Market positive as The Fed eases

US policymakers kicked off the easing cycle in September, surprising market participants with a 50bps cut to the Fed Funds Rate. The Fed claimed victory in the fight against inflation and instead turned its attention to a softening labour market.

Equity markets cheered and bond markets rallied – a sharp contradiction to previous ‘emergency’ 50bps cuts (2001 and 2009) which preceded financial crises. This time does appear different. The US economy continues to exhibit promising signals. Household balance sheets and consumption levels remain in solid shape, corporate earnings and capex intentions signal upbeat confidence in the business sector, and fiscal policy continues to support employment and industries that are key to the country’s long-term strategic initiatives. At the same time, inflation has returned to ~3% while wages and average hourly earnings continue to trend at a level above this; providing a valuable boost to real incomes.

US Real Average Hourly Earnings

Seasonally Adjusted (year on year % change)

Some indicators are flashing amber though and warrant close attention. The US unemployment rate has trended higher for the past 12-months, while we have also seen weakness in forward looking indicators like job openings and quits rates. Some small businesses are also reporting headwinds to earnings via a softening demand backdrop and margin pressures, while the broader manufacturing sector remains in the midst of a sustained downturn.

Neither of these factors warrant too much concern at this juncture in our opinion. The unemployment rate still remains at a historically low level and much of the recent increase is attributable to growing labour supply (people re/entering the workforce) rather than layoffs. Confidence in small and medium sized businesses should also improve from here following the larger than expected cut in official borrowing rates.

Added to this, things are also starting to turn up in the east which could provide a valuable boost to global growth and earnings. Chinese authorities have announced a series of monetary and fiscal policy measures, including cuts to key lending rates, lower mortgage rates, and even potential cash handouts to families, in an effort to stoke consumer confidence and boost domestic consumption.

Markets have responded emphatically, with local and offshore Chinese equity markets up 20-30% from September lows. Still, it is unclear if this will prove to just be a short-lived flurry in markets, versus a catalyst for a sustained recovery in economic activity. Most anecdotes suggest that buying to date has largely been concentrated to short covering and algorithmic trading, however given investor sentiment is so poor and with market valuations at these levels, even small boosts to confidence can prompt strong market momentum.

US Job Layoffs

# Monthly job layoffs in US economy (000’s)