Global Economic Trends Suggest Positive Movement
Global fundamentals trending positively, on track for two rate cuts this year. Despite recent equity gains, market performance indicates a combination of “risk off” and “risk on” sentiments.
Recent data and comments from Federal Reserve officials may seem confusing, but the big picture remains positive. Global fundamentals are trending upwards, with the global cycle and earnings revisions on the rise.
Federal Reserve's Rate Cut Forecast
The latest Federal Open Market Committee (FOMC) meeting showed a reduction in the forecast for rate cuts in 2024—from three down to one. This initially worried investors about the investment outlook. However, market performance last week indicates that investors have taken the Fed news in stride.
Positive Economic Indicators
- Strong May payroll growth and better-than-expected Consumer Price Index (CPI) data have boosted confidence in a soft landing for the economy.
- Winners: Tech, large-cap quality, and momentum stocks.
- Losers: Value, cyclicals, and small-caps.
Market Reactions
Treasury rates fell by about 20 basis points after the inflation news, while the USD rallied by 0.6% last week and 1.4% since the payroll report. Contrary to expectations, this shows a robust US dollar response following favorable job and inflation data.
Political Uncertainty and Safe Haven Demand
The unexpected French election contributed to a risk-off sentiment, particularly affecting European equities. Political uncertainty from snap elections in France, Mexico, and India likely triggered a safe-haven rush for US assets, strengthening the USD.
Investor Skepticism and Growth Concerns
Despite optimism, investors are skeptical about a soft landing. Concerns over slowing growth, not persistent inflation, are prominent. Recent data shows mixed growth indicators:
- May payrolls exceeded expectations with 272,000 jobs added.
- Other labor market indicators show cooling, with initial jobless claims rising to their highest level since August.
- University of Michigan Consumer Sentiment Index declined, raising worries about consumer spending.
Upcoming Economic Data
The underperformance of value, cyclical, and small-cap stocks suggests persistent doubts about solid economic growth. Upcoming May retail sales and personal consumption expenditure data are crucial. Positive credit card spending data for May offers cautious optimism, potentially easing growth concerns as May CPI alleviated inflation fears.
Federal Reserve's Future Actions
Investors might wonder why the FOMC didn't opt for two rate cuts to maintain flexibility. The one-cut median hasn't significantly impacted market pricing, which still expects two cuts by December. Fed Chair Jay Powell emphasized that these projections are not a committee plan or decision.
Conclusion
The Fed remains data-dependent. If inflation remains modest over the summer, the Fed will have a valid case for an “insurance” cut in September, supporting the expectation of two rate cuts this year.
