We have all been singing the praises of the US economy of late, where the rest of the world’s economies are under pressure, the US economy has chugged away and been the shining light. However, over the past week, we have seen some cracks starting to show in the US economy, which will be felt in all the reaches of the world.

One of the first cracks to show last week was the US PMI for October, which came in at a level of 46.7, 2.3 percentage points lower than the 49.0 recorded in September and also below the key 50 mark that separates US manufacturing expansion from contraction for the 12th straight month. It is interesting to note that before that, the US saw 28 months of manufacturing growth after May 2020, not long after the start of the pandemic earlier that year. Other PMI figures also showed contraction from the new order index and the Backlog of orders. This number expresses that tough times are ahead for the US.

PMI below 50 for 12 months

Another critical data set for the US over the past few months has been the US non-farm payroll number, beating expectations for most of this year. This shows that the US economy, and especially the labour market, has not flinched at the higher for longer mantra by the Fed. The hiking cycle has done little to dampen the hiring cycle in US businesses, and should the hiring slowdown, it could be a sign that the economy of the US will be slowing.

At the end of last week, we saw the US non-farm payroll number come in lower than expectations, which has caused a bit of a ruffle in the market. As we stated above, any weakness in the US economy will undoubtedly mean that the US economy is slowing, and the market will look to the Fed to navigate the country out of a hard landing. After the number, the call was hard from the market that the US Fed is done with its interest rate hiking cycle, and that was echoed on the market with the US dollar weakening and US treasury yields retreating from their highs. 


Non-Farm missing estimates

Immediately after the release, we saw market commentators already talking about a possible hard landing for the US economy. Should the data reflect that the US could be heading for a recession sooner rather than later, the narrative that the Fed has been feeding the market of higher rate for longer could be out the window. A recession in the US will force the hand of the Fed to start cutting rates to stimulate the economy and cheapen credit. The market is expecting the Fed to start cutting rates by June 2024.


Market is not expecting the Fed to hold rates

What would it mean for the market if the cracks widen in the American economy?

Thus far, we have seen the market moving out of the US dollar and back into riskier assets as any talk of cutting interest rates moves the incentive down for the market to invest in the US dollar. This will be good for EM currencies in the short but expect major volatility if the slowdown in the US economy continues as the US dollar also has the honour of being one of the vestiges of safety when the world turns dovish. This could be a rough 8 months for the market, with volatility the only certainty.