Huatai: Resilience Still Evident in the U.S. Economy, Urgency for Fed Rate Cuts Decreasing

Huatai released a research report stating that the nominal growth expectations in the United States have improved. The resilience of consumption in February remains, with a slight rebound in mortgage rates and marginal improvements in the real estate sector. January's non-farm payroll and inflation data exceeded expectations by a large margin, with the FOMC meeting minutes and some committee members leaning towards a more hawkish stance. Expectations for rate cuts have decreased, with the first rate cut pushed back from May to June, and the total rate cuts by 2024 reduced from 61bp to 85bp. Looking ahead, focus on the March FOMC meeting as well as non-farm payroll and inflation data. Key Points Growth: Nominal growth expectations increased, consumption momentum continued Nominal growth expectations in the United States have increased, with consumption momentum continuing and some improvement in the real estate sector. Boosted by better-than-expected US economic data, Bloomberg raised its forecast for US GDP growth in 2024 from 1.6% to 1.9%. On the consumption side, actual personal consumption in the fourth quarter of GDP quarter-on-quarter annualized growth was revised up to 2.8%. Multiple factors contributed to the US retail sales shrinking by 0.8% in January, significantly lower than the consensus expectation of -0.2%. However, the January data had a lot of noise, and it is estimated that US retail sales in February will rebound significantly from January. BEA credit card spending in February continued to rise from January, reaching the highest point since March 2023. In the real estate sector, the 30-year fixed mortgage rate rose to 6.9%, and mortgage applications continued to decline. Sales of new and existing homes rebounded in January, but may have been affected by the cold weather, resulting in a slower than expected recovery. In terms of investment, core capital goods orders rebounded in January, indicating a potential marginal improvement in business equipment investment. Financial Conditions: Goldman Sachs Financial Conditions Index (FCI) eased by 3 basis points since February Despite the decline in rate cut expectations leading to an increase in long-term US Treasury yields, better-than-expected tech stock earnings boosted US stock performance, resulting in minimal changes in financial conditions. The decline in rate cut expectations pushed up long-term US Treasury yields, with the 2-year and 10-year Treasury yields rising by 45 and 35 basis points to 4.64% and 4.26% respectively since February. During the same period, US stocks and the US dollar both rose, credit spreads narrowed, with the S&P 500 rising by 4.6% and the US dollar index appreciating by 0.7% to 103.9, while investment-grade corporate bond spreads narrowed by 6bps to 1.22%. The Goldman Sachs Financial Conditions Index has eased by 3bps since February, reaching a more accommodative level than it has been since 2023. Long-term interest rates, exchange rates, credit spreads and the stock market respectively contributed 13bps, 3bps, 1bp, and -19bps to this change. Inflation: January CPI exceeded expectations Consumer Price Index (CPI) exceeded expectations in January, with short-term inflation expectations significantly heating up, but little changes in medium to long-term inflation expectations. The US CPI and Core CPI increased by 0.3% and 0.4% respectively in January, exceeding expectations. Looking at specific components, core goods prices contracted by 0.3% month-on-month for the eighth consecutive month, but the Manheim index suggests that prices for used cars may have rebounded slightly in February. The unexpected increase in rental equivalence in January partially came from the rising weight of single-family housing, but rental prices overall are still cooling according to the Zillow and Apartmentlist rental indices. Personal Consumption Expenditures (PCE) and Core PCE both increased to 0.3% and 0.4% month-on-month in January, meeting expectations. In terms of inflation expectations, the strong US growth has pushed short-term breakeven inflation rates implied by TIPS up to almost 150bps, but the 5-year breakeven inflation rate remains at 2.6%, indicating overall stability. Labor Market: Strong rebound in January non-farm payroll, focus on sustainability Non-farm payroll and hourly wage growth both rebounded higher than expected in January, indicating a tight labor market in the US. The US added 353,000 non-farm jobs in January, significantly exceeding the consensus expectation of 185,000, with non-farm employment for November and December cumulative revised upward by 126,000 jobs. In terms of sectors, employment in service sectors such as business services and healthcare performed strongly, while employment in goods-producing sectors slowed slightly. Industries related to the business cycle in non-farm employment have also rebounded for two consecutive months, in line with indications of strong economic momentum in the US. Hourly wage growth rose by 0.2pct to 0.6% month-on-month, higher than the expected 0.3%. Some labor indicators have also shown improvement, with job vacancies slightly increasing in December, the job availability rate index from the Conference Board slightly improving in January, and initial jobless claims remaining low. The labor market rebalancing process is ongoing. Indeed job vacancies overall declined in February, and the leading indicator quit rate also decreased further. Looking ahead, focus on the March FOMC meeting (March 20) and February non-farm data (March 8). Risk Warning: US growth slows more than expected, Federal Reserve hawkishness exceeds expectations.