In light of the turbulence at the beginning of the month, the markets are now starting to consider more cuts over the next year in thethe United States, the United Kingdom, the Eurozone (and elsewhere) compared to the beginning of summer. Despite a certain homogeneitythese three economies they are behaving in a very different way. It is detected by the weekly market outlook edited bySteven Bell, Chief Economist EMEA of Columbia Threadneedle Investments.
United States
In the United Statesthe economy is slowing slightly, Inflation appears to have resumed its downward trend, and after the weak labor market report earlier this month, all investors are on recession alert. As we explained in our podcast a few weeks ago, the odds of a near-term recession were low despite the strong data signal, and now the market has changed its mind. However, the mood has changed. Another employment report is due before the FOMC meeting on September 18, which will lead to a 25-50 basis point cut. Markets expect the Fed Funds rate to fall to 3.2% over the next year, which is reasonable but has significant downsides if the economy slows a bit more quickly. The November elections will be key, and rates are generally expected to be higher under Trump than under Harris.
United Kingdom
The economy of the United Kingdom, On the contrary, it is recovering, with consensus expectations for 2% annual growth by the end of the year. This is the fastest growth among the G10 countries. 2% is not exactly a boom, but it is enough to reduce the pressure on the Bank of England to cut rates again. Last week’s inflation data was weaker than expected, even in the BoE’s preferred measure, which focuses on services. However, this is because holiday costs were measured before school closures began, so we should see a rebound in next month’s data.
Overall inflation is rising due to rising household energy bills. In good news, wage inflation is set to decline significantly on a three-month basis as we move away from April’s 10% minimum wage increase. The government’s generosity on public sector wages has threatened to push up the “going rate”. I confess I was wrong about next year’s minimum wage though: ministerial drafts suggested a rise of 6% or more, but the decree is now out and the best case is a rise of 10%. 4%. This is good news. for inflation.
THE Markets predict 50 basis point cutsand by the end of the year and another 100 basis points in 2025. 5-year swap rates are now below 4% and mortgage rates for the best credits have adjusted. I think we will reach 50 basis points by the end of the year, but that markets are too optimistic for 2025.
Eurozone
In the Eurozone, markets expect more than 50 basis points by the end of the year and another 80 basis points in 2025. Eurozone growth is “anemic” and inflation fell rapidly, but core inflation has been stuck at around 3% for the past three months and the ECB has raised its forecast. Much will depend on the wages data due on Thursday. These numbers only come once a quarter, the last ones were surprisingly high and the European Central Bank has done everything to play down. This week we need to see a strong improvement. Overall, I would be marginally negative on Eurozone rates.
In summary, the prospects for rate reductionthey look reasonably good in the US, They are good in the short term for the UK but not in 2025 and they are slightly worrying for the Eurozone. TIt all depends on the data, of course, with the upcoming U.S. jobs report being particularly important.
As for risk assets, “an economic growth continues with falling rates it seems to me to be a favorable context”-
