Holding One’s Breath | AXA IM

Poll aggregators suggest that the US presidential race is very tight, but the change in dynamics – Harris’ national lead has been shrinking slowly since mid-October, and Trump is now seen in the lead in 5 out of 7 swing states, albeit with tiny margins – combined with the memory of the polls’ understatement of voting intentions for the Republican candidate in 2016 and 2020 has pushed the market into pricing quite clearly a Trump victory. Collectively, investors seem to agree with the notion that a Trump 2.0 administration would come with more inflation and a higher deficit – we concur. This results in a rise in US long-term yields and an upward revision in the market’s expected trajectory for the Fed even in the absence of new significant macro data. 

Finanzas en 2 minutos: El crecimiento económico estadounidense se ralentiza en el T3 y el Banco de Japón mantiene intactos sus tipos | AXA IM

El Banco de Japón (BoJ) mantuvo su tipo de interés de referencia a corto plazo en el 0,25% en su última reunión de política monetaria, su nivel más alto desde 2008 y conforme a lo previsto por el mercado. Esta decisión se adoptó en un contexto de cierta incertidumbre política tras las recientes elecciones en Japón, en las que la coalición en el poder perdió la mayoría. Sin embargo, el BoJ sugirió que los riesgos en torno a la economía estadounidense se estaban atenuando en cierta medida y conservó un tono optimista en el comunicado emitido, sugiriendo así la posibilidad de nuevas subidas si la economía sigue evolucionando en línea con sus previsiones. AXA IM prevé que el BoJ esperará hasta principios de 2025 para llevar a cabo la próxima subida del 0,25%..

The risk of lower US returns | AXA IM

A reasonable description of a bear market is when equities and credit generate returns well below those of less-risky assets like government bonds. In 2024 equity and corporate bond returns have outpaced returns from government bonds by healthy margins, making it a bull market year. In the US, strong growth (2.8% annualised GDP growth in Q3), has supported corporate profits while expectations of lower rates have helped companies manage their interest expenses. However, this has come at the cost of increasingly expensive valuations. The price-to-earnings (PE) ratio of the S&P 500, based on 12-month forecasts of earnings per share, is currently at 21.6 times according to the IBES Consensus. The average has been 16 since 2008. High yield credit spreads are tight. The asset swap spread on the ICE BofA US High Yield B-rated index is around 311 basis points (bp) which is in the bottom 7% of the distribution of that spread since 2014. Given we do not know what the post-election period will bring in the US, it is worth assessing how close we are to a bear market in risk assets, or at least to a period of returns being disappointing relative to the outcome in 2024 so far.

Japan reaction: Focus turning back to domestic growth and inflation dynamics | AXA IM

As expected, the Bank of Japan (BoJ) maintained its current policy stance at this week’s meeting, unanimously voting to keep the short-term policy rate unchanged at 0.25%. Perhaps more interesting was the subtle shift in focus away from global factors. Indeed, the Bank noted that the prospect of interest rate cuts by other major central banks and easing global inflation should avert an economic slowdown in areas such as the US and European economies, which Governor Ueda had flagged as the key downside risks at the previous meeting. And at the press conference, the Governor stated that the Bank would be following standard policy, adjusting policy based on the evolution of domestic growth and price conditions, with less attention paid to global risks.

Finanzas en 2 minutos: El FMI prevé un crecimiento «estable pero decepcionante», mientras que la actividad en la zona euro sigue sin despuntar | AXA IM

La actividad empresarial de la zona euro continuó estancada en octubre, ya que el sector manufacturero se contrajo, aunque a un ritmo más lento, mientras que la actividad de servicios se expandió, según el índice adelantado de gestores de compras (PMI) del bloque. La lectura compuesta, que incluye datos tanto manufactureros como de servicios, subió hasta 49,7 desde el 49,6 en septiembre; recordemos que toda cifra por debajo de 50 indica contracción. El PMI compuesto de Estados Unidos subió a 54,3 en octubre desde 54,0, con un crecimiento impulsado por el sector servicios, ya que la producción manufacturera siguió contrayéndose. El PMI compuesto de Japón cayó a 49,4 desde 52,0, la primera vez que se sitúa por debajo del umbral de 50 desde junio.

Prices, jobs, and personalities. Here comes the US election | AXA IM

For investors, the expected inflation rate is key to making investment decisions. Inflation over the course of an investment time horizon will partly determine the level of real return. As such, having a stable inflation rate is desired. This is not just important for investors but for the broader economy in general. Individuals and businesses can take more efficient decisions on consumption and investment spending when there is more certainty about how the general price level will evolve. Inflation shocks, like the one the world experienced in 2022, are not good for real returns or making optimal business investment or consumer spending decisions. Hence the importance of inflation targeting. Central bankers know the importance of trying to maintain stable inflationary expectations. Expectations are formed by the institutional policy framework, the cyclical position of the economy, and the recent experience that consumers and businesses have faced. If inflation has been high, then it is normal that expectations become more volatile and elevated. A key role of central banks is to work on those expectations by persuading economic agents that inflation will return to “normal” and thus long-term decisions on spending, wage demands, and pricing should not be permanently impacted. In this cycle, central banks have done a pretty good job.

October Op-ed - Meeting in the middle | AXA IM

Last month we wrote about the risk that the Federal Reserve (Fed) ends up “doing too much”, providing too much accommodation too fast to a still very resilient US economy, while the European Central Bank (ECB) would stick for too long to its restrictive stance, failing to realise that the speed and depth of the deterioration of the real economy could usher in inflation undershooting in the Euro area. The recent dataflow may have forced both central banks to reconsider, and they could “meet in the middle”, the Fed becoming more prudent, refraining from resorting again to “jumbo cuts”, while the ECB sounded more atuned to the need to accelerate the removal of restrictive policy as inflation is falling faster than in its own recent forecasts.

October Monthly Investment Strategy - A far-reaching US election | AXA IM

“Remember, remember the fifth of November”

Finanzas en 2 minutos: El BCE recorta tipos al revisarse a la baja la inflación, mientras que el crecimiento del PIB chino se ralentiza | AXA IM

La economía china creció un 4,6% anual en el tercer trimestre (T3), por debajo del 4,7% del T2 y a su ritmo más lento desde principios de 2023. La cifra superó las expectativas del mercado, que la situaban en el 4,5%, y sugiere que el objetivo de crecimiento «en torno al 5%» fijado por el Gobierno chino es factible. Sin embargo, otros datos publicados la semana pasada, como las ventas minoristas y la producción industrial, superaron las expectativas. Pekín prometió recientemente medidas de estímulo presupuestario y monetario para ayudar a apuntalar la segunda mayor economía del mundo, que ha acusado sus problemas en el sector inmobiliario, así como la debilidad de la demanda interna.

UK reaction: Some volatility at play, but broader pressures are easing | AXA IM

Today’s CPI data all but seal the deal for an additional cut to Bank Rate at November’s Bank of England meeting. The headline rate dropped to cyclical low of 1.7% - markets had anticipated a drop to 1.9% - from 2.2%, reflecting a broad-based slowdown across goods and services. Indeed, CPI goods inflation dropped to -1.4% in September, from -0.9%, while services CPI inflation dropped to 4.9% – over a two-year low – from 5.6% August. Core CPI inflation slowed by more than expected as a result, to 3.2%, from 3.6%.

UK reaction: Looser labour market conditions point to further cut | AXA IM

The latest labour market data point to an additional cut at the Bank of England’s meeting in November. The Labour Force Survey data showed a chunky 373K increase in employment in the three months to August and the unemployment rate edged down again to 4.0%, lower than in the previous three months and the level this time last year. Ongoing sampling issues, however, mean the data are unreliable and should be taken with a large pinch of salt. Note the survey reached an average of 88.5K individuals with a response rate to 42.8% (around 38k respondents), whereas in H1 2024, those figures were 53.1K and 17.6% (around 9k respondents), respectively.

Forget the market noise: Focus on value and the long-term | AXA IM

Sometimes it seems the economics profession operates in a parallel universe. There are confident forecasts for economic growth, inflation, and interest rates - which with hindsight, have a more than mixed track record.