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The policy divergence between Central Banks continues

The policy divergence between Central Banks continues

The Topic of the Week:

FED Confirms That Major Central Banks Are No Longer Implementing Their Monetary Policies in a Coordinated Manner

The latest GDP data released in the United States (a quarterly drop from 3.4% to 1.3%) has once again raised the specter of a possible recession (something that has always occurred when we have had a prolonged period of monetary tightening). However, this does not seem to be the central scenario, as both the labor market, corporate results, and economic activity indicators remain very solid. For example, the May manufacturing PMI rose to 51.3 points, improving by almost one and a half points over the previous figure, and in any case exceeding 50 points, which indicates that we are in an expansion zone.

Employment data also appears to be solid overall, although there are several factors to consider that could give us some clues about the future evolution of this indicator: (i) the unemployment rate remains close to historical lows, but over the past year it has been gradually increasing from the low reached in April 2023 of 3.4% to the latest data released in May of 4.0% (which rose one tenth from the previous 3.9%); (ii) there are discrepancies between the «Payrolls» survey, where workers with two jobs count as two employed persons, and the «Household» survey, where each employee counts only once even if they have more than one job. The difference between the first and second surveys is 4 million workers (158.5 vs 154.5 million), and in addition, the second survey shows that in the last 6 months there would be 1 million more unemployed people in the United States; (iii) the number of people with multiple jobs in the United States would be 8.4 million, a figure that practically equals the historical maximum; (iv) the quality of employment also raises some doubts, as the number of full-time jobs fell by 625,000 people, while part-time jobs increased by 285,000, this being the largest drop in full-time employment since December.

U.S. inflation levels surprised on the downside in May, falling one tenth overall (from 3.4% to 3.3%) and two tenths in underlying terms (from 3.6% to 3.4%). In this regard, we believe it is relevant to point out that if we exclude housing and rental prices from the CPI data (the so-called «supercore CPI»), inflation would still be close to 5%. In Europe, on the other hand, inflation rebounded two tenths in May, from 2.4% to 2.6% overall and from 2.7% to 2.9% in underlying terms. It seems that in general, both in the United States and in Europe, the services component is what is keeping inflation still relatively far from the 2% targets that central banks have set themselves.

In this scenario, the main central banks are beginning to make moves in terms of monetary policy, with the Bank of Canada being the first bank to act among those that make up the so-called G7, with a 0.25% cut to 4.75%. Subsequently, and after a period of almost five years without reducing rates, the European Central Bank lowered the official rate by 25 basis points to 4.25%, confirming that the monetary policies of the main central banks are no longer acting in a coordinated manner (the FED, for example, continues without modifying its policy). This ECB cut was taken for granted after the communications of the monetary authority in previous meetings, however, its speech became somewhat more restrictive than expected. Lagarde announced that this move does not represent a new continued phase of rate cuts, and that for a new rate cut to occur, the inflation path would have to be clearly downward. The reality is that the latest inflation data released in May have rebounded, with the services sector as the clear culprit for these increases, and the ECB itself has revised upwards its inflation forecasts for 2024 and 2025 (2.5% in 2024, 2.2% in 2025), so the 2% target would not be reached until early 2026.

For its part, the FED met last Wednesday and decided to keep interest rates unchanged, despite the fact that the previous inflation data had surprised positively. In the subsequent speech, Powell announced a change in the rate cut forecasts for 2024 and 2025, once again delaying the turn towards a more lax monetary policy. The FED discounts a single cut for 2024, which could come in September if inflation data continues its current downward trend, and foresees 4 additional cuts for 2025. It is confirmed once again that there are not many reasons to lower rates, considering that inflation continues to fall gradually in a macro environment that, although it has slowed down somewhat, remains far from a recession scenario.

Market Spotlight:

The closing of the stock markets in mid-June left us with a mixed performance between the United States and Europe, where once again the balance tipped in favor of the S&P 500 and the Nasdaq. While these markets continued to rise, +1.58% for the S&P 500 and +3.47% for the Nasdaq 100, which year-to-date have already accumulated +13.8% and +16.8% respectively, in Europe we saw the main stock indices correct significantly. Thus, the Euro Stoxx 50 fell -4.20% in the week and was accompanied by the Ibex 35 with a fall of -3.62%, with Italy and France being the worst off markets. The call for elections in France due to Macron’s poor electoral results in the European elections was one of the triggers for the strong sell-off, which could have been greater if not for the money that entered the market at the last hour of the Friday session.

As for fixed income assets, US and German bonds saw the yield on their 10-year issues reduced by more than 20 basis points, with returns remaining at +4.22% and +2.36% respectively. Meanwhile, in Spain the correction was much smaller and only fell 6 basis points to +3.34%. France also saw the risk premium on its 10-year bond (excess return paid over the benchmark bond in Europe, in this case the German one) soar last week above 75 basis points, levels not seen in 7 years, when Marine Le Pen was challenging Macron for the presidency.

With regard to alternative markets, gold closed the week with gains exceeding +1%, recovering some of the ground lost on the previous Friday, while Brent North Sea crude oil rose +3.77%, thus erasing the sharp falls caused by the OPEC announcement of increased production starting in September.

On a macro level, today we will see the May CPI data for Europe, for which a slight rebound is expected from the April data to +2.6%, compared to +2.4% previously. Tomorrow, Wednesday, will be a holiday in the United States, which will leave the markets very quiet, in a truce phase. On Thursday, as every week, the weekly employment data will be released, and on Friday we will see the most important macro reference of the week when the European and US PMI data are released, indicators that will provide clues about the solidity of the global economic trend.

The Quote:

And we say goodbye with the following quote by Paulo Coelho, Brazilian novelist, playwright, and lyricist: «The world changes with your example, not with your opinion.»

Summary of the Performance of Main Financial Assets (06/17/2024)

Please note that this report does not provide personalized financial advice. It has been prepared independently of the specific financial circumstances and objectives of the persons who receive it.