Macroeconomics

With Donald Trump’s solid victory helping the dust around the US election result settle faster than many might have expected, investors’ attention has promptly shifted to the potential economic and financial market implications of the new administration.

In what has been a busy week for macro news in Europe, the latest round of data for the Eurozone delivered a surprise that could have implications for the European Central Bank’s (ECB) interest rate plans.

With the first Labour budget since 2010 dominating headlines, hallway conversations and family gatherings in the UK for the past couple of months, the stakes were very high indeed for the chancellor, Rachel Reeves, on Wednesday. Political opinions aside, the budget is usually an important event for market participants and this one was no exception.

With elevated yields and inflation expected to come back to target, we think investors can target a level of real return that was extremely difficult to achieve in the previous cycle.

With cracks starting to show in the US economy, many are wondering whether tight corporate bond spreads leave investors vulnerable. But with corporate balance sheets holding firm and yields on higher quality bonds looking attractive, staying invested in credit should continue to reward investors.

Data out of Europe over the past few weeks has pointed to both lower growth and lower inflation, and rate expectations have shifted accordingly with market pricing now implying a 96% chance of another 25bp cut from the European Central Bank (ECB) on October 17, up from around 25% on September 20.

Uncertainty is over, it was a 50 basis points (bps) move. As we mentioned in our previous blog, the most important take away from the Federal Open Market Committee (FOMC) meeting would be their assessment of the economy.

While the majority of headlines have concerned whether the Fed will do 25bp or 50bp to kick off its cutting cycle, we think this is only one part of the discussion – and not necessarily the most important one.

Yesterday the European Central Bank (ECB) delivered a 25 basis point (bp) cut, their second in the current easing cycle and in line with market consensus.

With the Federal Reserve (Fed) set to begin its long-awaited interest rate easing cycle at next week’s Federal Open Market Committee (FOMC) meeting, Wednesday’s Consumer Price Index (CPI) inflation report for August was the last big economic release investors could comb for clues as to the size of the first cut.

We struggle to recall a more eagerly awaited US labour market report than that published last week. Stakes were high given the previous report showed a steep rise in unemployment and caused market mayhem in early August, but anyone hoping for a conclusive picture was left disappointed as a mixed set of figures left the strength of the US economy open to interpretation.

In his headlining speech at the Jackson Hole Economic Symposium, Federal Reserve (Fed) chair Jerome Powell’s message to the market was clear.