Falling into Place
- 05 August 2024 (10 min read)
Since the beginning of the year, the most salient macro surprise had been the resilience of the US economy, especially its labour market. This phase seems to be closing now, with more and more signs that the forces of economic gravity cannot be defied for ever. Yet, just as much as euphoria was probably misplaced in the first half of this year, there are still reasons to expect a reasonably soft landing for the US economy. By the standards of the last two mild recessions in the US (1990 and 2001), the labour market is still in a better shape. Jay Powell’s “measured dovishness” may seem conservative after the payroll print but there is an arguable case for the Fed not to move immediately into emergency action. Still, the market is in no mood to reserve judgement. If some over-reaction is probably at play – it’s mid-summer after all - the macro and market configurations have fallen into place: “bad news is bad news”, instead of being merely seen as the harbinger of rate cuts which would still support the equity market. We suspect that the current political state of play in the US – with Harris now in a 1.6 pp lead in the polls’ average – is magnifying the impact of the macro news, as the “Trump trade” – consistent with higher long-term yields – is looking less alluring. Yet, we would call for caution: if the US data deteriorates too quickly, Harris, who cannot distance herself completely from the economic policy of the current administration, could be hit, while Trump’s fiscal stimulus and protectionism would become more attractive to electors.
In the UK, BOE Governor Bailey must be happy he sided with the doves to cut rates last week given the “bad winds” blowing from America. By contrast, the BOJ’s bold hike – and hawkish rhetoric – looks even bolder. The ECB has until September to make up its mind. The Euro area’s dataflow has been inconclusive so far this summer, but with quasi-certainty now the Fed will cut, and mediocre prospects for external demand, we remain confident the ECB will cut again in September.
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