Asset Management: Monthly Macro Insights - July 2024

Business confidence fell at the end of Q2-24, casting doubts on the positive momentum going into the second half of the year, while rising political uncertainty adds to an already complicated conduct of monetary policy.

Ending the first semester on a weak note

Global growth looks to have lost momentum according to business confidence indicators. The S&P Global PMI fell both in the manufacturing (-0.1pt) and services sectors (-0.9pt) despite rising confidence in the US (+0.3pt to 51.6 and +0.5 pt to 55.3, respectively). Furthermore, as noted previously, national indicators continue to paint an even weaker picture compared to the S&P Global indices.

Murky outlook in China

In China, headline inflation remained at a mere 0.3 per cent in May while core inflation unexpectedly fell to 0.6 per cent, fuelling concerns over persistently weak domestic demand amid a prolonged property sector slump. What’s more, the US announced steep tariff hikes targeting a short list of strategic imports from China, covering namely semiconductors and electric vehicles, and Europe could follow. Overall, with China's two big traditional growth engines – property and trade – sputtering, it seems that more policy support is needed to solidify the economy. However, the People’s Bank of China’s focus on currency stability appears to have tied its hands on cutting interest rates – at least until the Fed moves.

Inflation and politics

Most investors expect that the ECB and the Fed will cut their policy rates in September, although the decisions are highly dependent on incoming data.

In the eurozone, political uncertainty in France is likely to weigh on economic activity. More broadly, weaker eurozone June PMI and national surveys increased near-term growth nervousness, which would favour a rate cut in September. However, the ECB is simultaneously facing a very tight labour market and rising wage costs that are feeding services inflation.

Meanwhile, after four months of strong price increases, May US inflation data were more modest. While the Fed acknowledged this was good news, it will likely need consistently low readings in the three CPI reports leading to the September meeting to gain greater confidence that inflation is moving sustainably towards the 2 per cent target before embarking on monetary easing, unless the labour market shows clear evidence of deterioration.

What’s more, the political outlook will also play a role in the Fed’s reaction function. After a disastrous presidential debate, President Biden’s odds of re-election have receded. At the top of Donald Trump’s agenda, three items – raising trade tariffs, curbing immigration and prolonging expiring tax cuts – would all be inflationary, and their implementation could make it difficult for the Fed to ease.

Overall, central banks remain compelled to keep interest rates high amid persistent services inflation, and rising political uncertainty add to an already complicated conduct of monetary policy.

Read the full version of Monthly Macro Insights - July 2024

by Marc-Antoine Collard, Chief Economist and Head of Economic Research

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