Since we presented our Macroeconomic Outlook webinar early last month, there have been some significant new data releases, both positive and negative. We continue to hold our view that current macroeconomic conditions warrant a rate cut sooner than later, and that the underlying US economy remains robust.
On Wednesday, Fed chair Jerome Powell iterated the Fed’s decision to keep rates unchanged but hinted that “a rate cut could be on the table in the September meeting.” The equity markets rose bolstered by the view a rate cut is coming in September; however, equities have had a significant retreat the last two days due to fears that the Fed may not be acting quickly enough. This was backed by downward guidance from some of the bellwether stocks as well as other macroeconomic data.
Today, the US Bureau of Labor Statistics released its July employment summary which showed weaker than expected data, continuing the trend of a softening labor market. July hiring was 114,000 vs. 175,000 expected, and June’s gain was revised lower to 179,000 from 206,000. This was also reflected in the unemployment rate, which grew to 4.3%, up from 4.1% last month. As a reminder, the unemployment rate has been below 4% for much of the last two years. Fears that the labor market is signaling the beginning of a more serious economic slowdown have driven a sharp selloff in the public markets.
Yesterday, the Bank of England cut rates by a quarter-point, joining the European Central Bank, Bank of Canada, and Swiss National Bank who have also cut rates this summer. Inflation has been stickier in the US compared to global peers, forcing the Fed to hold its benchmark rate.
While June’s CPI of 3.0% represented the lowest level in 3+ years, it remains above the Fed’s 2.0% target. A deeper look into the latest inflation data shows that CPI decreased 0.1% month-over-month from May, a trend that we expect to continue. Stickiness in inflation can be attributed to shelter and services costs and we are optimistic these will soon fall. Many pieces of services inflation are connected to what has been a hot labor market; labor shortages drove up worker wages that were passed on to consumers. Shelter costs, the largest weighting in the overall CPI basket, are considered a lagging indicator due to the methodologies in which prices are collected and will likely feel downward pressure as a record number of housing units under construction come to market.
With inflation falling and cautionary signals in the labor market, we believe the Fed has support to justify a rate cut soon to ensure economic activity continues. Reducing rates will also be a key catalyst for igniting activity in the broader M&A markets – lowering borrowing costs can increase the amount of leverage used in deals, allowing buyers to more closely meet seller’s expectations and reduce today’s bid-ask-spread. To date in 2024, the increase in valuation multiples vs. 2023 on broadly syndicated loan funded deals has been driven by an increase in debt / EBITDA multiples, which have grown from 4.8x to 5.2x. We expect this trend to continue following a rate cut, which can create an active M&A environment in 2H24 and beyond.
The broader US economy remains strong. The economy grew at a robust 2.8% annualized rate in Q2-24, up from 1.3% in Q1-24, held up by resilient consumer spending. Many economists forecast 2024 US full-year GDP to be above 2.0%, healthy and ahead of many global peers. Despite intraday volatility, our prognosis on the US economy is steady. We are optimistic that our economy is finding a positive landing as it rebalances from Covid anomalies, and a near-term rate cut can quell negative indicators and return the US to a path focused on growth and productivity.
November 20, 2024 
