During Market Turbulence - Citibank

June 11, 2024

US Economics: Slowing down, even as payrolls stay stronger

? The steady rise in the unemployment rate may capture Fed attention as early as this week's FOMC meeting and, by September, should be enough to have the Fed pivoting toward the employment mandate.

? US economy is still slowing according to the usual cyclical pattern. The Fed is also likely to follow the cycle, cutting 25bp at every meeting starting in September and continuing into 2025 until reaching a terminal rate of 3.25-3.5%.

Citi Analysts were surprised by the strength of establishment survey payrolls at 272k ? and that will probably be enough to keep Fed officials on hold in both June and July. But it doesn't change Citi Analysts' view that after an extended period of resilience, the US economy is still slowing according to the usual cyclical pattern. The Fed is also likely to follow the cycle, cutting 25bp at every meeting starting in September and continuing into 2025 until reaching a terminal rate of 3.25-3.5%.

Even as establishment payrolls job growth continues to come in strong, Citi Analysts see concerning signs in a range of labor market indicators. At the most basic level, payrolls are counting more jobs than other attempts to measure the same quantity. The quarterly census of employment and wages (QCEW), which is used to benchmark total payrolls, suggests that job growth has rapidly slowed.

The household survey

contacts individuals to form

an estimate of employment.

Where payrolls increased by

2.8 million year-over-year,

household survey

employment was up just

376k over the same period.

This also suggests

downside risk to payrolls.

The unemployment rate,

which derives from the

household survey, has now

Source: Citi Analysts, BLS as of Jun 7, 2024.

risen 0.3pp over the last 4 months and has already reached the Fed's year-end forecast

of 4.0%. While receiving less attention, this gauge of labor market activity is weakening

as Citi Analysts expected and faster than consensus expectations. The glide higher in

unemployment has consistently predicted a sharper weakening in labor markets in

the past.

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US Economics: Slowing down, even as payrolls stay stronger

JOLTS data on job openings, hirings and separations continues to present a picture of a cooling labor market. While the hiring rate remains at a ten-year low of 3.6%, low quits and layoffs have so far prevented a sharper rise in unemployment. The ratio of openings to unemployed individuals has returned to 1.2-to-1, the higher end of the pre-pandemic range. In that sense, Fed officials may increasingly see the labor market as having come in to "balance."

The pickup in job growth in

May came together with a

surprising bounce in NFIB

small business hiring

intentions. Citi Analysts

have been more focused on

small and medium business

behavior as this is where

Citi Analysts think more

firms are facing challenges

from higher wages and

interest rates. Consumer

survey data points to a gradual loosening of the

Source: Citi Analysts, The Conference Board as of Jun 7, 2024.

labor market with jobs plentiful declining steadily and "hard to get" beginning to rise

from low levels.

Given the mixed labor market data, a key dovish/hawkish indicator at this week's FOMC meeting will be whether Chair Powell concentrates more on payrolls or on the unemployment rate and other weaker labor market data. The Fed is also likely to see this week's inflation reading as a signpost on the way to rate cuts, after last month's reading was judged as "encouraging" by Fed officials and given a "C+" by Governor Waller. Citi Analysts project core CPI to slow to 0.26%MoM from 0.29%MoM in April and 0.36%MoM in March. The sequential slowing and reading not far off from those in late 2023 when core PCE inflation ran at 2.0% will count as "more good data" for Governor Waller and the committee. Citi Analysts are forecasting core PCE at around 0.20%MoM in coming months to keep Fed officials on-track to cut rates later this year, even if the labor market data holds up better than in Citi Analysts' base-case forecast.

*INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE *INVESTMENT INVOLVES RISKS

US Economics: Slowing down, even as payrolls stay stronger

Citi Analysts have recently become more convinced that shelter inflation will sequentially slow as the Fed has long forecast. Zillow rents have been rising at a pre-pandemic pace for some time, but now the new tenant rent index has softened along with general housing activity. Broad goods prices are likely to move more sideways, while a decline in auto prices should offer some help to get to a lower overall core reading.

Source: Citi Analysts, BLS as of Jun 7, 2024.

*INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE *INVESTMENT INVOLVES RISKS

India Equity 4Q Earnings ahead with positive revisions momentum

? Nifty EBITDA/Earnings growth was ahead of estimates by +200bps/+700bps at 8%/13% YoY.

? Nifty EPS growth outlook for FY25E/26E stands at 9%/13% YoY for Citi while Consensus expectations are for 10%/16% YoY.

BSE100 (ex-energy & large oneoffs) EBITDA/Earnings growth was ahead by +650bps/+1300bps vs estimates, on strong 'beats' in Financials and Industrials sectors. Other sectors, while mostly inline EBITDA, saw slightly ahead Profit After Tax (PAT) vs. estimates leading to higher earnings growth.

BSE100: Headline Performance vs Est. (ex-Energy)

Nifty EBITDA/Earnings growth was ahead of estimates by +200bps/+700bps at 8%/13% YoY. Amongst sectors, Staples and energy have seen earnings downgrades and have subdued FY25 growth expectations while Industrials and Healthcare have seen upgrades and have strong growth expectations.

YoY comparison excludes 2 private sector banks Source: Citi Analysts, Company Reports, as of Jun 2, 2024.

NIFTY FY25E/26E EPS: Citi/Consensus

NIFTY Earnings and Revisions: Nifty EPS growth outlook for FY25E/26E stands at 9%/13% YoY for Citi while Consensus expectations are for 10%/16% YoY. Through 4Q earnings season, consensus estimates for FY25/26E have seen slight upwards revisions.

Source: Citi Analysts, Bloomberg, as of Jun 2, 2024.

*INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE *INVESTMENT INVOLVES RISKS

India Equity 4Q Earnings ahead with positive revisions momentum

Amongst sectors, estimates suggest sustained strong growth trends in Industrials and Healthcare, while Discretionary (incl. Auto), Utilities & Financials are expected to see slowdown in earnings growth; IT and Staples are expected to continue to see tepid earnings growth while commodities continue to be affected by base-effect.

PAT Surprise vs Expectations

Flows and Valuations In May, Foreign Institutional Investors (FIIs) have been net sellers to the tune of ~US$-3bn (CYTD: US$-3bn). Domestic Mutual Funds (DMFs) continue to remain net buyers (DII inflows of >US$+6bn in May and US$25bn CYTD).

Source: Citi Analysts, Company Reports, as of Jun 2, 2024.

FII vs DII: Strong domestic flows CY2024TD ($Mn)

Indian equities continue to trade at relative premium on both absolute/relative sense: Nifty trades at +1SD to 10Y average and >+1SD to its 10Y avg premium vs emerging markets.

Source: Citi Analysts, Bloomberg, as of Jun 2, 2024.

*INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE *INVESTMENT INVOLVES RISKS

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