Macro update - why are we waiting?

At 4% year-on-year in May, US headline inflation has more than halved from its mid-2022 peak of 9%. Headline rates in Europe seem also to have turned decisively lower, with big falls still pending later in the year as the energy price arithmetic works its way through (last week’s bounce in wholesale gas prices notwithstanding: they had fallen to less than 10% of last summer’s highs).

In both the US and Europe, prices will soon be growing more slowly than wages – on a 3-month view, as opposed to a year-on-year comparison, they probably already are – and squeezed spending power is about to get some relief. Meanwhile, transatlantic business surveys have softened, but not collapsed, and labour and industrial capacity seem still to be pretty fully employed: despite that squeeze, actual spending has in fact held up well. Even UK economists are a bit less miserable than they were. What’s not to like?

In one sense – the longest-term, biggest-picture one – not a lot. Or at least, not in the realm of economics: there are of course plenty of geopolitical, environmental and social rocks in the road ahead. But in terms of the macroeconomy, not only is the inflation cycle on the turn, but today’s cleverer chatbots (present company excluded) are a timely reminder that the secular gloom about productivity may have been overstated. And no, this does not mean that “The Singularity”, or mass unemployment, loom instead – we’ll revisit those misplaced worries in a future post.

So why aren’t we sounding more positive on stock markets? We have not been pessimistic of late, but we haven’t yet felt able to urge a significant addition to holdings. From our top-down vantage point we advised reducing positions early last year, and have largely sat tight since.

The reasons have varied – mostly shifting back and forth between the two tactical concerns of rising interest rates and falling corporate earnings, with banking worries (remember those?) the most recent instance of the latter.

What we see as residual interest rate risk is once again our main tactical concern. The Fed and the ECB have just confirmed that they have not quite finished tightening yet, with the ECB arguably looking most decisive of late (not that the euro has taken much notice yet). The Bank of England remains the least convincing of the big three Western central banks (apologies to the SNB and BoC), perhaps because its rate setting committee has less skin in the game, but even in Threadneedle Street it has been difficult of late to ignore the signs of resilience in the UK economy: rates are likely to rise further next week, and indeed might yet push above those in the US if the labour market remains tight (the money market is already betting as much).

And while the distance ahead is small relative to that already covered, we expect policy rates to trace a flatter, more plateau-like path when the tightening stops – in contrast to the sharper profile still priced into money markets. If we’re right about real wages being the cavalry set to arrive over the hill and rescue hard-pressed households during the second half of the year, then the impact of monetary tightening may remain underwhelming. Which will be good for growth, but bad for core inflation, which is already (unsurprisingly) taking longer to turn the corner than headline rates – and bad in turn for the chances of interest rate cuts further down the road.

So far, firmer stock prices largely reflect the excitement in the technology sector. Gains have been pretty narrow (though that does not mean they are without foundation, as noted). We doubt that the cyclical train has yet left the station.

Of course, we could be trying to be too cute here. We have written often about the difficulty (futility?) of trying to “time” the market. Arguably, if valuations are OK and the long-term outlook remains constructive perhaps we should just get on with it. But so many people have said so many strange things about interest rates in recent years that is it hard to believe that investors have fully digested a return to the old normal just yet.

Ready to begin your journey with us?

Past performance is not a guide to future performance and nothing in this blog constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.

Read more articles

  • Supply chains: state of play

    Strategy Blog

    President Trump’s aggressive tariff agenda threatens global trade. Despite rerouted exports and rising costs, supply chains remain resilient, though pressure may grow if tariffs persist.

  • Strategic exits: an introduction and guide to optimising your exit

    Entrepreneurs

    Achieving a successful business exit is a significant milestone, and navigating this complex process requires careful planning and expert advice. We are proud to support Boardwave in its mission of accelerating success by offering insights and guidance on optimising exits for entrepreneurs.

  • Growth Equity Update

    Insights

    Not all AI. The strength of VC funding growth (up 3x ytd in the US, up 20% In Europe) is led by AI but it’s not the whole story. To the end of April funding for ‘non-AI’ companies is up 67% yoy in the US and 14% in Europe. Software, biotech and fintech are all prominent – we look at what’s driving this.

  • Rothschild & Co expands Wealth Management offering in Luxembourg

    Press releases

    Rothschild & Co is pleased to announce the expansion of its Wealth Management activities in Luxembourg. This strategic move is part of Rothschild & Co's ongoing commitment to providing first class Private Banking services to its clients across Europe.

  • Trump II: FAQs

    Market Perspective

    In this Market Perspective we discuss the economic impact of Trump's second term, focusing on tariffs, inflation, and market volatility, while highlighting potential geopolitical shifts and the uncertain outlook for global growth and investment strategies.

  • Rothschild & Co Appoints Matthew J. Greenberger as Managing Director and Head of Real Estate, North America

    Press releases

    Rothschild & Co is pleased to announce that Matthew J. Greenberger will join the firm as Managing Director and Head of Real Estate, North America, based in New York. In this role, Mr. Greenberger will be responsible for leading Rothschild & Co’s real estate advisory activities across the region, strengthening the firm’s capabilities in an expanding sector.

Back to top