No Fed panic despite recession fears

The S&P 500 has fallen more than 5% from its peak and 10Y US Treasury (UST) yields have plunged from 4.29% to 3.75%. Firstly, the US election has returned to a 50-50 race after President Biden’s exit, lowering the risks of more inflation and less regulation from another Trump term. Secondly, 2Q24 earnings have hurt sentiment and thirdly, July’s jobs and manufacturing data were weak.

Source: Bank of Singapore, Bloomberg

The Fed, however, is unlikely to react to one month’s news and will wait for more data before it next meets on 17-18 September.

July’s ISM manufacturing survey fell from 48.5 to 46.8 - below the key 50.0 mark that separates expansion from contraction - and showed activity in the sector has been shrinking for almost two years now.

Source: Bank of Singapore, Bloomberg

Similarly, July’s jobs report showed the labour market is slowing. Payrolls only rose 114,000, unemployment increased from 4.1% to 4.3% - up from its five-decade low of 3.4% in 2023 - and average hourly earnings showed annual wage growth fell from 3.8% to 3.6%. However, last month’s data was likely affected by Hurricane Beryl as 436,000 workers said they were unable to go to work because of bad weather.

July’s rise in unemployment has triggered the ‘Sahm Rule’ that predicts the onset of recession if the US jobless rate - using three-month averages - rises by 0.5% points from its low of the past 12 months. However, the labour force participation rate also increased last month, potentially on faster immigration, so the rise in unemployment may be due to more labour supply rather than just weaker demand for workers.

We thus draw the following conclusions:

• We think the Fed will stick to a first 25bps rate cut next month to its 5.25-5.50% fed funds rate and only ease more aggressively by 50bps if August’s data is weak too.
• The Fed may cut again by 25bps in November as insurance against recession but if inflation stays solid, we think the Fed will wait until December. Thus, we keep our view of two 25bps rate cuts in 2024.
• Lastly, we prefer short-dated 2Y and 5Y bonds to benefit from upcoming Fed cuts steepening the US yield curve. In contrast, we would avoid chasing 10Y and 30Y bonds for duration as the US elections may keep long-term yields volatile.

This article was first published by Bank of Singapore on 5 August, 2024. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.

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