Investment Institute
Market Views

Changing of the Guards

KEY POINTS
Macro management principles holding firm since the 1980s/1990s are coming under criticism, including within mainstream political forces. Paradoxically though, doubts on the role of central banks are emerging while they are on the cusp of winning their war against inflation.
We continue to monitor the political developments in France. Finding the path towards a stable government may take more time.

Understandably, the French elections and the US presidential race have focused attention on the potential for radical policy experimentation. We think attention should also be drawn to how even mainstream political forces can be affected by a new approach to macroeconomic management straying away from the main principles which have been guiding policymakers since the 1980s. A circumspect attitude towards the role of fiscal policy in cyclical fine-tuning, the primacy of monetary policy and a distrust for direct state intervention in capital allocation are giving way to enthusiasm for activist fiscal policy, a critical view of the capacity of monetary policy alone to deal with inflation shocks and some appetite for price controls. We review a paper by Van Klooster and Weber which in our view encapsulates very well the new Zeitgeist. While we agree that without determined government action during Covid and the energy price shock triggered by the Ukraine war a painful recession could not have been avoided, there is a risk that what was emergency management turns into a structural shift.

Paradoxically, central banks are coming under heavy criticism when they are on the cusp of a victory on the inflation shock. We do not expect any hard decision this week, but the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the start of a process, and we expect the next 25 bps cut coming in September.  In the US, the June print for the CPI probably sealed the deal for a first cut in September.

We continue to monitor the latest political developments in France. The President has made it plain he would wait for compromises across political families to emerge before appointing a new Prime Minister. This process could still take some time. We draw attention to the fact that beyond the budget bill for 2025, a new government will have to produce a credible medium-term plan to allow the EU to grant France extra time to bring its deficit to 3%. This will take more than just cobbling up together a non-committal budget. 

Download the full article
Download report (438.9 KB)

    Disclaimer

    The information on this website is intended for investors domiciled in Switzerland.

    AXA Investment Managers Switzerland Ltd (AXA IM) is not liable for unauthorised use of the website.

    This website is for advertising and informational purpose only. The published information and expression of opinions are provided for personal use only. The information, data, figures, opinions, statements, analyses, forecasts, simulations, concepts and other data provided by AXA IM in this document are based on our knowledge and experience at the time of preparation and are subject to change without notice.

    AXA IM excludes any warranty (explicit or implicit) for the accuracy, completeness and up-to-dateness of the published information and expressions of opinion. In particular, AXA IM is not obliged to remove information that is no longer up to date or to expressly mark it a such. To the extent that the data contained in this document originates from third parties, AXA IM is not responsible for the accuracy, completeness, up-to-dateness and appropriateness of such data, even if only such data is used that is deemed to be reliable.

    The information on the website of AXA IM does not constitute a decision aid for economic, legal, tax or other advisory questions, nor may investment or other decisions be made solely on the basis of this information. Before any investment decision is made, detailed advice should be obtained that is geared to the client's situation.

    Past performance or returns are neither a guarantee nor an indicator of the future performance or investment returns. The value and return on an investment is not guaranteed. It can rise and fall and investors may even incur a total loss.

    AXA Investment Managers Switzerland Ltd.