Adjusting expectations: Rate cuts, oil surges, and job market trends

Inflation pressures delay Fed rate cuts

This chart examines the projected rate cuts by the Federal Reserve for 2024. Initially, the Fed anticipated three cuts in December, while market expectations suggested a more aggressive six cuts throughout the year.

However, with the latest U.S. consumer price data showing a continued increase in March, particularly in gasoline and rental housing, financial markets are now adjusting their expectations. The likelihood of rate cuts is being pushed back, with a delay until at least September now anticipated.

Both the Fed and market participants will continue to closely scrutinize economic and inflation data to gauge the timing and necessity of rate adjustments.

Beneish M-Score highlights risks in emerging markets

The Beneish M-Score is a mathematical model that employs various financial ratios to identify companies likely to have manipulated their earnings. Created by Professor M. Beneish in 1999, it serves as a prevalent tool for detecting fraud. A score above -1.78 indicates potential manipulation of a company's financial statements.

Macrobond/Factset Equity Factor Aggregates (EFA) offers the Beneish M-Score for over 100 countries. In today's demonstration, we focus on a chart that highlights 18 emerging markets. Our analysis shows that two countries, Argentina and Turkey, have recently exceeded the critical threshold, suggesting potential manipulation in their financial reporting. Both countries are currently grappling with severe economic challenges, which may be influencing these findings.

Moreover, Egypt and Hungary have recently exceeded the upper edge of their interdecile range (10-90 percentiles). While they have not crossed the >-1.78 threshold, this may be a worrying upward trend.

Brent oil prices reach new highs due to geopolitical tensions and production cuts

The Brent spot price has surged to its highest level since last October, driven by three pivotal events: escalating tensions in the Middle East, Ukrainian drone attacks on Russian refineries, and the anticipation that OPEC will maintain its production cuts.

These geopolitical factors have propelled Brent oil futures to multi-year highs, as illustrated by the red line on the chart. Remarkably, current futures prices have exceeded those observed during the early 2022 price surge.

This upward trajectory in Brent oil prices is concerning for global markets, signaling potential increases in fuel costs for consumers this spring and summer.

Commodities remain low compared to the S&P 500 despite Brent price surge

Despite the recent surge in the Brent spot price, commodities remain historically low compared to the S&P 500. This analysis highlights the ratio between the S&P GSCI Commodity Index and the S&P 500. Three distinct peaks stand out, indicating periods when commodities were relatively expensive compared to the S&P 500: during the 1973/74 oil crisis, the 1990 Gulf War, and the 2008 global financial crisis.

Currently, the scenario is inverted, with commodities being relatively cheap compared to the S&P 500. An examination of deviations from the historical average reveals that such conditions were previously observed only before 1973, during the tech bubble, and now. This period also marks the longest stretch below the one standard deviation band. Unlike past instances, the ratio is now at an all-time low.

March CPI data shows persistent inflation, influencing Fed's rate decisions

US inflation appears to be stabilizing around 3%, but recent data suggest persistent pressures. This analysis delves into the CPI basket and the price movements of its individual components. Roughly 38% of the items have maintained their price levels or experienced a decrease compared to the previous year.

However, 36% of the items have seen an annual inflation rate exceeding 3%. With consumer prices increasing more than expected in March, financial markets now anticipate that the Federal Reserve might delay interest rate cuts until September. The mix of ongoing high inflation and a robust job market could influence the Fed's monetary policy decisions in the coming months.

US labor market shows strength amid tight conditions and rising jobless claims

The US labor market has demonstrated resilience, as evidenced by recent nonfarm payroll figures exceeding expectations despite slight increases in the unemployment rate. However, this 3.5–4% unemployment rate range is among the lowest recorded in recent decades. The labor market remains tight, with job vacancies outnumbering unemployed individuals.

Still, the impact of previous monetary tightening is anticipated to unfold over time, potentially affecting economic activity and employment adversely. To gauge job market health across states, we've created an indicator based on the ratio of states with increasing or decreasing continuing jobless claims. Historically, when all states have experienced rising jobless claims (tracked by a 12-month moving average), the unemployment rate has escalated, often signaling a recession. Currently, the indicator suggests that higher jobless claims across states have not reached 100%, having declined from above 95%. This may underscore the US labor market's resilience.