation report looms US rate cut seems distant as inflation report looms US rate cut seems distant as inflation report looms

US rate cut seems distant as inflation report looms

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Key points

  • Nonfarm Payrolls impact on rate cuts: The upside surprise in the US Nonfarm Payrolls has shifted market expectations, now predicting only one rate cut in December, a significant change from the seven cuts anticipated at the beginning of the year and the Fed's forecast of three cuts. This shift suggests the Fed is becoming more cautious and delaying the rate cut cycle due to inaccuracies in its own models.

  • Nowcasting in economic forecasting: The concept of nowcasting, which involves short-term forecasting of key economic indicators, is highlighted as a valuable tool amidst noisy macroeconomic data. Using real-time data sources like the Redbook same-store sales index and the Dallas Fed Weekly Economic Index can provide more accurate predictions, reflecting the recent acceleration in the US economy.

  • Current economic and market conditions: Positive performance in risk-on asset classes such as developed and emerging market equities contrasts with the negative performance in commodities, private equity, and small caps. The global economic backdrop remains positive, with no stress signals from financial markets, supporting a favorable environment for equities and other risk-on assets.

The value of nowcasting as Nonfarm Payrolls shock investors

Ahead of Friday’s upside surprise on US Nonfarm Payrolls market pricing was evenly divided between the Fed cutting rates either at the September or November meeting. As we will soon publish in our Q3 quarterly outlook our view is that the economy and markets will hum along in Q3 and that macroeconomic indicators are generally supporting this view. Our views have generally been on the positive side and we have multiple times spoken into resilient US data and that inflation would surprise to the upside. After the Nonfarm Payrolls figures on Friday the market is now only pricing in one rate cut and earliest at the December meeting. Quite far from the seven rate cuts priced in at the beginning of the year and the Fed’s own forecast this year for three rate cuts. The fact that the Fed’s own models have been wrong again is likely making the Fed more cautious and thus delaying the rate cut cycle.

There is so much noise in macro indicators right now that it can be difficult to choose what to put a weight on. In our team, we are putting weight on the concept of nowcasting. The idea is to keep the forecasting horizon short (hence nowcast) and predicting key economic indicators such as real GDP that are published with a significant lag. If one had used the two weekly series called the Redbook same-store sales index and the Dallas Fed Weekly Economic Index then you would not have been surprised about the latest developments. The US economy has accelerated over the past couple of months. The advantage of using nowcasting is that you avoid making longer term predictions based on weak causality, but instead you go with the methodology applied in weather forecasting. If the current state is sunny weather then the likelihood of sunny weather tomorrow is very high. It is basically the same with the economy.

US May inflation report is this week’s key event

For asset allocation portfolios and investors watching the macro economy this week’s most important report is the US May inflation report on Wednesday. With the core CPI services less housing (supercore measure) reading at 0.42% MoM in April, the sticky part of inflation seems to be stuck around 5% annualised inflation. If we get another reading like this then a rate hike is almost impossible unless there is a materially decline in economic activity. Add to this that wage pressures and financial conditions continue to support demand and inflationary dynamics.

Positive backdrop in most asset classes with commodities still weak

The past week has seen good performance for risk-on asset classes such as developed (+2.6% ) and emerging market equities (+2.2%) followed by convertible bonds (+1.4%). In the bottom we find negative performance across listed private equity (-0.9%), commodities (-0.8%), and developed small caps (-0.3%). In commodities, the weakness has been driven by first lower energy prices and recently weak metals prices as China’s macro data continue to paint a mixed signal.

With a positive backdrop from the global economy and financial markets not sending any stress signals we expect to continue being in a positive environment for equities and generally risk-on assets.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.