4 minGlobal economy remains dependent on US domestic consumption
Guy Wagner The global economy remains dependent on US domestic consumption, which continues to prove remarkably resilient, defying even the recent deterioration in the job market, note Guy Wagner and his team in their latest monthly market report "Highlights".
Indeed, despite the rise in the unemployment rate from a low of 3.4% in 2023 to 4.2% in August, household consumption continues to grow at an annualized rate of around 3% in real terms. “The persistent divergence between stagnant industrial production and expanding service activities does not appear to be diverting the US economy from its steady growth trajectory,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “In the Eurozone, cyclical growth is lacking in impetus. The latest activity indices suggest late-summer weakness, which is not only continuing in the manufacturing sector, exacerbated by a struggling automotive sector, but is also spreading to services, at least in the two leading countries, Germany and France.” In China, the public authorities seem determined to stabilize once and for all the real estate market, whose deterioration in recent years has weighed heavily on household confidence, jeopardizing the 5% growth target for the year as a whole. “The announcement of a series of monetary easing measures will shortly be followed by fiscal support measures, the details and scope of which have yet to be specified,” explains the Luxembourgish economist. In Japan, the moderation in inflation and the implementation of the wage increases negotiated in the spring are restoring positive growth in household purchasing power in real terms, likely to lead to an acceleration in economic activity in the fourth quarter.
The cut of 50 instead of 25 basis points reflects the monetary authorities' determination to contain the deterioration in the job market and avoid a recession. Guy Wagner
Further moderation in headline inflation
Low oil prices have led to a further moderation in headline inflation, while core inflation is currently stagnating. In the USA, headline inflation fell to 2.5% in August. The personal consumption expenditure core price index, the Federal Reserve's preferred price indicator, remained stable. In the Eurozone, the headline inflation rate even fell below the 2% threshold, dropping to 1.8% in September. The inflation rate excluding energy and food, however, showed little change, moving to 2.7%.
Federal Reserve begins monetary easing cycle
At its September meeting, the Federal Reserve began the cycle of monetary easing by reducing the target range for the federal funds rate by 50 basis points. Guy Wagner: “The cut of 50 instead of 25 basis points reflects the monetary authorities' determination to contain the deterioration in the job market and avoid a recession. In view of the considerable moderation in inflation over the past two years, monetary policy-makers now regard full employment as a priority objective within their dual mandate.” In the eurozone, the European Central Bank reduced its deposit rate by 25 basis points, as planned, after having cut it for the first time in June. Although President Christine Lagarde did not give any explicit guidance, weak economic activity and slowing inflation argue in favour of further monetary loosening in the fourth quarter.
Long term interest rates remain on a downward trend
Moderating inflation and the monetary easing initiated by the two main central banks are keeping long-term interest rates on both sides of the Atlantic on a downward trend. As a result, the yield to maturity on the 10-year US Treasury note fell. In the eurozone, the benchmark 10-year rate declined in Germany, France, Italy and Spain.
Stock markets resume their upward trend
After a more volatile phase in July-August, stock markets generally resumed the upward trend firmly established since the beginning of the year. “The US Federal Reserve's determination to avoid recession by cutting its key interest rates by 50 basis points, combined with the major monetary support measures announced by the Chinese authorities to stabilise the property market, gave a boost to both the U.S. and Chinese equity markets.” As a result, the S&P 500 in the US gained 2%, ending September at a new all-time high. The MSCI Emerging Markets index even rose considerably more, driven by strong gains on the Hong Kong, Shanghai, Shenzhen and Beijing stock exchanges. The MSCI All Country World Index Net Total Return, expressed in euros, ended the month up 1.5%, setting a new all-time record, as did the S&P 500. “Sector-wise, consumer discretionary, utilities and communication services posted the strongest gains, while energy, healthcare and consumer staples recorded the least favourable performances”, concludes Guy Wagner.
