Latest Economic Review: Sunpointe Illuminations

April 2024

Labor markets show solid hiring and moderating wage inflation

The March employment report showed another surge in hiring with 303,000 new jobs added to the U.S. economy. The unemployment rate edged lower to 3.8%, even though the labor force participation rate moved higher to 62.7%. Health care led with 72,000 new jobs, followed by government (71,000), leisure and hospitality (49,000), and construction (39,000). The January report was revised higher while the February report was revised slightly lower. The all-important average hourly earnings data showed a gain of 0.3% month-over-month (M/M) or 4.1% year-over-year (Y/Y). One concern was a household survey which showed an increase in part-time hiring at the expense of a decline in full-time hiring. This report showed that labor markets are still strong with some moderation in wage inflation.

Mixed economic data picture creates some uncertainty over timing and path of Fed rate cuts

According to the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures, inflation rose 2.8% Y/Y in February and was in-line with expectations. Headline PCE increased 2.5% Y/Y and came in slightly below expectations. The March CPI report showed hotter than expected inflation, as CPI rose 3.5% Y/Y and Core CPI rose 3.8% Y/Y. All eyes have been on the Fed and their next move regarding monetary policy. After pricing in six or seven 2024 rate cuts at the beginning of the year, market expectations have come down sharply and the Fed’s dot plot now shows three rate cuts in 2024. The Fed Fund Futures now project two rate cuts starting at the September meeting.

The ISM manufacturing index increased to 50.3 in March, ending a streak of sixteen consecutive months of contraction. The composition of the above-consensus report was also strong, as the production, new orders, and employment components all increased. The ISM Services PMI weakened in March, led mainly by a decline in new orders. Production and employment posted slight increases in the level of activity. The headline reading of 51.4 was below expectations. A figure above 50 indicates expansion.

Source: CNBC, U.S. Bureau of Labor Statistics

Can AI & GLP1s fuel earnings growth for the third straight quarter?

As we enter the Q1 2024 earnings season, expectations are for the third consecutive quarter of Y/Y growth. Earnings are forecast to grow 3.2% in Q1 with the strongest growth coming from the utilities, IT, communication services and consumer discretionary sectors. Energy, materials, and healthcare companies are expected to post a decline in Q1 EPS. Earnings estimates have been revised lower since the start of the year for Q1. The analyst community expects 10.9% EPS growth for the S&P 500 in 2024 and 11.6% growth in 2025.

Source: FactSet 

ECB looks poised to cut rates in June to stimulate growth in the fragile eurozone economy

While the eurozone economy remains fragile, it appears to have stabilized in March based on the Flash Composite PMI. The reading of 49.9 was just below the key 50 level and was a nine-month high. A modest recovery of service sector output gained momentum, accompanied by a softening in the rate of manufacturing output decline. However, ongoing decreases in output in France and Germany offset a gathering upturn in the rest of the eurozone pointing to an uneven economic picture. Inflation in the eurozone hit a four-month low of 2.4% in March with the core rate falling to 2.9%. Both readings remain above the ECB’s 2% target and most of the increase came from the services side of the economy. Given the weakness in eurozone economic activity and tamer inflation, the ECB could begin to cut rates in June to stimulate growth.

Say goodbye to negative interest rates, Japan!

On March 19th, the Bank of Japan ended perhaps the world’s greatest monetary policy experiment with its first interest rate hike since 2007. The shift reflects changes in the underlying conditions of the Japanese economy, mainly the rise in inflation which has topped 2% for the past 22 months. Japan is hardly booming with growth that moves in and out of recession depending on the quarter, but perhaps this signals the end of persistent deflation. The BOJ was the last central bank to exit negative interest rates with the target on overnight loans moving to a range of 0%-0.1%. It will also stop buying exchange-traded funds and abolish its yield-curve-control framework, a tool to cap long-term bond yields. While this is an important development, the BOJ remains quite accommodative.

China’s PMIs rebound, but concerns remain over deflation and the real estate crisis

China’s factory activity in March expanded by its strongest pace in more than a year. The Caixin/S&P Global China manufacturing PMI was 51.1 in March, its strongest since February 2023. This reading on manufacturing was consistent with the official National Bureau of Statistics Manufacturing PMI which came in at 50.8 in March. Growth in the Chinese services sector hit a nine-month high in March based on the official Non-Manufacturing PMI. The headline reading of 53.0 was well ahead of the 51.4 reading in the previous month. One continued concern for China is potential deflation and falling prices. Producer prices have declined for well over a year while consumer prices have declined for four of the past five months.

It has been quite a run for the S&P 500

The S&P 500 gained over 10% during the first quarter of 2024 and has risen ~25% since its rally began in November 2023. The S&P 500 has also gone more than a year without incurring a 2% decline, the 6th longest streak since 1965. The key U.S. benchmark has also notched 22 all-time highs this year. We recognize that much of the strength has come from only a handful of names, but market breadth broadened in Q1 with better participation from value stocks and small caps. Uncertainty over inflation and the future path of interest rates and Fed policy has spooked markets a bit in early April.

Source: Bloomberg, Goldman Sachs, as of 3/31/24

Beware of cocoa/chocolate prices!

Cocoa prices have surged more than 140% thus far in 2024, due to severe supply shortages in West Africa. Unfavorable growing conditions and crop disease on West African farms over the past year have curbed cocoa production and fueled a parabolic rally in cocoa prices. Cocoa prices are seeing support from the current El Nino weather pattern after an El Nino event in 2016 caused a drought that fueled a rally in cocoa prices to a 12-year high. Countries such as Ivory Coast, Ghana, and Nigeria have slashed exports. Surging chocolate prices should lead to a decline in demand and falling prices.

The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.