A summary of the latest trends in the markets (July 2024)
Snapshot of the economic and market update for the third quarter of 2024
As we come to the middle of the year, it’s important to take a pause to see how expectations have matched with reality. Entering 2024, we expected continued resilience in the global economy. Indeed, the global economy has been registering another year of above trend growth. The change this year is that there is less divergence beneath the surface. Last year, the U.S., Japan and pockets of emerging markets (EM) excluding China surprised positively, while the eurozone, UK, Canada and China ended up disappointing. Some of this divergence is now diminishing. In the eurozone and UK, consumer confidence has been increasing which should help consumption and slowly stabilize the manufacturing sector. In China, the upturn in consumption should remain gradual, but fiscal policy continues to support infrastructure and growth.
On the other hand, progress on disinflation has become more uneven, leading to divergent paths for central banks. Since December, year-over-year U.S. core inflation has moved down 30bps, compared to 80bps in the eurozone and 90bps in the UK. While expectations of Fed rate cuts have been pushed back and reduced, they have been pulled forward for the European Central Bank and the Bank of England – with the ECB and other European central banks cutting first. For EM central banks, the delay in Fed cuts has led to slower or delayed rate-cutting cycles in response to currency pressure. Two important exceptions remain: China, continuing its stimulative monetary policy, and Japan, which finally embarked on a very gradual rate-hiking path.
Instead of decreasing, the U.S. rate differential with the rest of developed markets has increased again this year. As a result, the U.S. dollar has not depreciated as expected. Additionally, political uncertainty caused volatility in some currencies.
For markets, strong performance continued in the second quarter of 2024, driven by the resilient global economy and solid earnings. Markets remained ultra-focused on the path of inflation and the timing of central bank rate cuts. Other key topics during 2Q included continued AI-related enthusiasm and surprising election outcomes in India and Mexico. Global equities moved higher, up 11% year to date, but market concentration remains a key risk for investors. Meanwhile, global bonds are down 3% so far in 2024, as the changes in policy rate expectations continued to drive volatility. Going forward, it will be key to monitor whether the economic and earnings resilience continues and whether inflation continues its downward path, opening the door for more central banks to begin cutting interest rates. As the first half of the year showed, despite a lot of uncertainties, staying invested has been the winning strategy.
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