Summary
Eastspring’s Multi Asset Portfolio Solutions team expects moderating inflation, decelerating growth, and an easier monetary policy in the second half of 2024. This should be positive for high quality bonds. Given the attractive levels of current bond yields, the team has begun entering long duration government bond positions.
This is an extract of our Q3 2024 Market Outlook. Click here to download the full report which includes a special feature “Copper: The red metal is poised to rise”.
Macro: Outlook Moderating global growth and disinflationary forces pave the way for a Fed pivot
The global economy has been expanding steadily for the past eight months, as shown by the J.P. Morgan Global Composite Purchasing Managers’ Index (PMI) Output Index. However, this momentum showed signs of easing in June where the PMI for new export orders, which proxies export demand, fell into the contractionary territory, which is marked by a below 50 reading.
Global Purchasing Managers’ Index (PMI)
Source: LSEG Datastream, 14 June 2024.
Inflation in the US showed signs of easing in the second quarter. Both headline and core Consumer Price Index (CPI) readings generally softened, leading to a decline in the Citi Inflation Surprise Index, which measures whether inflation is beating expectations.
Citi Inflation Surprise Index (US, G10)
Source: LSEG Datastream; Citigroup. 28 June 2024.
Softer US CPI data in the second quarter and potential softening of the labour market (which could ease wage inflation), may now prompt the Fed to start cutting rates soon. The Fed seeks to avoid being too slow to cut rates in order to maintain policy credibility. Otherwise, it risks having inadequate rate cuts during a meaningful growth slowdown phase, potentially leading to a recession.
Asset Allocation: Staying “risk-on” for now
Over the shorter-term tactical horizon, gradually moderating inflation and benign (yet still positive) growth can continue to support risk assets, with US equities being our favoured equity position, as it continues to benefit from relatively strong earnings. In our view, US consumer spending, which is a key driver of US growth, and ultimately global growth, will eventually decelerate more meaningfully as key sources of consumer spending such as excess savings from the pandemic, wage income and consumer credit growth, for example, start to fade. To this end, the team is prepared to be more defensive on risk assets, such as equities, over the 12-month horizon.
Datasource: Multi Asset Portfolio Solutions team. Asset class views are as of the team’s most recent monthly meeting in July 2024 and should not be taken as a recommendation. 3m = 3-month view. 12m = 12-month view. The information provided here is subject to change at the discretion of the Investment Manager without prior notice
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