Asset Management: Monthly Macro Insights - June 2024

Although the global economy is still experiencing the lagged effects of tighter monetary policy, business confidence has been improving over the past few months, suggesting positive momentum going into the second half of the year. Will central banks be a tailwind or a headwind?

Improvement amid conflicting signals

As we approach the half-way mark for 2024, investors’ global economic outlook is increasingly positive amid stronger business confidence. The S&P Global PMI rose to a 12-month high of 54.1 (+1.4pt) in May in the services sector, while in the manufacturing sector, the upturn seems to have gathered pace as the index rose to a 22-month high of 50.9 in May (+0.6pt). That said, national indicators have painted a much different picture compared to the S&P Global indices and still suggest a challenging environment.

The Fed, and the others

Historically, the Fed has tended to lead the global financial cycle by adjusting its policy stance before other central banks, substantially influencing financial conditions elsewhere. But this time is somewhat different, with the Fed retaining a hawkish bias while some centrals banks among advanced economies have started to cut rates. This divergence, namely vis à vis the ECB, seems reasonable for several reasons.

First, differences in growth have been significant. The Eurozone endured a shallow recession last year and only began staging a tentative recovery in Q1-2024. In contrast, US growth has proven resilient.

The big question is what comes after the ECB’s June rate cut. President Lagarde has been very mindful not to make strong forward guidance regarding the future policy path, especially as it is becoming increasingly difficult to balance risks of leaving rates higher for longer or cutting too early.

Overall, the global economic outlook has brightened recently, in part due to the prospect of monetary policy easing. Nevertheless, there are plenty of obstacles to navigate, with inflation rates surprising to the upside once again, thus forcing many central banks to keep their interest rates elevated. Furthermore, several elections will come against the backdrop of geopolitical hotspots. Freight rates have jumped over the past months as the shipping crisis caused by Houthi rebels in Yemen attacking container vessels has led to delays for customers and congestion in several ports, which could contribute significantly to goods inflation.