Fast reading
- The S&P 500 Index hit a new high as the latest US inflation data boosts chances of a September rate cut.
- European Commission data points to a steeping disinflation trajectory.
- Red Sea trade disruption has less impact on trade than feared.
Cautious optimism was the dominant mood across markets this week after a series of positive inflation reads and forecasts in the world’s major economies.
In the US, April’s Consumer Price Index (CPI) reading came in at 3.5%, the first time in four months that the data was in line with economists’ expectations. This renewed hopes of early central bank action to cut interest rates, prompting the S&P 500 Index to close above 5,300 for the first time, and bringing year-to-date returns to 11.3%.1
A similar story played out in Europe, where the region’s Stoxx 600 Index closed at a record high after updated estimates from the European Commission suggested inflation will fall faster than previously expected.
The Commission’s revised forecast points to a decline in annual inflation to 2.5% this year before hitting the European Central Bank’s 2% target in the second half of 2025. This is an improvement on its February forecast where it said the decreases would be to 2.7% in 2024 and 2.4% in 2025.
Chris McGinley, Head of Trade Finance, Federated Hermes, points to a decline in shipping lane disruption in the Red Sea as one reason for the European Commission’s more optimistic outlook. Here, attacks from Houthi rebels operating out of Yemen had led shipowners to reroute their cargos away from the Suez Canal and around Africa instead. This longer route can add to journey times and push up costs.
“However, so far, the impact has been milder than some had feared and it looks like this has fed into the lower-than-expected inflation numbers in the eurozone,” explains McGinley.
Figure 1: Shipping costs have come down from start-of-year highs
Louise Dudley, Portfolio Manager, Global Equities, Federated Hermes Limited, notes the upbeat mood across markets, adding that inflation data, and the timing of central bank interest rate cuts would continue to be the key catalysts.
“We see a US cut in September and December priced in and so are paying close attention to CPI, unemployment, and GDP read-outs,” she adds. “We still expect the Fed to require consistency in the data, and don’t expect them to pull the trigger too early. We cautiously expect one interest rate cut this year but expect volatility to hit if inflation remains sticky and unemployment is hot.”
What scope for policy divergence?
Orla Garvey, Senior Fixed Income Portfolio Manager, Federated Hermes Limited, highlights the theme of fiscal and monetary policy divergence between the US and other major economies. The latest iteration of the theme, she says, sees an upswing in growth in the eurozone and the UK and a slight stalling of momentum in the US. This does not mean it will be easy for the European Central Bank (ECB) or the Bank of England (BoE) to take a separate path from the Fed, however.
“We think the ECB and BoE can loosen monetary policy to an extent and we do expect a series of cuts from both central banks this year,” she says. “Outside of that, it becomes more of a delicate balance as persistent dollar strength might be a concern – as would the impact on the external account from higher US rates.”
Figure 2: Over the hump? Global inflation reads since 2019
For more on central bank policy, read the latest update from Deborah Cunningham, our Chief Investment Officer, Global Liquidity Markets.
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1 All data, Bloomberg as at 17 May 2024.
