As expectations for a rate cut by the Fed strengthen, Fed already in September in the wake of the declarations of Powell, thanks to the good inflation data, the spotlight is once again on ECB in view of the meeting on July 18. How will the Central Banks move? This is the question that answers Fabio FoisHead of Investment Research & Advisory in Anima’s outlook for the second half of the year.
ECB dove
“The evolution of the macroeconomic scenario in the first half of 2024 has set the stage for the start of a cycle of rate cuts on both sides of thethe Atlantic“, writes Fois, underlining that in the Euro Area, in particular, the conditions to allow the European Central Bank (ECB) to loosen the monetary tightening has already materialized: despite the growth data in the first half of the year being better than expected, the economic momentum remained, overall, well below potential, with manufacturing only recently showing signs of a moderate recovery. The outlook for consumption is constructive, but there will be no overheating: European households will continue to benefit from the gradual increase in purchasing power resulting from slowing inflation and the savings rate will normalize, given the rebuilding of real wealth and monetary easing. On the price dynamics front, inflation is losing momentum in line with ECB estimates, net of a persistent stickiness in the service price component, which should run out after the summer. This hallowed the central bank to start to cut rates: we expect the script to repeat itself in the second part of the yearor, at the rate of one cut per quarter.
Fed hawk (halfway)
In the United Statesi, the conditions for easing the grip “are maturing, but at a slower speed. American growth continued to show itself to be decidedly resilient in the first half of 2024, but we remain convinced that it is on a path of gradual slowdown, as shown by the quarterly data on Gross Domestic Product which, although still above potential, are losing momentum quarter after quarter. On the one hand, the labor market, although resilient, continues to rebalance, as recognized by Jerome Powell, Chairman of the Federal Reserve (Fed). On the other hand, household consumption, although still robust in terms of levels, shows a deterioration in the “quality” of spending. On the price front, progress in the disinflation process was unsatisfactory in the first half of the year, due to a reacceleration in the prices of services and a recovery in the prices of basic goods, which forced the Fed to keep rates on hold and wait for further confirmation on the sustainability of the disinflationary trend”.
Let’s stay optimists on this point, for several reasons:
- the expectations of inflation remain stable and close to the Central Banks’ targets;
- the rebalancing in the labor market continues;
- there moderation of consumption andwill put downward pressure on the prices of basic goods and services
- The easing of pressure on core inflation will allow the Fed to begin cutting rates after the summer, at a rate of one cut per quarter, as with the ECB.
China, export boom
In China, finally, the central scenario is unchanged: “We remain convinced that the chinese economy has entered a structural transition phase, in which only one of the two engines that drove growth before Covid (exports and construction) is still on (exports), while the construction sector is going through a transformation process that will no longer allow it to offer a contribution to growth comparable to those recorded in the past. As already happened in 2023, also in 2024 Chinese GDP will expand at a rate close to the “new” potential of 5%, supported by exports, but held back by the transition of domestic demand: the private consumption is not yet ready to take over from construction.”
In this context, “our central scenario for 2024 rhymesbroadly aligned with that described at the end of 2023, also with regard to risks. Developments on the growth and inflation front remain crucial, especially in the United States, where the turning point is maturing but has not yet arrived. If for whatever reason progress on the inflation front does not materialize or growth does not continue in the weakening process, the Fed may remain reluctant to cut rates throughout the second half of the year, and the turnaround would be postponed for the second year in a row.”
