More widespread rate cuts.
Inflation continues to edge downwards in much of the world. That said, various indicators regularly give pause to both investors and central bank officials. In most cases, it’s prices in the services sector, which aren’t falling as quickly as other consumer prices. Prices for some consumer services are being buoyed by strong demand combined with the cumulative effect of wage increases over the past two years. But inflation continues to return to normal, especially because the upward pressure on wages is gradually abating. Excluding services, the inflationary uptick caused by the pandemic and the war in Ukraine is now a thing of the past. In the US, for example, goods prices are now on a downward year-on-year trend. In view of all these factors, central banks’ highly restrictive monetary policies no longer make sense. The Swiss National Bank was the first to cut its rates, followed most recently by the Bank of Canada and the European Central Bank. Similar moves are now expected from the Bank of England and the US Federal Reserve. The Fed is likely to begin cutting rates at its next meeting, on 18 September – just six weeks before the US presidential election. The US central bank usually tries to avoid changing its monetary policy so close to an election, so as not to be seen to be favouring one candidate over another. But things may well be different this time around. There’s a big chance that Donald Trump will be re-elected, and Fed Chair Jerome Powell could soon start to feel pressure from the administration, as he did during Trump’s first term. Changing monetary policy before the election would be a way to show Trump – who appointed Powell back in November 2017 – that the Fed is independent. The upcoming rate cuts in the US should be good for the bond markets, particularly dollar-denominated bonds. US long-term yields are some of the highest among developed countries and almost certainly offer the most downward potential.
USA – is tech running out of steam?
It’s now almost certain that the US Federal Reserve will lower interest rates in September, as inflation continues to drop. But the tech sector, which usually does well in a low interest rate environment, has been hit by major profit-taking in recent days. Investors preferred to lock in some of their gains, in case there are any disappointments in the upcoming earnings season, given that expectations are riding extremely high. Small and mid caps, which are most likely to reap the benefits of a decline in borrowing costs, fared well out of this sector rotation. With interest rates going down, it makes sense to invest in these stocks, which have been lagging behind over the past two years.
This week's figure : 61%
The likelihood of Donald Trump winning the US presidential election in November went from 69% to 61% after Joe Biden announced that he was withdrawing from the campaign.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
