- On the economics front, consumption, investment, and trade have held up well so far this year.
- Tensions in the Middle-East or China’s economic struggles have not hurt global supply or demand.
- Markets, after the wobble of late-July, early-August, are back on sound footing.
- The complacency about the outlook is evident in market pricing.
- Fed may have to reign in melt-up risks by being deliberate and slow in easing policy.
Commentary: Final stretch of 2024
After broadly surprising on the upside in the first two-thirds of the year, global markets and economy appear to be set for the final stretch with lingering feel-good sentiments. Many factors that ought to be keeping risk aversion elevated have failed to do so. Anxieties about sticky inflation have faded, while fears of a hard landing have so far proven to be unfounded. Early-August episode of market volatility seems in the distant past. Tensions in the Middle-East and Ukraine simmer, but their impact on energy prices has been muted. Concerns about China’s economic slowdown persists, but pressure on the RMB has abated and systemic risks from the property market are in the backburner.
On the economics front, there is plenty of ground for businesses to feel good. Most have seen cost pressures abate while demand has been resilient. PMIs, particularly services, remain buoyant. In Asia, many, if not all, manufacturers are reporting strong order books. Exports have been robust; regional travel and tourism sector is reporting good data, while overall consumption numbers are healthy. In the US, from PMIs to retail sales, housing to manufacturing, jobless rates to investment, all support an economy on stable footing, with Atlanta Fed GDP Nowcasting for 3Q tracking 2.5% growth.
In financial markets, yield curves have shifted below the end-2023 points, reflecting emerging comfort around the inflation and monetary policy outlook. Equity volatility has declined and banking system liquidity remains comfortable. Credit spreads have bottomed, but the slight widening that has taken place in the past month still leave them near historically narrow levels.
The Fed has all but declared that policy rate cutting will begin from this month onward, which is further source of comfort for global markets. The dollar’s mild selloff over the last couple of months has given respite to EM currencies, bringing back flows to their asset markets. These are markers for a constructive backdrop for the last third of the year.
The risk is that a “melt-up” scenario emerges in the coming months, getting in the way of steady rate cuts. This it typified by the ongoing debate of 25 versus 50bps in rate cuts for September and how much more after that before the year is over. Instead, some considerations should be given to our central scenario, which is that after cutting in September, the Fed may choose to hold in November to make sure that the totality of the dataflow supports sustained rate cuts. The last thing the central bank may want to do is to fight a recession that never appears close, and then being cornered into dealing with the aftermath of an everything-rally next year. Disappointing the markets slightly may well be the order of business, in our view.
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