Weekly Wisdom – March 14, 2024

By Hightower Great Lakes on March 14, 2024

Soft Landing Narrative Strengthens

Non-farm payrolls released last week came in above consensus for the fourth month in a row. The report indicated the creation of 275,000 new jobs, compared to the expectation of a 200,000 increase.

Among industries, construction added 23,000 new jobs, the most in the last six months and above the previous 12-month average of ~18,000.

The January and December job reports were both revised downward to 229,000 and 290,000, respectively, for a two-month total revision of 167,000 fewer jobs. With the six-month average at 231,167, the previous three prints post-revisions still support a growing labor market.

Hourly earnings increased 4.3% y/y and 0.1% m/m, both below Wall Street’s estimates. The m/m increase of 0.1% is the lowest since February 2022, and below the 12-month average increase of 0.32% per month. For context, pre-Covid hourly earnings were expanding 3% y/y.

Both the non-farm payroll and hourly earnings data support the soft-landing narrative: continued job growth coupled with a slowing wage increase. The Fed’s preferred inflation measure, the personal consumption expenditures price index (PCE), increased 0.34% m/m for January 2024.

This is significantly lower than the highs experienced in the summer of 2022, when June data showed a 0.95% m/m increase in PCE. The recent softening inflation prints are providing the Fed with the necessary data it needs to begin thinking about rate cuts. A few more months of PCE marching towards the Fed’s 2% target should provide enough evidence to begin lowering the policy rate.

Chart 1: Job Gains and Hourly Earnings are Positive, but Trending Downward[1]

Rate Cuts to Begin This Year

Last week, Jerome Powell took on Capitol Hill in a two-day appearance. Although providing no new rhetoric, Powell reiterated the current Fed stance: “The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”[2]

As noted above, inflation has been weakening materially in recent months, but the Fed still prefers to see data soften throughout this year. Powell has been reluctant in hinting toward a timeline to begin cutting, but his expectation is that the committee will gain the confidence sometime this year to begin that process.

He stated that the Central Bank is “not far” from gaining the confidence needed to begin cutting interest rates, and that inflation “has eased notably over the past year.”

Continuing, Powell was questioned on the possibility of a coming recession, stating, “There’s no evidence or reason to think that the U.S. economy is in, or in some kind of, short-term risk of falling into a recession.”[3] As of March 7, the Atlanta Fed’s GDPNow tracker is estimating

2024 Q1 GDP growth at 2.5%.[4] This would mark the seventh consecutive quarter of real GDP growth above 2%, indicating a highly functioning economy with no signs of slowing.

Rates Have Likely Peaked

The policy rate is believed to be at its peak for this tightening cycle, dialing back the fears of a surprise hike. With the labor market showing continued strength and hot December and January CPI prints, rate cut probabilities for 2024 have fallen dramatically to start the year.

Earlier this January, market participants were projecting six to seven 25 bps cuts in 2024.[5] This wishful thinking has now come more in line with Fed dot plot expectations, which show the federal funds rate near 4.5% to end 2024.

We believe Powell leaned dovish last week and is looking forward to the Fed’s next steps. With inflation peaking months ago, strong economic and job growth, and risk-on market sentiment, the U.S. has shown resiliency exiting the period of zero-interest rate policy. Companies have maintained growth with interest rates above 5%, and earnings growth expectations for 2024 remain above 10%.[6]

Dovish Signals to Lead Investment Overseas

Looking beyond the major themes that have propelled markets this year, foreign and emerging market opportunities have been experiencing increased momentum as of late. With valuations and markets hitting new highs seemingly every day, divergence from big tech and AI is a recent trend. Looking abroad, we believe India to be a bright spot for 2024 and beyond.

Last week, Prime Minister Narendra Modi approved $15 billion worth of infrastructure projects in hopes of bolstering the economy to the third largest in the world. This comes just before the country’s election announcement as Modi looks to gain favorability.

The country experienced 8.4% economic growth in the fourth quarter of 2023, with the previous two quarters above 8% growth as well. In Q4, its manufacturing sector grew 11.6% y/y, with investment growth above 10% for the second quarter in a row.[7]

Chart 2: India’s $15 Billion Infrastructure Investment Plan[8]

IMF executive director Krishnamurthy Subramanian recently stated that India is “easily” the fastest growing economy in the world and that the country is poised for near 8% growth this year.[9] Subramanian believes the shift in its economy is due to the government’s focus toward higher capital expenditure.

The $15 billion infrastructure investment comes on top of the country stating earlier this year that it plans to spend a record $134 billion on infrastructure creation over the next two years.[10]

Investment opportunities in India are also seen as a divesture away of China. 61% of top U.S. executives reported that they would prefer to manufacture in India than China.[11]

Struggling to recover from Covid restrictions, a lack of transparency in data, shrinking population and pain in the real estate sector are a few of the issues facing the Chinese economy. India is in prime position to compete against other Asian-Pacific countries to win over business within manufacturing and supply chains.

Chart 3: Investment Allocation in India Is Pulling Away From China[12]

Click here to read last week’s Weekly Wisdom (3/9).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of March 11, 2024.

[2] Source: CNBC.com. As of March 6, 2024.

[3] Source: CNN.com. As of March 6, 2024.

[4] Source: Atlantafed.org. As of March 11, 2024.

[5] Source: WSJ.com. As of January 17, 2024.

[6] Source: FactSet. As of February 16, 2024.

[7] Source: Reuters.com. As of February 29, 2024.

[8] Source: Reuters.com. As of March 8, 2024.

[9] Source: CNBC.com. As of March 1, 2024.

[10] Source: Reuters.com. As of February 1, 2024.

[11] Source: CNBC.com. As of January 24, 2024.

[12] Source: FactSet. As of March 12, 2024.