Weakening or normalizing? A big-picture view of the global economy.
We examine the normalizing US economy, diverging consumer sentiment in Europe and the UK, easing monetary policy in major Western economies, and encouraging stimulus in China.
Disappointing manufacturing and jobs data triggered losses for the week across major US stock market indexes.
I remain confident that our base case scenario – a relatively soft landing for the US economy – will come to fruition.
Eyes will be on the US Consumer Price Index report and the European Central Bank meeting this week.
Markets shivered last week on renewed concerns about the US economy. Disappointing manufacturing and jobs data triggered losses for the week across major US stock market indexes. However, I remain confident that our base case scenario – a relatively soft landing for the US economy – will come to fruition. This week, I explore five reasons why I have confidence in this outlook even in the face of recent market jitters.
First, let’s set the stage.1 Stocks fell globally last week, but the drop was sharpest in the US with the S&P 500 Index down 4.2% and the NASDAQ Composite Index down 5.8%. The Dow Jones Industrial Average held up better, down just 2.9%. The 10-year US Treasury yield dropped to its lowest level in more than a year. The 2-year US Treasury yield fell about 25 basis points last week. Crude oil prices fell again, reaching their lowest level since December 2023.
So what happened last week to ignite those jitters?
Markets could find more reasons to be nervous. For example, Dollar Tree lowered its annual forecast last week, reiterating that lower-income consumers are under pressure. And Chicago Fed President Austan Goolsbee shared that “If you’re going to have a soft landing, you can’t be behind the curve,” underscoring the fear that the Fed may already be behind the curve.6
In addition, the 2-year/10-year yield curve “disinverted” last week — returning to its normal shape in which shorter-term rates are lower than longer-term rates. Some might assume this is a positive development as inverted yield curves are considered to be a recession indicator. However, disinversions aren’t seen as a good sign — they’re a signal that markets are pricing in rates cuts due to negative economic data, and so they suggest we may be one step closer to the start of a recession. However, thus far it has been an unusual cycle with an extremely long period of yield curve inversion that has already defied historical norms, so I’m not putting too much stock into this one development.
In fact, I remain confident that our base case scenario – a relatively soft landing – will come to fruition. Following are five reasons I believe the US economy will experience a soft landing:
Finally, I don’t mean to be dismissive of areas of weakness in the US economy, as they are there. In fact, they are more pronounced but similar to those seen in Europe and Canada, where manufacturing has been weaker but services has been stronger. The difference is that the US has benefited from greater fiscal largesse from its government during the pandemic as well as the grand privilege of long-term fixed rate mortgages. However, I believe all these economies will re-accelerate in coming months as they benefit from continued easing; the Bank of Canada cut rates last week and I’m confident the European Central Bank will cut rates this week. Of course, that doesn’t mean we aren’t going to see more market jitters in the near term. I believe we should be prepared for volatility and not react to it with fear, but instead look for opportunities to add exposure to oversold asset classes.
Eyes will be on the US Consumer Price Index (CPI) and the European Central Bank (ECB) meeting this week, although CPI is far less important now that markets are more concerned about growth rather than inflation. I expect the ECB meeting will likely result in another rate cut given recent economic data that has been weaker than expected.
Date |
Event |
What it tells us |
---|---|---|
Sept. 9 |
Eurozone Sentix Investor Confidence Index
|
Measures the economic outlook for the eurozone based on a survey of investors and analysts
|
|
Mexico Consumer Price Index
|
Tracks the path of inflation |
|
NY Fed Consumer Inflation Expectations
|
Assesses US consumers’ expectations for the path of inflation |
|
US Consumer Credit |
Covers most credit extended to individuals, excluding loans secured by real estate |
Sept. 10 |
UK Unemployment
|
Indicates the health of the job market |
|
Germany Consumer Price Index
|
Tracks the path of inflation |
|
EU Economic Forecasts
|
Provides an outlook for the economic health of the European Union (EU) |
|
NFIB US Small Business Optimism Index
|
Provides a summary of the health of small businesses in the US |
|
Japan Reuters Tankan Index
|
Assesses business conditions in Japan from the Central Bank of Japan |
Sept. 11 |
UK Gross Domestic Product
|
Measures a region’s economic activity |
|
UK Industrial Production
|
Indicates the health of the industrial sector |
|
US Consumer Price Index
|
Tracks the path of inflation |
|
Japan Producer Price Index
|
Measures the change in prices paid to producers of goods and services |
Sept. 12 |
Brazil Retail Sales
|
Indicates the health of the retail sector |
|
ECB Monetary Policy Decision
|
Reveals the latest decision on the path of interest rates |
|
US Producer Price Index
|
Measures the change in prices paid to producers of goods and services |
Sept. 13 |
Japan Industrial Production
|
Indicates the health of the industrial sector |
|
UK Inflation Expectations
|
Assesses expectations for the path of inflation |
|
Eurozone Industrial Production
|
Indicates the health of the industrial sector |
|
University of Michigan US Consumer Inflation Expectations
|
Assesses US consumers’ expectations for the path of inflation |
|
University of Michigan US Consumer Sentiment
|
Assesses US consumer expectations for the economy and their personal spending |
|
China Retail Sales
|
Indicates the health of the retail sector |
|
China Industrial Production
|
Indicates the health of the industrial sector |
|
China Unemployment Rate
|
Indicates the health of the job market |
Weakening or normalizing? A big-picture view of the global economy.
We examine the normalizing US economy, diverging consumer sentiment in Europe and the UK, easing monetary policy in major Western economies, and encouraging stimulus in China.
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1 Source for all data points on last week’s market performance: Bloomberg, L.P., as of Sept. 6, 2024
2 Source: Institute for Supply Management, Sept. 3, 2024
3 Source: S&P Global, Sept. 3, 2024
4 Source: US Bureau of Labor Statistics, as of Sept. 3, 2024
5 Source: Federal Reserve Beige Book, Sept. 4, 2024
6 Source: The Wall Street Journal, “Hiring softened this summer, teeing up Fed rate cuts,” Sept. 6, 2024
7 Source: S&P Global, Sept. 5, 2024
8 Source: Institute for Supply Management, Sept. 5, 2024
9 Source: Federal Reserve Beige Book, Sept. 4, 2024
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
The opinions referenced above are those of the author as of 9 September 2024.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
The Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics. (insert agency for other countries as needed)
The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest US publicly traded companies.
The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.
The NASDAQ Composite Index is the market-capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange.
The Federal Reserve Beige Book is a summary of anecdotal information on current economic conditions in each of the Fed’s 12 districts.
The ISM Services Purchasing Managers’ Index (PMI), which is based on Institute of Supply Management surveys sent to purchasing and supply companies of more than 400 services firms.
The ISM Manufacturing Purchasing Managers’ Index (PMI) is based on Institute of Supply Management surveys sent to purchasing managers at manufacturing firms nationwide.
The Job Openings and Labor Turnover Survey (JOLTS) is a monthly report by the US Bureau of Labor Statistics of the U.S. Department of Labor counting job vacancies and separations, including the number of workers voluntarily quitting employment.
The S&P Global US Manufacturing PMI™ measures the activity level of purchasing managers in the manufacturing sector through a questionnaire of ~800 manufacturers.
The S&P Global US Services PMI is compiled by S&P Global from responses to questionnaires sent to a panel of around 400 service sector companies. The sectors covered include consumer (excluding retail), transport, information, communication, finance, insurance, real estate, and business services.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.
A basis point is one-hundredth of a percentage point.
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