Economic Policies of Central Banks and Current Trends
European Central Bank and Bank of Canada
The European Central Bank (ECB) and the Bank of Canada lowered interest rates this month, emphasizing that the monetary easing cycle continues. These measures are aimed at reducing inflation and stimulating economic growth. In contrast, the Federal Reserve (Fed) has not taken similar steps yet, but it is likely to lower rates by the end of the year, indicating the end of the monetary tightening period.
Situation in the United States
The Fed continues to focus on inflation and the labor market. Despite a slight increase in the unemployment rate by 0.4 percentage points over the last three months, the labor market remains generally resilient. The May payroll report showed significant job gains, exceeding the breakeven level for the US economy (~100-125 thousand), supported by immigration flows. Economic growth is normalizing after the rapid pace of the last two quarters, and progress in reducing inflation continues, giving grounds to expect further decline in inflation to the Fed’s target by the end of the year.
Global Economic Conditions
The global Purchasing Managers’ Index (PMI) shows growth, indicating an improvement in business activity. Europe has emerged from recession and expects positive economic growth this year, despite rising inflation in the eurozone in May. However, the overall trend toward rate cuts remains.
Specifics of Japan and the United Kingdom
Japan remains an exception, with expected inflation growth that could lead to policy tightening after a long period of deflation. In the United Kingdom, inflation is stickier, delaying but not canceling rate cut expectations.
China’s Economy
China’s economy shows a reliance on exports but continues to struggle in the real estate sector, which restrains consumer activity.
Markets and Earnings Revisions
Earnings revisions in the US and globally are positive, with expected earnings growth of 12% and 11.7% respectively. This suggests improvements across all sectors, contributing to the market rally. Focus is shifting towards stocks, investment-grade bonds, and undervalued natural resources.
Interest Rates and Money Markets
Markets expect one to two quarter-point rate cuts by the end of 2024. Money markets are highly sensitive to economic data, and the Fed will cautiously lower rates based on incoming data. Market prices for one to two quarter-point rate cuts this year are considered reasonable.
Credit Markets
Credit markets remain strong, with increased bond issuance and stable interest coverage ratios. Leverage remains below the long-term average, supporting high-yield valuations.
Equity Market
Global equities rose 3.0% over the past month, led by US equities, which gained 3.8%. Positive global economic data and recovering inflation contribute to market growth. The Fed continues its easing trend, making equities preferable over bonds.
Real Estate and Real Assets
Real estate fundamentals remain stable, particularly in the multifamily and industrial sectors. However, excess supply may limit short-term growth. High mortgage rates and property prices restrain home-buying demand.
EUR/USD Pair
The EUR/USD situation is influenced by multiple factors. ECB rate cuts could weaken the euro, while expected Fed rate cuts could weaken the dollar. Economic data and inflation indicators will be key factors affecting the EUR/USD dynamics.
Conclusion
In the short term, the EUR/USD pair may remain under pressure due to expected further ECB rate cuts and potential Fed easing. Investors should closely monitor economic data and central bank statements to better understand future market movements.
Recommendations and Opinion
Based on the current analysis, I would recommend that investors closely watch economic data from the US and Europe, as well as central bank statements. Inflation indicators and labor market data will be key indicators for predicting the next steps of the ECB and the Fed. For long-term investments, consider stocks and investment-grade bonds, as well as undervalued natural resources.
Idea for Further Analysis: Investigating the impact of global economic trends on specific sectors such as technology and healthcare, and their investment potential under changing monetary policies.
BT
