Recent weeks have signalled that, in addition to central banks’ policies and inflation trends, domestic politics and their impact on international relations are important determinants of financial markets and economic direction. In terms of markets, expectations of Fed rate cuts have been changing due to slowing US inflation and conflicting labour data showing strength in the economy. We think falling inflation is crucial for central bank decisions. This, along with the following themes, is likely to drive the markets.

• Multi speed economic growth. We upgraded our global growth forecasts slightly for this year, led mainly by revisions in EM. But in the US, labour markets indicate that consumption will gradually slow and that is a large part of the economy. In Europe, economic activity is likely to be supported by domestic demand and real income.
   
• US disinflation continues Recent. Recent moderation in US core services inflation is encouraging, but some stickiness will persist. We raised our headline CPI forecasts to 3.3% and 2.5% for 2024 and 2025. The Fed also upgraded its 2024 forecasts for personal consumption expenditure inflation.
   
• Asynchronous central banks. European banks (ECB, Swiss National Bank) have already started cutting rates. This divergence vs the Fed is unlikely to last very long as US inflation is declining. In addition, we do not think other central banks make decisions in a vacuum away from the Fed.
   
• We have previously highlighted the importance of geopolitics. Now, themes such as rising protectionism (ie, trade tariffs) and political uncertainty are playing out. A potential Trump Presidency could result in a deterioration of US ties with EU, and continuation of the rivalry with China.

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