Asset Management: Monthly Macro Insights - May 2024

Recent monthly indicators suggest that the slowdown in global growth around the turn of the year has bottomed out. However, inflation outlook remains murky and the latest data have shaken investors’ confidence that significant monetary policy easing is in the offing.

Unpleasant surprises in the US…

Global economic growth has been moderating since the second half of 2023 and, until recently, was also greatly uneven among countries. Yet, the regional divergence has somewhat diminished in Q1-24 as the US lost steam while Europe rebounded.

Amid higher borrowing costs, historically high delinquency rates in both credit cards and auto loans, and the rundown of accumulated excess household savings, US GDP growth came in below consensus estimates, at 1.6 per cent annualised – or 0.4 per cent q/q, making it the lowest reading since spring 2022.

Simultaneously, the disinflation process has been stalling since January, with monthly consumer price increases that are not compatible with a swift return to target. Correspondingly, Fed Chair Powell has been forced to acknowledge at the May meeting that gaining confidence in inflation normalising will likely take longer than previously expected.

… yet investors remain sanguine

Overall, the US has been facing an ominous mix of slower growth, yet accelerating inflation in the first part of this year. Still, financial markets have so far proved resilient, and global financial conditions have eased in recent months. The paradox is that, combined with past years’ expansionary fiscal policies, this easing of financial conditions is feeding the resilience of the economy, and in turn is another reason why the speed of the final descent of inflation to targets is highly uncertain.

Diverging monetary policies

While the Fed has seemed on pause for some time, the ECB has signalled it is highly likely to start cutting interest rates at its next policy meeting on June 6, as long as price pressures are in line with its forecasts, and labour costs cool somewhat. However, the Governing Council is facing a complex equation.

On the one hand, financial market spillovers from monetary policy divergence can be significant. Expectations that the Fed will hold off cutting rates in part explain the rise in yields on governments bonds in Europe, making it more costly to borrow and buy a home or expand a business. All else equal, this is a headwind for the eurozone economy, which would tend to lower inflation.

On the other hand, some ECB members have expressed concerns about committing to more easing after June because of the risk that this would cause the euro to depreciate, thereby increasing inflation by pushing up import prices. What’s more, the eurozone delivered upside surprises on growth and core inflation in the first part of 2024.

Overall, the eurozone’s growth is somewhat recovering without clear signs of improving productivity growth. While services inflation remains sticky, a complicated equation could disappoint investors’ outlook of ECB monetary easing beyond the well-telegraphed June rates cut.