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Interest rates will be lowered gradually: US Federal Reserve

nbk Weekly Market Report

KUWAIT: Federal Reserve Chair Jerome Powell stated that interest rates will be lowered gradually, emphasizing that the US economy remains strong. He expressed confidence that inflation will continue to move toward the Fed’s 2 percent target. Powell mentioned that economic conditions support further easing of price pressures, but policy adjustments will be based on incoming data rather than a fixed course. While the Fed’s current rate is still restrictive, Powell indicated potential quarter-point cuts in the next two meetings, though decisions will depend on new information. He also noted that while the labor market is still solid, it has cooled over the past year.

JOLTS Job Openings

Over in the US, the number of job openings increased by 329,000 to 8.04 million in August, surpassing market expectations of 7.64 million. Significant job openings growth occurred in construction (+138,000) and state and local government, excluding education (+78,000), while other services saw a decrease (-93,000). Regionally, job openings rose in the Northeast, South, Midwest, and West. The number of hires remained steady at 5.3 million, as did total separations at 5.0 million. However, job quits fell to 3.084 million, the lowest level since August 2020, down from 3.243 million in July.

ISM Manufacturing & Services PMI

In September, US manufacturing stayed weak but showed some positive signs. New orders improved, and the cost of raw materials dropped to its lowest level in nine months. These changes, along with falling interest rates, suggest that manufacturing might pick up in the coming months. The Institute for Supply Management (ISM) reported that its manufacturing index stayed at 47.2, still below 50, meaning the sector is shrinking.

However, this marks the sixth month of contraction, though the overall economy continues to expand. Despite the weak survey results, real data like factory output and durable goods orders showed the manufacturing sector is holding steady. Manufacturing output grew by 2.6 percent in the second quarter, up from 0.2 percent in the first, and more growth is expected after the Federal Reserve’s recent interest rate cuts.

Moreover, US services sector activity hit its highest point in 18 months, driven by a strong increase in new orders, indicating that the economy remained stable in the third quarter. The Institute for Supply Management (ISM) reported that its non-manufacturing PMI rose to 54.9, up from 51.5 in August, marking continued growth in the services sector, which makes up over two-thirds of the economy. This growth aligns with positive data on consumer spending and a reduced trade deficit, suggesting the economy maintained momentum from the previous quarter.

Unemployment claims

The number of Americans filing for unemployment benefits increased slightly last week, though disruptions from Hurricane Helene in the Southeast and strikes at Boeing and ports may impact the labor market soon. According to the Labor Department’s report, the job market remained stable at the end of the third quarter, which could give the Federal Reserve little reason to rush into significant interest rate cuts. Another report showed that the services sector reached its highest level in over 18 months, driven by strong new orders.

Economist Christopher Rupkey noted that the labor market appears steady, making it unlikely the Fed will cut rates aggressively unless conditions worsen. Initial claims for unemployment benefits rose by 6,000 to 225,000 for the week ending September 28, slightly above expectations. Unadjusted claims dropped by just over 1,000 but were below the anticipated decline, causing seasonally adjusted claims to rise. Despite this, claims remain low, indicating a stable labor market with few layoffs. However, this calm may be disrupted by Hurricane Helene, which caused widespread destruction in six southeastern states, leading to a long and costly recovery process.

Non-farm payrolls

US job growth in September saw its largest increase in six months, with 254,000 new jobs added, and the unemployment rate dropped to 4.1 percent. This points to a strong economy that likely won’t require major interest rate cuts from the Federal Reserve this year. In addition to the job gains, wages rose steadily, and the economy added 72,000 more jobs in July and August than initially reported. Recent data revisions have also shown the economy is performing better than expected, with upgrades in growth, income, savings, and corporate profits.

Fed Chair Jerome Powell acknowledged this positive outlook and signaled no rush to cut interest rates significantly. The unemployment rate’s drop from 4.2 percent in August was due to a rise in household employment, which more than offset the number of new workers entering the labor force. Although the jobless rate has risen since April, it has been influenced by factors like temporary layoffs in the auto industry.

Average hourly wages rose by 0.4 percent in September, following a 0.5 percent increase in August, and were up 4.0 percent compared to the previous year. This strong wage growth makes it less likely that the Federal Reserve will implement a large interest rate cut at its November meeting. Financial markets now predict a 91 percent chance of a smaller quarter-point rate cut in November, up from 71.5 percent before the report, while the likelihood of a larger half-point cut dropped to 9 percent from 28.5 percent. The US Dollar index closed the week at 102.520.

Euro-zone CPI

The annual inflation rate in the Euro-zone fell to 1.8 percent in September 2024, its lowest since April 2021, down from 2.2 percent in August and below forecasts of 1.9 percent. Inflation is now below the ECB’s 2 percent target. Energy prices dropped significantly (-6 percent vs -3 percent), and inflation for services eased slightly (4 percent vs 4.1 percent), while prices for food, alcohol, and tobacco rose marginally (2.4 percent vs 2.3 percent).

Core inflation also eased to 2.7 percent from 2.8 percent. Inflation slowed in major economies like Germany, France, Italy, and Spain. The ECB anticipates inflation to rise later in 2024 due to previous sharp falls in energy prices dropping out of the annual rates, with a gradual decline toward 2 percent expected by the second half of 2025. The EUR/USD currency pair closed the week at 1.0976.

China manufacturing PMI

China’s factory activity contracted for the fifth month in a row in September but exceeded expectations with a reading of 49.8, up from 49.1 in August. The manufacturing sector continues to face challenges due to an ongoing economic slowdown, a property crisis, and Western export restrictions, particularly on electric vehicles. In response, the Chinese government has taken steps to stimulate economic growth, including cutting the reserve requirement ratio by 50 basis points and reducing the seven-day reverse repurchase rate by 20 basis points. These measures led to a significant rally in Chinese equity markets, marking their best week in nearly 16 years. The USD/CNY currency pair closed the week at 7.0176.

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