General Economic Overview – Quarter 2 2024
The momentum in equity markets has continued unabated in the second quarter of the year especially
in US, once again led by a concentrated set of stocks, although this has broadened during the quarter.
Since our April review, the growing consensus among managers is that we’re in a higher-for-longer
interest rate environment. At the beginning of the year markets were pricing in repeated Fed rate cuts
in 2024. Instead, the Fed has held its finger on the pause button, including at the last meeting in June.
The Fed has gradually been adjusting to the reality that rates will need to stay higher for longer – not
only in the short term but also further out, which is illustrated by the gradual upward revision of its own
estimate of long-run interest rates. Market pricing has adjusted accordingly. In Europe, with growth
improving, inflation still above target and unemployment at a record low, the European Central Bank’s
rate cut in June did not mark the start of a deep rate-cutting cycle, as noted by Christine Lagarde in her
press conference. The same stance is likely from the Fed if it starts to ease later this year.
Central banks describe themselves as data dependent. This means that in theory they have no
philosophical bias towards higher or lower rates; they will be what they need to be. Most central banks
also have more than one mandate – whilst much of the focus is on inflation, they also can have mandates
around employment and financial stability.
These mandates have probably led to a more conservative approach to lowering rates in the US where
inflation does not suggest interest rates should be cut just yet. Inflation is above target with some signs
it could increase further, and markets seem to be paying attention to this with the volatility in bond
yields. The other two mandates, employment and financial stability, do suggest rate cuts may be
appropriate. The falling number of job openings indicate that the employment market is weakening.
Perhaps more importantly, the scale of deficit spending in the US and the amount of debt that will need
to be issued means there could be a dislocation in bond markets and financial markets that could require
the Fed to act. Lower interest rates would reduce the probability of this.
Please be aware that this material is for information purposes only and is supplied by Rayner Spencer Mills Research, an independent research consultancy. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, Rayner Spencer Mills Research own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Neither Equium Wealth Management Limited or Rayner Spencer Mills Research accepts any legal responsibility or liability for any matter or opinion expressed in this material.