Summary
We believe that the US economic growth momentum will likely continue to decelerate, as consumer spending eventually slows on the back of dwindling excess pandemic savings, decelerating wage growth and tighter lending standards.
Market update
Equities: Global equity markets rose in June, buoyed by robust corporate earnings, advancements in AI & Technology, and strengthening economic fundamentals. US equities rose 3.6%, propelled by the AI sector, a sturdy economy, and a surge in manufacturing activity. In USD terms, Emerging Markets (EMs) outpaced Developed Markets (DMs), rising 4.0% in June compared to DMs’ 2.1% gains. Asia Pacific ex Japan markets rose by 3.9% even though China equities declined amid capital flight fuelled by economic uncertainty. ASEAN markets too gained 0.5%, however they underperformed the broader Asia region and EMs. Notably, Asia’s tech exporters, Taiwan and South Korea, rose strongly, posting 12.0% and 8.9% gains respectively.
Fixed Income: In June, global bond markets saw a modest rise as US Treasuries’ (USTs) yields fell along key tenors, signalling the possibility of Fed rate cuts later in the year amid softening inflation. The yield on two-year USTs decreased by 18 basis points to 4.71%, while the yield on ten-year USTs dropped by 15 basis points to 4.36%. Against this backdrop, global aggregate bonds returned 0.1%, US Treasury bonds returned 1.0%, and Singapore bonds rose by 1.1%. The US high yield market rallied, aided by continued inflows and a rally in US Treasuries. The Asian USD bond market also gained 1.2%; both IG and HY issuers posted gains.
Macro overview
Growth: The global economy has been expanding steadily for the past eight months, as indicated by the J.P. Morgan Global Composite PMI Output Index data, although the expansion rate eased in June 2024. The Economic Surprise Index (ESI) data across key regions (namely US and Europe) have also started to deteriorate i.e., economic data coming in below consensus expectations, thereby supporting a decelerating growth backdrop. Looking ahead, we believe that the US economic growth momentum will likely continue to decelerate, as consumer spending, a key driver of US growth, eventually slows on the back of dwindling excess pandemic savings, decelerating wage growth, and tighter lending standards. In the next six months, we see the risks between a hard and soft landing as balanced with a slightly higher probability assigned to a soft landing.
Inflation: Although the US Consumer Price Index (CPI) displayed robust readings during Q1 2024, Q2 readings indicated a return to disinflationary trends, setting the conditions for the Fed to cut if the trend continues into Q3. While we acknowledge that supply-side inflation risks could arise due to geopolitical tensions, we believe that disinflationary forces will ultimately prevail as the labour market continues to see weakness through the rest of 2024.
Monetary Policy: The latest Fed median projection (the ‘Dot Plot’) now implies a single 25 basis points (bp) rate cut this year, in contrast to three cuts projected in March. In our view, the Fed remains highly data dependent and that they will act decisively should there be continued signs of slowing growth and improving inflation data. The recent US CPI and core PCE inflation readings show promise, and market participants have already priced in ~70% probability of a rate cut in September.
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