2024-10-04 - Wealth

Slight Uptick in U.S. Economic Activity

The recent release of the Federal Reserve's final Beige Book for the year has captured the attention of economists and investors alike. This document, which offers a comprehensive snapshot of economic conditions across various regions of the United States, revealed that a noticeable number of areas are experiencing slight yet steady growth in economic activity. Of particular interest is the emergence of three specific regions demonstrating moderate growth, contrasting with two others where conditions remained flat or declined slightly. This improvement is significant when compared to the previous Beige Book, where only a couple of regions reported mild growth, indicating that a broader swath of the U.S. economy is beginning to reflect optimistic trends.

The uptick in economic vigor signifies a favorable macroeconomic outlook for the United States over the past few months. There are indications that consumer markets, business productivity, and job stability are all progressing in a positive direction. This collective trend will undoubtedly play a crucial role in shaping the Federal Reserve's future monetary policy decisions. Investors are likely to reassess their confidence in the U.S. market based on these developments, possibly fuelling continued economic activity or prompting a recalibration of strategies to tackle potential risks that may arise.

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Despite the generally moderate tone of the Beige Book and its familiar format, the impact on the U.S. dollar index was muted. On the day of the reports, the dollar experienced fluctuations, initially rising before settling into a decline, with notable movements around 10:00 PM Beijing time. Following the Beige Book's publication at 3:00 AM the next day, a small increase in the dollar index was recorded. This reaction is indicative of the market's cautious optimism, rather than overt enthusiasm.

Turning to price levels, the Beige Book suggested that the current pace of price growth is expected to persist. However, some companies across various regions have flagged concerns that rising tax rates could pose significant upward risks to inflation. Presently, the core Consumer Price Index (CPI) in the U.S. has registered at 3.3%, a figure that remains steady, showing an increase from 3.2% in July and August. These inflationary indicators imply that the U.S. is still in a rebound phase, which could limit the Federal Reserve's capacity to enact aggressive rate cuts in the near future.

In the realm of employment, the Beige Book's narrative remains neutrally optimistic. The current labor turnover rate is low, which has subsequently restricted recruitment activity, contributing to a flat level of layoffs. Projections for employment levels in the coming year indicate a stable or slightly upwards trend. The latest unemployment rate stands at 4.1%, unchanged from previous figures, yet down from July's 4.3%. The most recent data showing an addition of just 12,000 non-farm jobs in October serves as a point of concern, marking the lowest figures seen in years. If the employment figures for November continue on this downward trajectory, it could signal deeper issues within the labor market. Conversely, should new job growth rebound to normal levels of around 200,000, previous anomalies in job growth may not significantly alter the outlook for employment in the United States.

From a technical perspective, the market analysis indicates that the mid-term benchmark range from November 6 to November 22 saw a rise from a low of 103.3 to a high of 108.0. Currently, the price is positioned at 106.2, which lies within the neutral zone as defined by Fibonacci retracement levels (between 105.1 and 106.3) and exhibits a lack of a clear directional trend. The candlestick formation observed for November 29, along with corresponding patterns from previous days, suggests a bullish trend might be anticipated, potentially moving the market towards the upper limit of 108.0.

Examining the recent upward trajectory of the dollar index since October reveals that it is primarily driven by the anticipated resurgence of high inflation and aggressive Federal Reserve policies. Nonetheless, should either of these factors fail to materialize, there is a strong possibility that the dollar index could swiftly recoup its previous gains. The long-term direction of the dollar index ultimately hinges upon the Federal Reserve's monetary policy stance. As long as there is no substantial deviation from the current path of interest rate cuts, the dollar index could be vulnerable to volatility; the phrase “the higher it climbs, the harder it falls” aptly summarizes this precarious situation for the currency.