May 6 / Victor Arduin

Macroeconomics Weekly Report - 20240510

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Will the Fed raise interest rates in the US?

  • Price growth persists into 2024, frustrating the market's most optimistic expectations, which,at the end of 2023, predicted a possible interest rate cut in the first half of this year.
  • Non-farm payroll came in below market estimates last month, momentarily dispelling speculation about the need for the Fed to raise interest rates to curb inflation.
  • One of the consequences of this scenario of growing risk aversion is the appreciation of US Treasury bonds, boosting the dollar and creating a bearish environment for commodities.


The market's initial optimism about US interest rate cuts at the end of 2023 has given way to a more cautious outlook. Economic indicators, while poiting to an improvement in inflation, suggest that convergence towards the 2% target will be more gradual than previously anticipated.

This scenario presents challenges for the commodities markets. The appreciation of the dollar, driven by economic numbers in the United States, makes assets traded in the American currency more expensive. Not only are borrowing costs expected to remain high for longer, but there is also the speculation of a further increase in interest rates, currently in the 5.25%-5.50% range, will rise further.

The Federal Open Market Committee (FOMC) continues to stress that the conduct of monetary policy is conditional on economic indicators converging to more favorable levels. With this in mind, in this report we will discuss some of the country's main economic indicators and their influence on maintaining interest rates in the country.

Image 1: US - Inflation (%)

Source: Bureau of Labor Statistics

Image 2:  US - Non-farm Payrolls

Source: Bureau of Labor Statistics

Labor market eases inflationary pressures

For the time being, last week's data on the US labor market brought some relief regarding the need for further interest rate hikes in 2024. Non-farm payroll came at 175,000 against a market forecast of 243,000. The unemployment rate rose slightly to 3.9% (+0.1%). In addition, wage growth slowed down from 4.1% to 3.9%.

On the other hand, despite the slowdown, the country's economic performance remains resilient, especially with retail sales figures showing robust growth in March (+0.7%). This result, combined with upward revisions to the US GDP, raises some concerns and contributes to the Fed's difficulties in containing inflation and reaching its 2% target.

Considering that a significant portion of GDP is made up of household spending, which is directly related to the purchasing power of wages (real earnings), it is clear that there is still a scenario of inflationary pressure that will make it difficult to overcome the "last mile" in the fight against inflation in the coming months.

Image 3: US – Monthly Retail Sales (%)

Source: Refinitiv

There are still no conditions for an interest rate cut

The persistence of high inflation in the United States, as measured by both the CPI index and the PCE, reinforces the scenario of risk aversion among investors, boosting yields on US Treasury bonds and raising the risk of a recession, although this risk is still considered low.
Inflation has been exceeding expectations throughout 2024, which significantly reduces the chances of an interest rate cut. At the end of 2023, the market was discussing the possibility of interest rate cuts in the first half of 2024. Now, with high inflation persisting, speculation is swirling around the possibility of a further increase.

However, the impact of current interest rates on the slowdown in the economy will become clearer as new data becomes available, such as the latest labor market figures. It is unlikely that the Fed will further intensify the policy of restrictive interest rates, at the risk of pushing the country into recession. According to the "soft landing" scenario projected by the US central bank, there is room for two cuts of 25 basis points in the interest rate from September until the end of this year.

Image 4: US - Treasury Yields (%)

Source: Refinitiv

In Summary

Knowing when interest rates will start to fall can be an important indicator for the commodities market, as it can signal a reversal in the appreciation of the dollar, impacting demand and the valuation of assets.

In recent weeks we've seen a series of bullish data on inflation in the United States, resulting in a rise in risk aversion and speculation about an increase in interest rates.

The persistence of higher than expected inflation does not invalidate the effectiveness of the restrictive monetary policy in combating inflation. There has been a gradual improvement in recent months, which will tend to strengthen in the future as new data becomes available.

In the current scenario, we expect the long-awaited US interest rate cut to take place from September, ending the year with two cuts of 25 basis points.

Image 5: General Consumer Confidence Index

Source: University of Michigan

Image 6:  USA - Inflation (PCE)

Source: Bureau of Economic Analysis

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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