Jul 2 / Victor Arduin

Macroeconomics Weekly Report - 20240702

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US interest rate cut in September gains momentum

  • Throughout 2024, the US interest rate cut was postponed due to resilient inflation and bullish data on employment and US economic activity.
  • However, last week's PCE data raised hopes that in the coming months there could be an easing of US monetary policy, something that could have a profound impact on the commodities market.
  • One of the biggest challenges ahead is to see a softening in the labor market, one of the main drivers of inflation due to the increase in employment and real wage gains. However, a slowdown could be evident in the July 5th report.
  • In addition, the US election brings uncertainty about the direction of the world's largest economy, where a persistent budget deficit provides grounds for the appreciation of the dollar, even in an environment of interest rate cuts.


US monetary policy, conducted by the Federal Reserve (Fed), has a profound impact on the global economy. The current restrictive level of interest rates provides grounds for appreciation for the dollar, one of the world's main currencies, but also poses challenges for international trade.

In the commodities market, for example, where most contracts are traded in dollars, an appreciation of the American currency could mean a reduction in demand from holders of other currencies who now have less purchasing power. Because of this, the market is closely watching for signs of a possible easing of monetary policy in the world's largest economy.

In this regard, we will discuss in this report the main variables to watch out for in the coming weeks that will be decisive for a change in the American monetary scenario.

Image 1: US - CPI inflation (%)

Source: Bureau of Labor Statistics

Image 2:  US - PCE inflation (%)

Source: BEA

By mid-2024 there was a worsening perception of inflation in the country

As commented on in previous reports, the US interest rate cut, one of the most eagerly awaited events of the year, was postponed due to various indicators showing resilience in inflation and economic activity throughout the first half of the year. The yield on the 2-year bond reached over 4.72%, an increase of 50 basis points compared to the end of 2023. This rise reflects the increased uncertainty and risk aversion in the market.

The latest data has raised hopes of monetary policy easing as early as September. Last week, PCE (Personal Consumption Expenditures), one of the metrics most closely monitored by the Fed, slowed from 2.8% in April to 2.6% in May. In addition, the ISM manufacturing data indicated a slight deepening of the sector's contraction, from 48.7 to 48.5 in June.

Although they are not enough to determine an easing of monetary policy, they are positive signs that the disinflationary process is continuing in the country. But perhaps one of the most important pieces of data is yet to come and will have an important impact on the perception of inflation in the country.

Image 3: US - US Treasury Yields (%)

Source: Bureau of Economic Analysis

Still strong, the job market is one of the main concerns

One of the biggest challenges for a change in US monetary policy has been the resilience of the country's labor market, especially in the services sector, which has been responsible for adding inflationary pressure due to job growth and real wage increases.

The monthly payroll, which tracks around 80% of the country's workforce, revealed the creation of 272,000 new jobs, the second highest number in the last six months. The Fed, as repeated by its chairman, needs more confidence to start cutting interest rates, a signal that doesn't seem to be coming from the labor market.

The next few weeks will be crucial in determining what actions the Fed decides to take at its meeting at the end of the month, with a focus on the payroll report on July 5. If inflation continues to show signs of cooling, the Fed could signal (forward guidance) an interest rate cut. However, if the inflationary scenario worsens, it is more likely that the current restrictive level will be maintained.

Image 4: US - Non-Farm Payroll Report

Sources: Refinitiv

Election period may bring more uncertainties than certainties

In the political sphere, there are also uncertainties that could have an impact on inflation and interest rates, as well as the trajectory of the dollar. Some possible scenarios we could see in a possible new Biden or Trump administration.

If, on the one hand, a Democratic administration is likely to maintain an energy policy focused on protecting the environment, resulting in higher energy costs, on the other hand, a lower level of protectionism will ease the pressure on goods and services, benefiting the American economy in greater integration with the world, especially China. A Trump administration could bring in deregulations that encourage the use of fossil fuels, making energy costs lower, but it could also increase protectionism in the country to encourage domestic economic activity, resulting in strong inflationary pressure.

Furthermore, regardless of the new president in the United States, there is a problem to be faced for the next few years. The gradual worsening of the American fiscal scenario persists, with a budget deficit of 6% of GDP and a public debt of over 34 trillion dollars. Even if the Fed finds room to lower interest rates in the future, the dollar could still strengthen due to the higher premiums offered by US Treasury bonds, which are used to finance government spending.

In Summary

The US interest rate cut is one of the most eagerly awaited events for 2024, but persistent inflation in the country has frustrated market expectations of an easing of US monetary policy as early as March.

Still highly uncertain, the latest figures suggest that the disinflationary process is still underway and gained momentum in May. If the payroll data shows a slowdown in the labor market in June, there's a good chance we'll see a more dovish statement at the next Fed meeting, suggesting that a cut of 25 basis points will take place in September.

However, the US presidential race could cast uncertainty over the trajectory of the country's economy for the coming year, which could force the Fed to adopt a more cautious stance.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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