Global Economy & Markets, Weekly Roundup 15/07/24
The Federal Reserve’s confidence that inflation is moving back down to target has increased, while the attempted assassination of Mr. Trump adds a new layer of political uncertainty
Global equity markets edged higher in the past week (MSCI ACWI: +1.3% wow), while government bond yields decreased, with investors ramping up their expectations for monetary policy easing in H2:2024. Euro area periphery bond spreads narrowed further (GGB-Bund below 100 bps).
The S&P500 reached fresh highs, with attention gradually turning to the Q2:2024 earnings season (expectations for +11% yoy EPS growth). On Monday July 15th, markets’ reaction to the assassination attempt against former President Trump, was measured.
US political developments are set to increasingly be a focal point as we head towards the November elections, with the attack on Mr. Trump adding a fresh layer of uncertainty. At the same time, President Biden faces increasing calls to withdraw from the campaign, following his disappointing performance in the first Presidential debate. According to prediction markets, the odds of a Trump victory have been boosted further.
On central banks, the ECB is expected to stand pat on July 18th, following the reduction of 25 basis points in June. The focus will be on the meeting statement and the Press conference, for possible hints on the intended course of action.
A potential rate cut on September 12th, a meeting which will be accompanied by updated economic projections, is likely, albeit the ECB may refrain from any respective explicit guidance, to maintain flexibility.
The euro area PMIs’ setback in June following five monthly improvements (composite PMI: -1.3 pts to 50.9), acts as a stark reminder that financial conditions remain restrictive enough, depressing economic activity. Financial markets, according to overnight index swaps, almost fully price-in a -25 bps cut in September and -50 bps cumulatively by end-2024 by the ECB.
On the other side of the Atlantic, Fed Chair Powell in his testimony to the US Congress while delivering the semiannual Monetary Policy Report, appeared to increasingly focus on the downside risks of waiting too long to start easing monetary policy. The central bank will not wait until inflation gets all the way down to 2% before easing policy.
Inflation (CPI) figures for June were “good news” for the Fed for a third consecutive month, as both the headline (+3% yoy) and the core indices decelerated, undershooting expectations. Recall that the three-month average of the monthly pace of increase of the core index was +2.1% in June in annualized terms, from +3.3% in May and a peak of +4.5% in March 2024.
That development will likely contribute to a build-up of confidence among Fed officials that a sustainable course towards the 2% target is being restored. Although that confidence will probably not suffice for a cut in the Federal Funds Rate (“FFR”) as soon as at the upcoming meeting on July 31st, the odds for the next meeting on September 18th have risen substantially.
Investors, according to futures markets, fully price-in a reduction by -25 bps to the FFR to a target range of 5.00% – 5.25% in September (versus a likelihood of 75% a week ago), while roughly split chances are assigned for the FFR to end 2024 at a range of 4.75% - 5.00% or 4.50% - 4.75%.
Global equity markets edged higher in the past week (MSCI ACWI: +1.3% wow), while government bond yields decreased, with investors ramping up their expectations for monetary policy easing in H2:2024. Euro area periphery bond spreads narrowed further (GGB-Bund below 100 bps).
The S&P500 reached fresh highs, with attention gradually turning to the Q2:2024 earnings season (expectations for +11% yoy EPS growth). On Monday July 15th, markets’ reaction to the assassination attempt against former President Trump, was measured.
US political developments are set to increasingly be a focal point as we head towards the November elections, with the attack on Mr. Trump adding a fresh layer of uncertainty. At the same time, President Biden faces increasing calls to withdraw from the campaign, following his disappointing performance in the first Presidential debate. According to prediction markets, the odds of a Trump victory have been boosted further.
On central banks, the ECB is expected to stand pat on July 18th, following the reduction of 25 basis points in June. The focus will be on the meeting statement and the Press conference, for possible hints on the intended course of action.
A potential rate cut on September 12th, a meeting which will be accompanied by updated economic projections, is likely, albeit the ECB may refrain from any respective explicit guidance, to maintain flexibility.
The euro area PMIs’ setback in June following five monthly improvements (composite PMI: -1.3 pts to 50.9), acts as a stark reminder that financial conditions remain restrictive enough, depressing economic activity. Financial markets, according to overnight index swaps, almost fully price-in a -25 bps cut in September and -50 bps cumulatively by end-2024 by the ECB.
On the other side of the Atlantic, Fed Chair Powell in his testimony to the US Congress while delivering the semiannual Monetary Policy Report, appeared to increasingly focus on the downside risks of waiting too long to start easing monetary policy. The central bank will not wait until inflation gets all the way down to 2% before easing policy.
Inflation (CPI) figures for June were “good news” for the Fed for a third consecutive month, as both the headline (+3% yoy) and the core indices decelerated, undershooting expectations. Recall that the three-month average of the monthly pace of increase of the core index was +2.1% in June in annualized terms, from +3.3% in May and a peak of +4.5% in March 2024.
That development will likely contribute to a build-up of confidence among Fed officials that a sustainable course towards the 2% target is being restored. Although that confidence will probably not suffice for a cut in the Federal Funds Rate (“FFR”) as soon as at the upcoming meeting on July 31st, the odds for the next meeting on September 18th have risen substantially.
Investors, according to futures markets, fully price-in a reduction by -25 bps to the FFR to a target range of 5.00% – 5.25% in September (versus a likelihood of 75% a week ago), while roughly split chances are assigned for the FFR to end 2024 at a range of 4.75% - 5.00% or 4.50% - 4.75%.