Barbara Reinhard, CFA
Senior Managing Director, Chief Investment Officer, Multi-Asset Strategies and Solutions
To say the U.S. markets reacted well to the Fed’s 50 basis point cut on Wednesday is a bit of an understatement: The S&P 500 made all-time highs, driven by Big Tech, while defensive sectors of the market lagged. We discussed last week how there may be a little irrational exuberance around the speed and depth of this cutting cycle, but how are things going elsewhere in the world?
Let’s recap where the U.S. is. Job growth remains steady at around 120,000 a month, and initial claims have fallen to their lowest since May while consumer confidence rebounded to its highest level from the same point. However, mixed signals from demand are emerging. New orders, inventories, and personal consumption have shown weakness, even as retail sales ticked upward at 0.1%. Despite these complexities, inflation has cooled to 2.5%, with core CPI at 3.2%, giving the Fed room to front-load its cuts while growth continues at 3%. In the words of Fed chairman Powell during the FOMC press conference, “all of this indicates an economy that is still growing at a solid pace,” but the Fed will look at the totality of the data and make decisions meeting by meeting.
On the global stage, the divergence in economic conditions among the developed markets is striking. The Eurozone faces anemic growth almost across the board, with recent data and surveys signaling a rapid decline in new orders and manufacturing activity. Germany in particular saw a drastic slowdown, with manufacturing activity reaching new lows for the year.
Meanwhile, Japan, which hiked rates as part of monetary policy normalization in July, opted to hold rates steady at its central bank meeting on Friday. The country is experiencing a moderate economic recovery, but there is meaningful uncertainty about its future and the Bank of Japan opted to wait and see the effect of its summer move. In explaining its decision, the Bank of Japan reiterated its belief in the “virtuous cycle from income to spending” thesis as the economy continues to grow above potential.
For investors, this divergence between the US, Eurozone, and Japan offers both risks and opportunities. While the U.S. seems to be navigating its cutting cycle with caution and flexibility, weaker global peers may struggle to maintain stability. In line with this, we continue to lean into U.S. equities while screening for opportunities both on a tactical and structural basis around the world.
Arjun Kaushik contributed to this article. U.S. economic data from Bloomberg.