As earnings season wraps up, the U.S. economic landscape is surely one of transformation. Especially with trade uncertainties fading and the Federal Reserve heading in a little bit more hawkish direction. For perspective, more than 90% of S&P 500 companies have already reported their earnings. The implications for equity markets and inflation are still being heavily scrutinized by analysts to this day.
The latest data indicates that the U.S. experienced its highest continuing jobless claims since November 2021, raising concerns about employment stability. The picture on the country’s broader economy front is one of a significant slowdown. In the second quarter, growth fell to an annualized 0.3%, a steep decline from 0.7% in the first quarter. These economic indicators have fueled speculation over the Federal Reserve’s near-term monetary policy trajectory.
Fears around trade, which have hung over the market outlook for much of 2019, are starting to recede. The outlook for international trade is boosting confidence. Consequently, equity markets are having a historic boom and most investors are relieved that new tariffs and other trade barriers are not emerging. Mainland European indices are at the forefront of the recent stock market bull run. This excellent performance is a testament to the overall mood in the market.
Like the pound, the FTSE 100 has been underperforming other markets. This is all the more surprising considering all the surprisingly strong data that has been coming out of the UK. After contracting by 0.2% in May, in June the UK economy grew by 0.4%. This sudden windfall has raised fresh hopes for the order of the public finances. Before the OBR’s announcement, analysts had estimated that the public finance shortfall might reach £50 billion. Recent events suggest that number could be much lower than anticipated.
It seems the Federal Reserve is most deftly steering through these choppy economic waters. It’s coming under increasing pressure from all sides—including by demands from former President Trump to lower interest rate to 1%. This demand is indicative of a sincere lay belief. In fact, many observers expect the Fed to adopt a much more accommodating monetary policy with growth slowing and jobless claims continuing to rise.
In other related news, Scott Bessant dropped this great news. …or the fact that eleven candidates are still running to replace current Chair of the Federal Reserve! To say we have a diverse, new cohort of leaders is an understatement. As economic conditions and popular support continue to evolve, the central bank is preparing itself to rethink its approach.
With the upcoming Producer Price Index (PPI) factory prices data inflation will be back in the spotlight again. Inflationary pressures are a concern for consumers and policy makers alike. All eyes on the Fed Market participants are treading lightly on this data as they look to see what’s next for the Fed. This is a frank admission that inflation expectations—not actual inflation—are motivating interest rate hikes. Today’s PPI report likely will have a disproportionate impact on future economic policies.
Taken together, these different macroeconomic currents create an obfuscating yet revealing portrait of the U.S. economy. The combination of high jobless claims, slowing growth, and changing monetary policy dynamics sets the stage for potential volatility in financial markets. Investors and economists are watching these developments with keen interest. They want to understand their effects on the national and international economies.