The Fed might miss the party.
The US Federal Reserve’s latest meeting was a much-awaited event, as investors were concerned that Fed Chair Jerome Powell would harden his stance. Recent inflation figures don’t seem to have moved in the direction that the Fed had been expecting them to over the last few months, with US inflation no longer easing. Since June 2023, annual consumer price growth has remained around 3.5%, which is above central banks’ 2% target. This is because prices in the services sector, particularly when it comes to rent and health care, have remained stubbornly high.
Yet Mr Powell remained quite upbeat at last week’s press conference. He still expects inflation to ease by the end of 2024, and he continues to think that monetary policy is a little too restrictive for the current economic climate. So the prospect of an upcoming rate cut hasn’t been ruled out altogether, but it’s likely to happen later than expected. There’s now no chance of a rate cut at the Fed’s June meeting. And unless there’s an unexpected slump in economic activity or inflation, the window of opportunity for a rate cut is likely to narrow as we get nearer to the presidential election in early November – the Fed is independent and apolitical and usually tries to avoid any risk of interfering in major elections. So there’s a chance that the Fed won’t change its monetary policy until its December meeting, or even until 2025. It will therefore be lagging behind its European peers, which should begin lowering rates over the summer, after the Swiss National Bank got the ball rolling in March.
At the press conference, Jerome Powell managed to convey the idea that the Fed probably won’t join the rate cutting party in 2024, without upsetting investors. The prospect of monetary policy loosening – even if it looks set to come later than expected – means there’s less of a risk that long-term rates will rise sharply and more chance that the stock markets will continue to gain ground. We think the stock market consolidation in April has probably come to an end. It helped to wipe out some of the excess short-term optimism and suggests that the rally that began in 2023 will continue.
A solid earnings season in the eurozone
Almost 60% of STOXX Europe 600 companies have now published their Q1 results. So far, close to 50% have surprised positively, with earnings coming in 6% higher than forecast overall. Financials – once again spurred by banks – together with health care and energy stocks have been boosted by sharply rising earnings. Tech stocks, however, have had a tougher time. The semiconductor manufacturers ASML and STM, in particular, were shunned by investors after publishing their results. Earnings have beaten expectations in most sectors, especially more cyclical ones. And we think this trend is set to continue. Expectations are not high, even though the region’s purchasing managers’ indexes are still in expansion territory, with economic activity picking up, particularly in the services sector. Manufacturing, however, is still lagging behind but should start to improve now that factories have finished drawing down their inventories.
This week’s figure : +3.45%
This was the amount by which the Japanese yen rose against the US dollar last week following the Bank of Japan’s intervention in response to the yen’s recent softness.
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.
