CIO View
After the ECB, now waiting for the FOMC
Getting back to the desk shortly after the release of the JOLTs report and asking our U.S. economist about the outcome, he replied “bad, I mean good!” Were there maybe two JOLTs reports released at the same time? Let’s put this – at first glance - somewhat confusing reply into perspective. First, a cooling labor market is good news from a financial market’s point of view. Then, of course, it would fit our forecasts. And it would validate economic textbooks’ claims that central bank policy rates above the neutral rate do dampen growth momentum and inflation pressure. All major economies have weakened in line with economic theory on the back of give-or-take 500 basis points of rate hikes. The UK experienced a technical recession in H2/2023, Germany teetered on the brink of one, Canada’s economy had a negative quarter, France stagnated, etc. Just the United States Economy kept powering on, delivering 4% annualized growth during H2/2023.
From several angles, it looks a bit as if it’s now payback time for the U.S. economy. “[T]he slowdown in private and public investment in 1Q 2024 suggests that last year’s massive fiscal tailwind is now fading”, BofA Global Research wrote in a research note last week.(1) How come, given that this year’s fiscal deficit is still at 6.5%, as the IMF projects? Here’s the catch: “[I]f the deficit remains stable or contracts slightly thereafter, the impact of fiscal policy on GDP growth (i.e., the fiscal impulse) will go from strongly positive to flat or negative”, BofA analysts wrote. It would take a further expansion of the U.S. fiscal deficit to add to this year’s growth, like it did last year. The Atlanta Fed GDPNow GDP Forecast dropping to 1.8% seems to complete the picture.
As it often seems to be the case, when the evidence of a U.S. slowdown becomes overwhelming, along comes a blowout labor market report. Like last Friday. “Good, I mean not good”, we’d be tempted to say. New jobs crushing all forecasts, wage growth above expectations, thus definitely not to the Fed’s liking. Naysayers might point to the unemployment rate, which re-took the 4% for the first time since January 2022. But anyway, this was a strong report. Bond markets didn’t like what they saw, with 2-year U.S. yields spiking by 15bp after the release. The shape of the U.S. labor market will make for a lively discussion at this Wednesday’s FOMC meeting, and the DWS CIO Day.
Although the ECB delivered exactly on our forecast introduced almost a year ago of a first 25bp cut in June 2024, the path ahead seems a bit less certain. For one, we have the impression that ECB officials might have overdone it in terms of “transparency”, i.e. pre-commitment, in the run-up to the meeting. One could even ask why they bothered to come to Frankfurt, just to rubber-stamp a cut announced already. Moreover, wage inflation is a European topic as well. Just one day after their cut, compensation per employee data showed a 5.1% rise from a year ago in Q1, compared to 4.9% in Q4/2023.(2) A July cut is off the table, and we need Q2 wage growth data, to be released in late August, to behave in order to see the next ECB rate cut in September. Leaving it with just one cut would probably smell too much of a policy error.
Equity markets were not too much impressed by the drama in the bond arena, with the S&P 500, the MSCI World, and a couple of other indices making new highs. We don’t want to bore you with all those metrics of how short a time it took for NVIDIA to become the #2 most valuable company of the globe. Could it be that the company’s valuation now looks a bit stretched even to Jensen Huang? At least we learned last week that the CEO expects to sell up to USD 735 million in Nvidia stock over the next 12 months.(3) Others keep drawing the comparison with the late ‘90s dot-com bubble. Richard Bernstein Advisors pointed out that the share of stocks in the S&P 500 that outperformed the index has dropped to the lowest level since 1999.(4) Goldman Sachs nevertheless sees a strong market, at least for the weeks ahead, driven by a wall of money.(5) As Bloomberg reports, “[a] flood of cash from passive equity allocations will pour into the stock market in early July, setting up a continuing rally through the early summer, according to Goldman Sachs Group Inc.’s trading desk. […] New quarter (Q3), new half year (2H), this is when a wall of money comes into the equity market quickly.”
The European elections will probably have limited impact on markets, given that “[t]he centrist majority in the European parliament is holding as the right did not outperform”, as our friends at DB Research are writing this morning.(6) However “the biggest impact could be at the national level with Macron calling a legislative election.” Main focus for markets this week will be on the United States, where besides the FOMC meeting we’ll get May CPI data on Wednesday, PPI on Thursday and the University of Michigan consumer confidence data on Friday. On Friday as well, the BoJ will meet.
1. Source: BofA Global Research: Why is the fiscal impulse fading despite “unsustainable” deficits?; by Aditya Bhave and Jeseo Park, June 4, 2024.
2. Source: Bloomberg, June 7, 2024.
3. Source: Barron’s, June 6, 2024.
4. Source: X, June 6, 2024.
5. Source: Bloomberg, June 5, 2024.
6. Source: Deutsche Bank Research Europe Blog: “EU elections – key takeaways”, by Marion Muehlberger, Ursula Walther and Marc de-Muizon, 10 June 2024.
Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of 6/10/24.