General outlook on the macroeconomic environment and interest rates
Perspectives
Recently released data has underpinned our baseline scenario, soft landing, and have reduced the risk of recession. Despite being slightly lower than forecasts, US GDP growth in the third quarter showed that the economy is in good health. And inflation, although it continues to moderate, recently left readings higher than expectations. The non-farm employment data for October showed an increase of only 12,000 jobs, well below the 100,000 expected. However, hurricanes and strikes had a lot to do with it, not to mention that the previous month’s reading far exceeded forecasts and unemployment remains at 4.1%.
The members of the Fed More monetary tightening leaners are talking about a possible pause in rate cuts due to persistent inflation, but we still expect the Fed to cut rates in November and December, although 50 bp cuts are highly unlikely. Indeed, the perceived improvement in the economy’s health and wealth effects, combined with the sustained easing of financial conditions, have increased the risk that inflation returns and this exceeds the Fed’s objective in 2024 and has reinforced the possibility of a no-landing scenario.
Another factor to take into account is the american elections and the impact of the policies implemented by the winner. Although some have been recorded fluctuations Since Kamala Harris entered the race, we have seen little price movement, reflecting how close the result is expected to be. The US currently presents record deficit levels in peacetime, and these are likely to increase if either party gains a majority in both the House of Representatives and the Senate. As a result, we think it is prudent to reduce the size of our bets on interest rates, given the uncertainty.
The euro zone is recording lower growth than expected at the beginning of the year. During recent weeks, the market has recognized the worst forecasts, which has led to a better relative performance of European fixed income. We believe that this better relative performance will continue due to the absence of catalysts for European growth.
We have been of the opinion for some time that the BCE is overestimating the future path of inflation and growth. The ECB inflation expectations They continue to be above what the inflation markets predict and their growth expectations have been systematically revised downwards in the projections. We expect the central bank to continue its rate cut cycle over the coming months in light of the headwinds to growth and that supports a duration position in euros.
He United Kingdomlike the euro zone, faces worse growth prospects than the US, lower productivity growth and tight labor supply, which is straining labor markets and wages. Extraordinary household savings are high as consumers remain too restrained to spend, but cyclical conditions are improving.
The general tone of the budgets The UK Labor government’s autumn report was negative, with investors focusing on the mix of additional borrowing, tax implications and the effects of spending plans on inflation. The ten-year Gilt started October slightly below 4% and marked an intraday high above 4.5%, its highest level this year. We maintain a slight overweight in UK duration.
