Expectations that central banks will lower interest rates in the coming months have moderated. Nevertheless, the global equity market is off to a reasonably good start this year, driven once again by the U.S. market and large-cap technology stocks. Notably, an abundance of recent data suggests that the U.S. economy remains resilient and is showing signs of strengthening. We discuss this more below.
Through much of 2023, there was evidence of slowing growth globally, particularly in the manufacturing sector, and to a lesser extent services. In contrast, the U.S. appeared to be moderating rather than slowing to the degree seen elsewhere. As a result, investors’ confidence in central banks’ ability to effectively cool economic activity to ease inflationary pressures has been steadily rising over the past year.
Recent data continue to highlight the U.S. economy’s resilience. The latest jobs report revealed the addition of 353,000 jobs in the month of January, nearly double the anticipated amount. Moreover, figures for the prior two months were revised higher, and gains were spread across a variety of industries as opposed to a select few. While layoff announcements have attracted attention over the past year, the employment backdrop has yet to markedly deteriorate. The number of Americans filing for unemployment benefits remains stable, and relatively strong wage growth continues. However, as usual, there are some signs of moderation to keep in mind. These include: an increase in part-time workers and a decrease in full-time positions, a lower number of job openings, and fewer people quitting their jobs. Overall, though, the U.S. labour market continues to display impressive strength.
Other recent indicators also signal a favourable backdrop for the U.S. economy. For example, January’s manufacturing data, while still weak in absolute terms, was better than expected and reached its highest level in over a year. In addition, the “new orders” component was particularly strong and may suggest further gains ahead. The services sector also showed an acceleration in January, while other areas such as consumer confidence and construction spending also came in reasonably strong. An improvement in financial conditions – often measured by a combination of equity market performance and the cost of accessing credit – are currently supportive for business activity overall.
A lingering question is whether U.S. inflation can continue to moderate in the face of an economy that is potentially reaccelerating. This may take some time to answer. With inflation largely trending in the right direction, the economy resilient as ever, and the U.S. central bank contemplating rate cuts, the U.S. equity market may continue to push higher for the time being. So too could investor optimism, as it often does when things are going well. As always, it is our responsibility to remain attentive to the risks and opportunities that may emerge.
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