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Economic Update: July 29, 2024

Posted July 29, 2024 at 9:45 am
J.P. Morgan Asset Management

Growth

2Q24 GDP growth came in at 2.8% q/q saar compared to expectations of 1.9% and above last quarter's 1.4%. Notably, the core PCE index rise to 2.9% was slightly firmer than expected but was below the 3.7% increase in 1Q, while consumer spending was a solid 2.3%. Overall, the report points to less softness than the 1Q print suggested. While the U.S. economy has cooled from its 4.1% pace in 2H23, growth averaged a solid pace of 2.1% in 1H24.

Jobs

The June Jobs report showed decent job gains, although other details looked a bit soft. Nonfarm payrolls rose by a strong 206K, beating consensus estimates. That said, revisions removed a hefty 111K jobs from April and May. Across sectors, health care and government saw the strongest job growth, but the cyclical temporary help services sector lost 49K jobs. Elsewhere, the unemployment rate ticked up to 4.1%, the highest level since November 2021, while wage growth eased to 0.3% m/m and 3.9% y/y. Overall, the labor market, while still tight relative to history, is steadily cooling, and easing wage growth provides further evidence that this labor market is not adding to inflationary pressures.

Profits

The 2Q24 earnings season has officially started! With 40% of market cap having reported, analyst estimates for pro-forma earnings per share (EPS) are currently tracking at $56.92. If realized, this would represent growth of 9.8% y/y and 5.9% q/q. Across sectors, information technology and communication services are expected to deliver another quarter of double digit earnings growth, while health care is expected to bounce back after a challenging first quarter. Elsewhere, some of the more cyclical sectors, like industrials and materials, are expected to see earnings fall relative to last year. As wage pressures fade and companies put greater focus on cost management, margins are expected to be the largest contributor to earnings growth.

Inflation

The June CPI report showed a welcome cooling of inflationary pressures. Headline CPI fell 0.1% m/m while core CPI rose just 0.1%, bringing the annual gains to 3.0% and 3.3%, respectively. Energy prices fell 2.0% m/m, led lower by gasoline, while lower new and used vehicle prices allowed core goods prices to fall 0.1% m/m. Across core services, shelter inflation rose just 0.2% m/m, breaking a near three-year streak of inflation at or above 0.3%, and auto insurance bounced 0.9% m/m after falling in May. Airfares also looked weak, falling 0.5% m/m. Overall, this report showed that disinflationary momentum is regathering steam, and price pressures should continue to ease through the summer.

Rates

At its June meeting, the FOMC voted to hold rates steady at 5.25%-5.50%, as expected, although its updated dot plot provided some hawkish surprises. In the updated Summary of Economic Projections, the Fed left its growth and employment forecasts for 2024 unchanged, while the headline and core inflation estimates were revised up 0.2% to 2.6% and 2.8%, respectively. On the dot plot, the median member lowered the expected number of 2024 rate cuts from three to one, although one cut was added to the 2025 forecast. The longer-run dot also rose to 2.8%, up from 2.6%. Moving forward, the outlook for interest rates remains largely dependent on incoming growth and inflation data. In our view, easing inflationary pressures through the summer and early fall should allow the Fed to cut one to two times this year.

Risks

  • Slower progress on disinflation could delay rate cuts, presenting challenges to both stocks and bonds.
  • A slow-moving economy is more vulnerable to any kind of shock.
  • Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.

Investment Themes

  • Fixed income offers attractive levels of income and protection against an economic downturn.
  • Broadening profit growth should present opportunities outside of the Magnificent 7 and support a more inclusive rally.
  • Improving economic conditions and fundamental tailwinds should support international markets.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Originally Posted July 29, 2024 – Economic Update

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