On Friday, BofA Global Research revised its forecast for the Federal Reserve's monetary policy, projecting a reduction in the federal funds rate (FFR) by 25 basis points in September. This adjustment is a response to a combination of economic indicators, including a softer-than-expected July employment report and the ISM manufacturing report. These data points are perceived as signals that reinforce the likelihood of a rate cut.
The July employment figures, influenced by the effects of Hurricane Beryl, showed 436,000 nonagricultural workers were unable to work due to adverse weather conditions, a significant increase from 59,000 in June. Additionally, there was a noted decrease in aggregate hours worked by production and nonsupervisory workers, which fell by 0.2% for the month.
Despite these figures, BofA does not consider the 114,000 jobs added in July to be indicative of a new trend in employment growth, instead pointing to the three-month average of around 175,000 as a more accurate reflection of the hiring landscape.
Amid these labor market developments, inflation remains above the Fed's 2% target, necessitating a careful balance between supporting economic growth and containing inflation pressures. BofA maintains its expectation for a gradual pace of easing, rather than a series of aggressive cuts, to address these economic conditions.
Furthermore, BofA has adjusted its forecast for the terminal rate in the upcoming normalization cycle, reducing it by 25 basis points to a range of 3.25-3.5%. This revised outlook reflects a potential shift in the need for a "higher-for-longer" policy stance if the economy is indeed cooling more rapidly than previously anticipated by BofA or the Federal Reserve. The firm will continue to monitor for signs that risks of a hard economic landing are increasing.
In other recent news, significant developments have been observed in the financial market. Analysts at Evercore and RBC anticipate that the Federal Reserve will implement interest rate cuts in 2024, with the first potentially occurring in September. Evercore suggests a strategy of three rate cuts, possibly initiated by a substantial 50 basis point reduction.
Simultaneously, BCA Research predicts a decline in the S&P 500 to 3750, foreseeing a recession towards the end of 2024 or the beginning of 2025. The firm also expects a global economic slowdown during this period.
On a more positive note, U.S. households have reportedly reached a record net worth of $161 trillion in the first quarter of 2024, largely due to rising equity prices and real estate values. This increase is expected to significantly boost consumer spending this year.
In Asia, optimism surrounds potential interest rate cuts by the U.S. Federal Reserve. This sentiment has led to a rise in the MSCI's broadest index of Asia-Pacific shares outside Japan. These are among the recent developments in the financial markets.
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