Capital markets whipsawed between a weakening US labour market and hopes that the Fed would successfully steer the economy towards a soft landing. Markets are optimistically interpreting the latest policy action, which could potentially boost consumption and investment. The other narrative is that the Fed would not have implemented a big cut without having apprehensions on the economic front.
Our view is that truth lies somewhere in between – a combination of the two narratives will most likely play out, depending on:
- The US being on a slight deceleration path, downside revision to eurozone. We maintain our views of only a mild deceleration. Labour markets, consumption pattern and savings rate remain key to monitoring the extent of the slowdown. In the eurozone, we trimmed our real GDP growth forecasts for 2025 from 1.2% to 1.0% mainly due to weak domestic demand.
- A Fed that is inclined to cut rates deeper would give more leeway to the ECB and the Bank of England to reduce their own policy rates. Higher number of Fed rate cuts means lower terminal rates for the Fed, with ripple effects on the ECB and BoE.
- US seems less concerned (for now) about fiscal deficits. The political leanings of Kamala Harris and Donald Trump are different, but neither of them seems to be bothered by high deficits. In Europe, it’s the opposite, and has caused investment and productivity gaps with the US over the years.
- China’s monetary stimulus is a definite boost to market sentiment. The monetary easing and changes to housing policy signal a renewed effort by the country to support the economy, but we await clarity on fiscal stimulus.
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