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Take the positives of a soft landing
- Markets are on divergent paths. A spike in political risk – with elections in France and the UK in Q3 and the US poll looming in November – adds to a theme of regional differentiation.
- Data increasingly points to a regional shift in growth expectations. We think this desynchronisation may generate opportunities across economies and asset classes.
- Our conviction strengthens around a soft landing in the US and global economies, where growth slows – and inflation comes down – without risking a recession. This scenario will likely be positive for equities, which are set to benefit from positive earnings growth. But watch for volatility around market and political news.
- Markets expect only 40bps of aggregate global rate cuts this year – down from three times that figure in early January. Different growth and inflation backdrops mean central banks have varying leeway to adjust their policy stance.
- A rate cut in the US is now likely in September, in our view. We think markets are too cautious on further cuts, and investors should use this disconnect to strengthen positions in yield curve steepening and duration.
Chart of the quarter: That desynching feeling…
The European Central Bank (ECB) cut rates in June and markets anticipate the US Federal Reserve (Fed) and Bank of England (BoE) will follow – at varying speeds. The Bank of Japan (BoJ) is expected to move the other way.