A busy summer as the US election nears

Lower US inflation in June supports interest rate cuts 

Last week, US Treasury yields fell as US inflation came in lower than markets expected. Global bond yields and the US dollar also fell as markets firmed up their view that the US Federal Reserve (Fed) will cut interest rates in September and December. While bond prices largely rose as yields fell, the reaction was more mixed for equity markets, as investors took profits in some sectors following the data release. We expect the Fed to cut rates once or twice in 2024. Last week, Fed Chair Jerome Powell reiterated that the Fed would cut rates if employment were to weaken unexpectedly. So, the incoming labour market data (2 August) will be key in firming up market expectations for rate cuts. 

Political volatility eases in Europe, but lingers in the US 

European equities rebounded last week and even outperformed their US peers as the market’s attention shifted back to the economic growth prospects in Europe and away from French politics (which had previously caused market uncertainty). Lower-than-expected inflation and an encouraging start to the earnings season helped bolster equities, too. We recently increased our exposure to European equities, which we currently own to a greater extent compared to our long-term allocation to capture the improving European economic outlook and attractive valuations. 

While election uncertainty has eased for now in Europe, investor focus is turning to the US. An increasing number of Democrats are calling for President Biden to stop his re-election campaign. Declining odds for Biden’s victory in November (based on polls) don’t seem to be affecting markets so far. But volatility could pick up as we near the election, especially if there were unforeseen events , as we saw with Trump’s shooting this weekend. At the time of writing, this has boosted Trump’s re-election odds, according to timely surveys of voter intentions. The US equity market has taken this positively, given prospects of tax and regulation cuts outweighing the impact of possible trade tensions (which would be more negative for China). The US bond market seems more concerned, though, as the extra spending would likely require more debt issuance – which could possibly trigger higher bond yields. 

Focus on corporate earnings, European Central Bank, UK inflation and China 

The US earnings seasons has kicked off with the big US banks reporting improvements in their investment banking units. More earnings reports are coming in, which investors will use to gauge the state of the US economy. Amongst the magnificent-7 stocks, Tesla, which contrary to its tech peers underperformed during the first part of the year, is due on Friday. For now, US economic growth is moderating from rather high levels and we think a recession is still unlikely over the next 6-12 months. However, we’ll be looking out for retail sales (Tuesday) and industrial production (Wednesday) data to see if this trend is continuing.  

On Thursday, the European Central Bank (ECB) reconvenes. It’s been a month since it cut interest rates and, while it’s unlikely we’ll see another cut this week, markets will be scrutinising President Lagarde’s press conference to see whether the ECB will follow through with additional rate cuts in September (which we think likely). In the UK, inflation (Wednesday) is expected to have remained at the 2% target in May. If so, this would bolster our view that the Bank of England will cut interest rates in August. Lower interest rates should support government bonds (we recently increased our exposure to short-dated European government bonds in EUR portfolios) and prove to be a tailwind to equities as well.  

Lastly, while still flirting with deflation, China’s economic growth slowed in the second quarter of 2024, with GDP growth figures missing expectations. But the attention is on the much-anticipated policy meeting of the top members of China’s Communist Party (Monday through Thursday). A large policy stimulus still seems unlikely given recent communication from officials, who’ve rather continued to advocate for smaller-scale measures to prevent unwanted side-effects despite the ongoing property crisis that continues to hit consumer sentiment, with June retail sales grinding to an 18-month low.