Over the summer, we have seen big moves in financial markets largely reflecting conflicting views of the US economy.
During the first half of 2024, markets were often driven by concerns about persistently high US inflation and the implication that it would be difficult for the Fed to reduce interest rates. However, the last three inflation prints now show core inflation in line with or below the 2% annual target, making it much easier for the Fed to cut . Attention has instead shifted to whether there is not only room but also a need for rate cuts to support the economy.
We agree that low inflation has cleared the path for “normalisation” of interest rates from current high levels and for the Fed to consider the labour market and not only inflation, but the process of rate cuts is still likely to be gradual and cautious, with large reactions in interest rate markets to economic news. As often before, lower bond yields in the US have been reflected in Europe.
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