Bassanese Bites: Great rotation? – July 15 2024
Global markets
Global equities continued to grind higher last week, helped by a softer than expected US CPI report and dovish comments from Fed chair Jerome Powell. The Goldilocks soft landing scenario is continuing to play out, which is supportive of both bond and equity markets.
Ahead of the all-important June CPI report, Fed chair Powell got the party started by noting in Congressional testimony that he is also appreciative of downside economic risks while at the same time acknowledging the labour market appeared better balanced and the disinflation trend seemed back on track. That was manna from heaven for financial markets, bolstering expectations for rate cuts this year.
The cherry on top came from the June US CPI, with headline inflation declining 0.1% (market +0.1%) and core inflation up only 0.1% (market +0.2%). The good news is that housing inflation seems to be finally slowing in earnest after remaining surprisingly firm earlier this year – despite a softening housing market and weaker rents on new leases. The lags from weaker rents on new leases to official measures of housing inflation finally appear to be kicking in.
US producer prices (PPI) on Friday were a touch firmer than expected, though still reasonably benign with a 0.2% monthly gain. All up, the combination of low CPI and PPI numbers for June bodes well for another soft private consumption expenditure deflator (PCE) later this month, which would virtually cement the case for a September US rate cut.
Yesterday’s attempted assassination of Donald Trump has only likely enhanced his odds of winning back the Presidency. From a markets perspective, this was already shaping up as the most likely outcome so – love or hate him – I do not expect it to unduly affect financial markets too much.
Key global events this week will be US retail sales and industrial production, both of which the market anticipates will be relatively soft – further supporting the soft landing narrative. It’s also the start of the June quarter US earnings reporting season, which should remain healthy overall – though with the potential for some earnings warnings given the slowing economy and easing in Corporate America’s ability to jack up prices.
Adding to the dovish news, even the Reserve Bank of New Zealand sounded less hawkish last week – expressing greater confidence that inflation would decline thanks to the weakened economy, which in turn opened up the prospect of rate cuts as early as this year. Indeed, if this week’s June quarter CPI is better than the RBNZ’s current forecast of 0.6%, an August or October rate cut is not out of the question. At present, my new base case is a rate cut in both November this year and February 2025, with a gain in this week’s CPI of only 0.5%.
