On a global level, macro-financial conditions in the second half of the year will be dominated by the continuation of global monetary easing.
The cycle of key rate cuts has already begun. It should deepen with the Fed in H2. The global balance of „key rate hikes vs cuts“ has continued to fall in recent weeks (see chart below).
Rates were cut earlier in emerging countries, particularly in Latin America (Brazil, Chile and Mexico).
The trend is now also established in developed countries.
In addition to the ECB at the beginning of June, other European central banks cut their key rates, including Sweden, Denmark, Switzerland and Canada.
Generally speaking, the prospect of the start of the Fed’s rate-cutting cycle (in H2 2024) and the end of the rise in the dollar will reduce the upward pressure on the other central banks in the 2nd half of the year.
This movement will undoubtedly be facilitated by the continuing global disinflation (see chart below), although the main part is behind us.
Disinflation will itself be helped by the easing of labour markets (see graph below for the USA) and inflation expectations.
And the easing in long rates is already confirming this trend.
This reflects slightly weaker than expected macro data from the US; a soft landing rather than a no landing.
The fall in long-term rates will be gradual and limited: investors are positioned to bear rates and equilibrium rates are probably higher than in the past.
Nevertheless, real long-term rates are too high (see chart below) to ensure the long-term sustainability of total US debt.
Moreover, history always argues in favour of a fall in long-term yields after a peak and then a cut in Fed key rates (see chart below).
This is why we are expecting a long-term (10-year) rate of around 3.90% in the USA at the end of 2024.
As for the world economy, despite the current soft patch, it will hold up well and will be able to post annualised growth of around 2.5% (see chart below), thanks in particular to :
- Good corporate profitability limiting the adjustment of employment and investment;
- The start of restocking which is beginning to support the industry;
- The fall in inflation, which has led to positive growth in real household income;
- The start of an easing in financial conditions, which will intensify in H2 with the start of central bank rate cuts;
- Rather expansive fiscal policies everywhere: in the United States (BIL, IRA, CHIPS), in Europe (Next Gen EU), in China (targeted support measures) and in most emerging countries (fiscal loosening before the elections in Indonesia, India, Mexico, South Africa, etc.).
As for the global equity market, its potential seems limited due to high absolute valuations (see chart below) in the global (US) equity market, a risk premium below the historical average, a high appetite for risk and fairly aggressive investor positioning.
Nonetheless, monetary easing and strong EPS momentum should leave the US equity market, and hence the global equity market, with little room for growth.
For the rest, the markets will obviously remain attentive to exogenous phenomena, such as geopolitics or possible political changes in Europe (in the United Kingdom and France) and of course in the United States, even though the new American presidency and Congress will not take office until January 2025.