Recent inflation and growth data from the US indicates continued strength in the economy, leading us and various institutions including the IMF to revise up US growth. We see the current strong momentum to continue into Q2 but expect a deceleration in H2, without negative growth in any quarter.
Data on the inflation side also points to stickier prices, with upside risks from the recent geopolitical escalation (oil). This opens a difficult phase for central banks such as the Fed for which we expect fewer rate cuts but higher uncertainty around policy actions. In addition, investors should assess the following factors:
- The dichotomy in US economy. Small business vulnerability to high rates vs large business resilience and the low income households fragility vs the high income strong consumption are key features of this cycle. Higher for longer rates will further increase these vulnerabilities. We still see the Fed cutting rates but at a slower pace, with a small risk of no cuts.
- Europe shows a clearer picture vs US allowing the ECB to start cutting earlier. Here as well we see slower rate cuts and also highlight that divergences in Central Bank actions will require FX to be closely monitored.
- Emerging markets offer bright spots to consider. Asian economies in particular prove overall much more resilient and more autonomous/driven by regional forces. India remains a bright spot and a structural growth story.
- Rising geopolitical risks will affect overall market visibility. With inflation risk in focus, geopolitics is increasingly relevant for oil prices, while demand for gold as a safe-haven diversifier could support the metal.
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