In the US, the slowdown in the labor market bodes well for the start of the monetary easing cycle next month and associated trade with a steeper curve. As Powell said in Jackson Hole, “the time has come for a policy adjustment.” There is no free lunch, however, as Fed funds futures are pricing in cumulative rate cuts of 100 basis points by year-end, which would assume a sharper deterioration in economic activity.
Although the risk of a recession in the US has increased, we believe it remains relatively low. Job vacancies are high, layoffs are limited and domestic consumption has proven resilient. Monetary policy stimulus should help find a new equilibrium and avoid a recession. US stocks are highly valued, the Chinese economy remains in slump, and industrial overcapacity poses major challenges for European companies. The only positive side effect of China's continued weakness is the fall in commodity prices, which contributes to the picture of disinflation.
In the US, sector rotation could begin given the upcoming election. Small caps, the USD, tech, autos and banks “vote for Trump”.
We are cautious about China, raw materials and European luxury. Visibility in China remains very limited due to an ever-adjusting real estate market, undermining consumer confidence. There is no ceasefire in sight for the trade wars that are expected to escalate in the coming quarters.
In Europe, consumers remain cautious and Chinese competition in industry is weighing on earnings prospects in many sectors. We prefer pharmaceuticals, utilities and real estate.
The economic slowdown is likely to push inflation further towards central bank targets. Bonds with a longer duration appear interesting.
Author:
Thomas Neuhold, CFA
Head of Austrian Equity Research, Head of Real Estate Research
Kepler Cheuvreux
3 September 2024
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