Global Economy Shows Promise as Rate Cuts Loom
Global fundamentals are trending positively. We are on track for two interest rate cuts this year. Even though it may not seem obvious from Federal Reserve officials' comments, the overall picture is bright. The global cycle and earnings are improving.
Federal Reserve's Latest Update
Recently, the Federal Open Market Committee (FOMC) decided that instead of three rate cuts in 2024, there might be just one. This news initially worried investors. But, overall, the market performed well last week indicating investors are getting comfortable with this news.
Market Performance
The market hit a new all-time high due to strong growth in May payrolls and better-than-expected Consumer Price Index (CPI) data. However, not all sectors gained equally. Tech stocks, large-cap quality, and momentum stocks did well, while value, cyclical, and small-cap stocks underperformed.
Treasury and USD Movements
Interest rates fell by about 20 basis points, but the USD surprisingly rallied by 0.6% last week and 1.4% since the payrolls report. This rally was unexpected given the positive jobs and inflation data.
Political Uncertainty in Europe
The unexpected French election contributed to a risk-off sentiment, particularly affecting European equities. Political uncertainty from elections in France, Mexico, and India likely made US assets more attractive, hence strengthening the USD.
Investor Skepticism
Despite the consensus view of a soft landing, there's investor skepticism. Concerns over potential slowing growth are more prominent than fears of persistent inflation.
Mixed Growth Data
Recent data shows renewed confidence in disinflation. May payrolls exceeded expectations at 272,000. However, other labor market indicators show cooling. Initial jobless claims rose, and the University of Michigan Consumer Sentiment Index declined, raising concerns about consumer spending.
Upcoming Data Crucial
Looking ahead, May retail sales and personal consumption expenditure data are crucial. Positive credit card spending data for May gives cautious optimism, just as May CPI data eased inflation fears.
Fed’s Future Actions
Investors are curious why the FOMC didn't opt for two rate cuts for more flexibility. The current one-cut median hasn't changed market pricing, which still expects two cuts by December. Fed Chair Jay Powell noted that the projections are not a committee plan. The Fed is data-dependent, meaning if inflation remains modest over the summer, there could be a case for a rate cut in September.
In summary, while there are mixed signals, the global economy shows promising trends with possible rate cuts on the horizon. This could be good news for various sectors, even though some caution is still warranted.
