The US Federal Reserve elected to keep interest rates unchanged at an upper bound of 5.5% yesterday. This was consistent with market expectations and our own forecast. In the statement and press conference that followed the decision, Chair Powell indicated that rates were likely to be higher for longer, citing “a lack of further progress” towards the Fed meeting its 2% inflation target. Powell did however suggest that he thought that the next move in rates was unlikely to be a hike, suggesting that the committee would need to see strong evidence that current rates weren’t sufficiently restrictive before that become a possibility. The Fed also announced that it plans to slow the pace at which it is shrinking its balance sheet, starting in June.
The March JOLTS report showed a decline in the number of job openings, which fell to 8.49m from 8.81mn in February. Declines in job openings were largest in the construction, financial services and retail trade sectors, arguably industries more sensitive to the prevailing high interest rate environment. The ratio of job openings to unemployed workers also fell to a value of 1.32 in April, which although still above pre-Covid trends, has come down significantly from a peak of 2.0 in March 2022. There was also a decline in the quits rate, suggesting that workers are becoming increasingly nervous about their ability to find a new job. In contrast to the tentative signs of cooling evident in the JOLTS report, the April ADP employment data showed a stronger-than-expected rise in private payrolls, which rose 192K. There was however an indication in the ADP report that wage growth was slower, with workers who changed jobs seeing a 9.3% rise down from 10.3% in March.
The April ISM manufacturing PMI print fell back below the neutral-50 mark, declining to a value of 49.2 from 50.3 in March. The move in the ISM index mirrors the decline seen in the S&P US Global manufacturing PMI, which fell to a value of 50 in April from 51.9 in March. Of concern for the Fed will be the rise in the ISM input price sub-component, which rose sharply, to its highest level since June 2022.
Saudi Arabia has reported a real GDP contraction of 1.8% y/y on the preliminary estimate for Q1. This was a more modest contraction than the 4.3% recorded in Q4 2023, but oil production curbs continue to weigh on headline growth. The oil economy shrank 10.6% y/y, while non-oil GDP registered growth of 2.8% and government activities expanded 2.0%. On a quarterly basis, Q1 was 1.3% larger than the previous quarter, with oil expanding 2.4% q/q and non-oil GDP up 0.5%, while government activity shrank 1.0%. We forecast real GDP growth of 1.0% in Saudi Arabia in 2024, with a projected 4.0% contraction in oil GDP and 4.0% growth in non-oil activity.
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