In our last report, we noted how impressed we were by the global economy’s continued resilience in the face of one of the fastest monetary policy tightening cycles on record. In the US for example, while 525 basis points of rate increases by the Federal Reserve since March 2022 have impacted the housing and manufacturing sectors to a degree, more broadly, unemployment rates remain low while CPI inflation has fallen significantly. The Fed remains on track to deliver a soft-landing, a feat few believed possible a few short months ago. At the recent gathering for global central bankers at Jackson Hole, Jerome Powell reiterated his commitment to maintaining a tightening bias until his 2% inflation target has been achieved. He must be quietly pleased with his progress to date.

While wage growth and consumer spending trends remain elevated, there are early signs of a slowdown in income growth and a rise in savings, which will be needed for inflation to continue to decline. Nominal spending levels have also cooled recently but remain elevated. The likely result will be a Federal Reserve that keeps interest rates higher for longer, without having to increase rates much further from here. The tightening already in place is still taking effect, making credit more expensive, reducing demand, and causing businesses to cut back. This should continue to pressure households in the months ahead.

In Europe, Managers see some similar promising trends unfolding on the macroeconomic front. Unemployment rates remain low and inflation continues to decline. Economic growth rates however remain tepid. Energy demand is a key variable in the discussion on regional economic growth trends and here, Europe has a glaring weakness. While the US is a net energy exporter today, Europe must import the majority of its energy needs and is therefore dependent on market forces to a large degree. Economic activity is energy transformed and here Europe is vulnerable to the continuing trend of rising oil and natural gas prices, which we foresee.

Higher for longer

Despite the weaker outlook for Europe, Managers remain constructive in their overall view. The belief exists that the policy tightening already in the system will be a headwind for growth over the next twelve months, but not enough to cause a recession. Jerome Powell will continue to work to deliver his soft landing, focusing on reducing demand for labour without causing a rise in unemployment. So far, so good. Since peaking in March 2022, job openings, for example, have fallen over 25%. This should put downward pressure on wage growth over time.

Equity markets continue to perform in line with consensus expectations this year and are pricing in an increasing chance of the soft-landing Powell is targeting. The global equity benchmark has returned +11% year-to-date in euro terms. Bond markets have also begun to discount a more positive economic outlook. The US dollar has rallied since our last update but may be making another ‘lower high’ on the chart. Managers continue to hold the view that the greenback has topped for the year and should continue to weaken in the months ahead. Fiscal imprudence, political uncertainty ahead of the 2024 US election and an end shortly to the interest rate rising cycle drive a negative USD view.