Commentary – Signs of Slowing US Economy
Last week’s economic data from the US mostly surprised on the downside, hinting on heightened odds of economic slowdown. Both manufacturing and services PMIs declined by more than expected, reaching 46.3 and 51.2, respectively (vs 47.5 and 54.5 forecasts). While manufacturing PMI stands at the post-Covid low, services PMI had the second-worst reading since the pandemic, yet remaining in a positive territory above the 50-point threshold. These worsened conditions are explained by reduced new orders and weakened business activity. Decline in consumers’ willingness to spend is demonstrated by weakening consumer credit which increased by significantly lower-than-usual amount in February. Meanwhile, factory orders data showed a steeper-than-expected contraction of -0.7% m/m in February (vs -0.5% forecast).
Non-farm payrolls roughly matched expectations in March, coming in at a modest level of 236,000. Notably, the figure stands well below the 2022 average. Coupled with the activity data discussed above, the cooling of US economy is now apparent. This is likely to pressure Fed during the upcoming monetary policy meetings. Importantly, the market-implied probability of another 25bps hike in May stands at 66%, while that of no change in policy rate is at 34%.
Markets now seem as concerned about the recession risks as they are regarding the Fed’s hiking cycle. Over the past months, investors have chased large cap equities that tend to weather economic downturns better than their smaller-sized peers do. This is demonstrated by Russell 2000 (benchmark index of US small-caps) gaining only 3.7% in past 6 months while S&P 500 and Nasdaq 100 have rallied 13.6% and 19.5%, respectively in the same period.
