Macro Update – June 2024

Macro Update April 2024

We maintain a “cautiously constructive” stance in our macroeconomic and market outlook. In the US, the recent surge in long-term interest rates is expected to moderate aggregate demand growth towards rates more aligned with the economy’s potential (around 2% growth). This, coupled with balanced supply and demand and stable inflation expectations, should lead to a gradual decline in core inflation in the coming months. Regarding monetary policy implications, while we anticipate few rate cuts this year and next, we deem it highly unlikely for the Fed to raise rates within the same timeframe. In the Eurozone, signs of economic improvement persist, with expected growth above 1% this year. This growth would be around potential and, along with anchored inflation expectations, should facilitate a decreasing trend in core inflation throughout the year. In China, despite increased stimulus efforts by authorities, political noise surrounding the approaching US elections could pose challenges for the market. Elsewhere, positive economic performance is expected in the rest of emerging Asia, and Japan anticipates an uptick in economic activity driven by wage growth acceleration, albeit recent inflation data may delay further monetary policy normalisation by the BOJ.

In the United States, the yield curve has appreciably shifted upwards since the beginning of the year, contributing to moderating the pace of aggregate demand expansion to rates around 2%, in line with the economy’s potential growth. Simultaneously, we believe that the risk of a significant economic slowdown in the short term remains low. Despite the potential end of the pandemic-related savings surplus and reduced fiscal stimulus, private consumption should remain supported by wages growing faster than inflation, a very low unemployment rate, and the solid financial standing of the average American consumer. The improved balance between supply and demand in the labour market, coupled with well-anchored inflation expectations, creates favourable conditions for wage growth to continue moderating in the coming quarters:

At the same time, the deceleration in rental prices, as recorded by private statistical sources, should begin to be reflected sooner rather than later in the “official” inflation indicators, thereby becoming an additional factor that should contribute to the moderation of core prices for the remainder of the year. Given the aforementioned points, and despite the significant uncertainty regarding the long-term neutral rate, a 10-year American yield around 4.5% seems to us to be sufficient to bring core inflation closer to the Fed’s 2% target over time.

However, we prefer to remain cautious before taking positions in the long end of the U.S. yield curve. This is due to two main reasons: we perceive more upside than downside risks to inflation, justifying a higher term premium, and there is a lack of political commitment in the U.S. to implement credible measures to reduce the public deficit, which, again, could impact the medium-term evolution of the term premium.

In the Eurozone, macroeconomic data continues to show a positive trend, even in Germany. We expect this improvement to consolidate throughout the year due to strong private consumption fundamentals (rising real wages, low unemployment, healthy household balance sheets with pandemic savings), the end of inventory adjustments aiding the industrial sector, stable fiscal policy, and low long-term real interest rates despite recent increases.

Core inflation should continue to moderate. We anticipate economic growth little a  above 1%, aligning with potential and avoiding undue inflationary pressures, especially as inflation expectations remain anchored and forward looking wage indicators begin to show signs of moderation:

Despite the ECB’s dovish stance, the expected economic upturn in the Eurozone over the next few quarters will likely limit the number of rate cuts this year and next. This reflects the fact that neutral rates in the Eurozone are higher now than during the period between the global financial crisis and the pandemic.

We remain cautiously optimistic about China’s macroeconomic outlook, but are wary of potential geopolitical noise from the upcoming U.S. elections, as both parties favour protectionist measures against China. However, many countries are recognising the U.S.’s diminishing reliability as a partner due to its political polarisation. Consequently, regions like Europe might adopt a more balanced approach towards China, potentially creating a less hostile external environment for the Asian giant.

In the rest of Asia’s emerging markets, we appreciate the blend of growth and macroeconomic stability. In Japan, we anticipate economic acceleration during 2024 as wages outpace inflation. This growth should support inflation rates compatible with the BOJ’s target, leading us to believe the BOJ will take further steps to normalise monetary policy before year-end, although possibly later than August due to recent lower-than-expected inflation data.

We will monitor geopolitical tensions and high levels of public deficit and debt in many countries. We do not expect the conflicts in the Middle East or Ukraine to cause a sustained rise in energy prices, given Iran’s reluctance to engage in Gaza and OPEC+’s capacity to manage supply shocks. However, we are concerned about the potential increase in protectionist policies and tougher stances towards China due to the U.S. elections, as well as the long-term unsustainability of public debt in several countries, which could lead to disruptive financial tensions.

Equities: The macroeconomic outlook is positive, suggesting continued exposure to equities. We recommend balanced positions between value and growth stocks, favouring cyclicals over defensives for the rest of 2024. We prefer European equities due to improved growth prospects and attractive valuations. Small-cap U.S. stocks also have potential due to a strong macro environment and possible Fed rate cuts. Some exposure to emerging Asian equities, including (but not overweighing) China, is advisable, considering potential geopolitical risks from the U.S. elections.

Government Bonds: We remain cautious about the long end of the U.S. yield curve due to potential upward pressure on the term premium from budgetary issues and symmetrical inflation risks. In Germany, current mid and long-term real rates seem too low given emerging macro recovery signs in the Eurozone. Japan may see further rate increases during this year, but this could take some time given still relatively low inflation prints in the most recent period .

Corporate Bonds: We favour corporate credit due to healthy corporate balance sheets and low default rates. At the same time tight spreads suggest complementing credit exposure with emerging market local currency debt, the latter offering good returns and potential currency appreciation. These markets present less risk than in the past due to strong governance, low deficits, and controlled inflation.

Currencies: The ECB’s dovish tone suggests some euro weakness, though not necessarily against the dollar. We favour NOK, NZD, AUD, and GBP for their high ratings, positive carry, and relatively good macro prospects. In emerging markets, we like BRL, INR, MXN, and IDR for their strong governance, high carry, and favourable growth outlooks. The dollar may face downside risks against the euro due to overvaluation, the U.S. fiscal situation, and narrowing growth differentials with Europe.

This report has been prepared by AMCHOR Investment Strategies SGIIC, S.A. (“AMCHOR IS”) an entity participated by the Alantra Group and incorporated as an investment firm authorized and supervised by the CNMV, registration number 273 with registered office at Calle Velázquez Nº 166, 28002 Madrid (Spain). 

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