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• 2024-05-07

"US Economy Surprisingly Strong? Fed Delays Rate Cut?"

Did the latest US employment data significantly exceed expectations? Does this mean that the interest rate cut for this year will be postponed again?

Will the Federal Reserve's rate cut be postponed again?

In the latest US employment data released on Thursday, the ADP employment figure for December was 164,000, reaching a new high since August; and although wage growth has slowed down, it also fully demonstrates the "strong" US job market.

The strong US employment data implies that the US economy is highly resilient, which supports the expectation of a soft economic landing, thereby giving the Federal Reserve more room to deal with inflation. Therefore, after the data was announced, assets such as US stocks, US bonds, and gold prices experienced a gap down, thus having a huge impact on the financial market.

So, how to understand this phenomenon?

The ADP data exceeded expectations? Why is the US economy still strong?

The ADP employment figure for December was an increase of 164,000 jobs, marking four consecutive months of growth in US employment; although the US manufacturing industry is struggling, consumer and service industries are the main drivers of US GDP. Therefore, for the US economy, it is a very good data.

The US employment situation exceeded expectations, and the ADP data looks very good.

We often say that the US is already in a recession, with GDP growth in 2024 being only around 1.5%, and the economy needs to land softly or even hard. So why do many US economic data perform well? Especially the number of employed people has always been quite good? There are several factors to consider.

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Firstly, the US in 2023 has also implemented many economic stimulus plans, such as sanctioning Chinese semiconductors, developing the domestic chip industry with the "CHIPS Act", and the "Infrastructure Investment and Jobs Act" that has been promoted and implemented, as well as the "Inflation Reduction Act" and so on.Last year, Biden implemented three major bills, which achieved good results.

These bills objectively increased the U.S. government's intervention in the market economy, increased demand, stimulated investment, and thus counter-cyclically regulated the U.S. economy.

Secondly, the negative impact of the Federal Reserve's interest rate hikes was offset. What is now supporting the U.S. economy is the service industry and consumption. So where does this money come from? In fact, it is still printed by the Federal Reserve itself.

In 2021, Trump printed a lot of dollars and distributed them to American residents in the form of check subsidies, resulting in a very high savings rate among American residents. This is called excess savings by economists. The amount of funds is as high as tens of trillions of dollars.

Trump printed money and distributed it to American residents.

From the current situation, these dollars that started in 2021 have not been completely consumed. Coupled with the fact that the U.S. employment and salary performance has always been good, and the American habit of spending all their money, the current income of American residents can still support them to prop up the U.S. economy through consumption.

Only when the excess reserves brought by Trump's money printing are exhausted and Americans find that they can't pay off their credit cards, will consumer resilience disappear and the U.S. economy will enter a recession.

The excess savings of American residents are basically exhausted.

However, recently, some experts have expected that the excess savings in the United States are expected to be exhausted by August this year. So the U.S. economy will indeed enter a recession this year. But we still have to wait.

Exceeded expectations, will the Federal Reserve turn hawkish?Due to the relatively strong U.S. economy, a hard landing has essentially evolved into a soft landing, which has dealt a heavy blow to the Federal Reserve's previous expectations for rate cuts.

Let's take a look at the Federal Reserve. From Powell's perspective, the Fed's primary objective is to ensure the resolution of the inflation crisis and to free the U.S. economy from the negative impacts brought about by inflation. The second task is to stimulate the U.S. economy to prevent it from collapsing.

As a follower of Volcker, objectively speaking, Powell still hopes to resolve the inflation crisis.

Now, the better-than-expected ADP employment data implies that the Federal Reserve has more policy space to address the inflation crisis. This aligns with the Fed's own policies and positions.

After all, Powell himself has stated that reducing U.S. inflation to 2% is the Fed's most important goal. Therefore, after the release of the employment data, U.S. Treasury yields broke through 4%, gold fell, and U.S. stocks continued to decline, with bears beginning to celebrate.

As a result, market expectations have begun to change again. They believe that the Federal Reserve will consider the impact of non-farm employment and shift towards a hawkish stance, increasing efforts to control and suppress inflation. The Fed's rate cut timeline for this year will be postponed, and the magnitude of the rate cut may also be reduced.

This indicates that if the U.S. economy is "relatively overheated," it will hinder the Fed's rate cut plans for this year, and maintaining the current high interest rates of 5.25%-5.5% is itself a hawkish monetary policy.

Thus, after the release of the U.S. ADP data, it is as if the Fed's monetary policy has become slightly more hawkish. Some experts even predict that as long as the U.S. economic growth rate can maintain a 2% pace, the Fed will indefinitely maintain the current high interest rates until the U.S. inflation crisis is completely eradicated.

It is clear that such a plan is actually the best, but the United States is not governed by what Powell says, nor by objective economic laws; its real controllers are still the top politicians in the United States.

In summary, the release of the U.S. ADP data has led to a shift in market expectations towards a more hawkish stance by the Federal Reserve, potentially delaying rate cuts and maintaining high interest rates to combat inflation. However, the ultimate direction of U.S. monetary policy is influenced by the country's top politicians rather than purely economic considerations.The United States indeed has a couple of tricks up its sleeve. Despite various crises, it still has a high probability of achieving a soft economic landing, and even employment data that looks unexpectedly good, leading to an "overheated" economy.

Therefore, in the face of high domestic inflation rates of 3.1% CPI and 4% core CPI, Federal Reserve Chairman Powell can free up his hands to maintain the current high interest rates, and even continue to suppress the inflation crisis by raising interest rates again, ultimately solving the inflation problem in the United States.

This year's black swans will only be more than last year's.

In my view, the global financial market this year is destined to be turbulent. The Federal Reserve will likely flip-flop between lowering and raising interest rates, leading to severe financial fluctuations. This means that black swans in the market will only increase, not decrease.