Week #19 — Market Update for May 6-10, 2024

Executive Summary

The U.S. stock market rose for the third consecutive week. Despite a lack of significant economic releases and the familiar hawkish stance of Federal Reserve officials, which investors have come to expect, the market maintained its upward trajectory. Next week may provide insight into the Federal Reserve's future actions, as a crucial inflation report is expected to show core CPI at 3.6% year-over-year.

Noteworthy trends emerged among the members of the Magnificent 7. META continued to recover from its recent selloff, gaining 5.4% for the week, while TSLA fell by 7.0% following disappointing vehicle shipment data from its Shanghai factory. April deliveries dropped 18% year-over-year to 62,167 vehicles, even though China's new-energy vehicle market is projected to grow by 33%. Other major manufacturers, such as Nio Inc. and BYD Co., saw respective surges of 134% and 49%.

Globally, stock markets generally followed the U.S. market. However, gains in European markets can also be attributed to improved economic conditions (please refer to the following section for details on the latest eurozone PMI and UK GDP) and strong earnings. STOXX 600 companies are now expected to see a decrease of 6.5% in earnings for Q1 2024 compared to a year ago, which is a significant improvement from the anticipated 11.0% decline forecast just a month ago.

The New York Fed Staff Nowcast model maintained its Q2 2024 U.S. GDP growth forecast at 2.23%, due to a lack of new data releases. In contrast, the Atlanta Fed's GDPNow significantly increased its estimate to 4.2% from 3.3%, as the prior figure, released on May 8, did not include the latest data published last week.

The earnings season is winding down. According to Refinitiv, 459 S&P 500 companies have already reported Q1 2024 earnings, with 92% of all companies now disclosed, up 13 percentage points from the prior week. Of these companies, 77.3% exceeded analysts' expectations, up from 76.8% last week. Earnings growth projections for the quarter have been revised upward again, now anticipating 7.4% year-over-year growth. Excluding the Energy sector, annual growth is projected at 10.5%, higher than previous projections of 7.1% and 10.2%.

Turning to monetary policy, market expectations of the Federal Reserve's actions have evolved slightly. The likelihood of a rate cut in September has decreased to 74.2% from 87.3%. Accordingly, traders have revised their projections for 2024's monetary easing to 34 basis points, down from 38.

In the bond market, the U.S. Treasury yield curve remained relatively unchanged, with 10-year bond yields steady at 4.50% and 30-year bond yields down 2 basis points to 4.64%.

For comprehensive insights and a deeper understanding of these developments, readers are encouraged to refer to the full article.

US Stock Market

The U.S. stock market rose for the third consecutive week. The absence of important economic releases and the accustomed hawkish rhetoric of Fed officials, to which investors have grown used, did not change the upward course of stocks. Next week could shed some light on the Federal Reserve's further steps as we await a crucial inflation report expected to show core CPI at 3.6% year-over-year.

Notable dynamics were observed among the members of the Magnificent 7. While META continued to recover from the recent selloff, gaining 5.4% over the week, TSLA fell by 7.0% following disappointing vehicle shipment figures from its Shanghai factory. Deliveries in April dropped 18% year-over-year to 62,167 vehicles despite overall growth in China's new-energy vehicle market, which is projected to increase by 33%. Other major manufacturers, such as Nio Inc. and BYD Co., saw surges of 134% and 49%, respectively.

In terms of sector performance, all eleven sectors exhibited positive dynamics.

The Fear & Greed Index, which measures market sentiment, rose to 48 from 40 a week ago, entering the “neutral” zone.

The SPY ETF, which tracks the S&P 500 Index, finally broke through the resistance at the 50-day moving average, clearing the way for further gains. At this point, it appears more likely to surpass the recent all-time high than to decline.

The earnings season is nearing its end. According to Refinitiv, 459 companies in the S&P 500 Index have reported their earnings for Q1 2024 so far. This indicates that 92% of companies have already disclosed their earnings, up 13 percentage points over the week. Of these companies, 77.3% have exceeded analysts' expectations, an increase from 76.8% the previous week. This rate remains above the long-term average of 66.7% but is slightly below the four-quarter average of 78.5%.

Earnings growth projections for the quarter have been revised upwards again. S&P 500 companies are now expected to see year-on-year growth of 7.4%. Excluding the Energy sector, the projected annual growth is 10.5%, in contrast to the previous projections of 7.1% and 10.2%, respectively.

During the week of May 13, 10 companies from the S&P 500 index are scheduled to present their financial results. The most eagerly awaited earnings reports include:

Global Markets

Global stock markets generally followed the U.S. market. However, gains in European markets should also be attributed to improved economic conditions (please refer to the following section for details on the latest eurozone PMI and UK GDP) and strong earnings. STOXX 600 companies are now expected to see a decrease of 6.5% in earnings for Q1 2024 compared to a year ago, a significant improvement from the anticipated 11.0% decline forecasted just a month ago.

The ACWX ETF, representing the MSCI All Country World Index excluding the USA, has successfully surpassed its recent high and is now trading at levels last seen before February 2022.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

·????? In April, global economic growth reached a ten-month high, driven by increased service sector output, which offset a mild slowdown in manufacturing. The J.P. Morgan Global Composite PMI Output Index, a key economic indicator produced with S&P Global, edged up to 52.4 from 52.3 in March, marking the sixth consecutive month of expansion. Nearly all countries saw positive economic activity except for Canada.

The service sector continued to outperform manufacturing, with service business activity rising at the fastest pace since June 2023. Growth occurred across business, consumer, and financial services. Manufacturing production also rose for the fourth consecutive month but at a slightly slower pace, with expansions in consumer and intermediate goods offsetting a contraction in the investment goods industry.

April saw a minor reduction in global employment for the first time in over two years. Employment decreased modestly in the service sector and remained unchanged in manufacturing. Regionally, the Euro area, Japan, India, the UK, Brazil, Russia, Australia, and Canada reported increased employment, while the U.S. and China saw job cuts.

Average input prices continued to rise, with inflation rates easing slightly from March’s six-month high. Cost inflation was stronger in services than manufacturing, despite decelerating in the former and accelerating in the latter. Developed economies experienced sharper cost increases compared to emerging markets.

Bennett Parrish, Global Economist at J.P. Morgan, highlighted that while global growth gained momentum, a significant 1.1-point drop in the employment PMI posed concerns. Elevated pricing PMIs underscored pressure on central banks to maintain their stance until inflation shows more progress. Despite a sharp drop in U.S. growth, improvement elsewhere indicated better geographic balance in the global economic expansion.

US

·????? President Joe Biden's administration was set to announce a significant decision on China tariffs, following a review of the Section 301 tariffs initially imposed under former President Donald Trump. The new tariffs aimed to strategically target sectors like electric vehicles, batteries, and solar cells while keeping existing levies largely in place. This move was expected to be one of Biden's most substantial actions in the economic competition with China, emphasizing his call to raise tariffs on Chinese steel and aluminum and initiating a new probe into China's shipbuilding industry.

Biden maintained that these measures addressed China's "unfair economic practices and industrial overcapacity," advocating for fair competition. Meanwhile, China condemned the tariffs, arguing that they disrupted economic and trade relations, pledging to defend its interests.

The announcement was expected to be enacted by U.S. Trade Representative Katherine Tai, who had highlighted the need to make tariffs more strategic and effective. Despite past internal divisions over the tariffs, the administration proceeded with a review, balancing political implications and their economic impact.

Under the 2020 phase one agreement, some tariffs were reduced in exchange for China's commitment to address intellectual property issues and increase U.S. purchases by $200 billion, a target that China missed by over a third. Despite ongoing diplomatic tensions, Biden's administration aimed to stabilize U.S.-China relations, acknowledging the "real progress" made after the two presidents met in California last year.

·????? Consumer sentiment in the United States experienced a significant drop in early May, reaching a six-month low as concerns about inflation and the job market mounted. The sentiment index declined to 67.4 from 77.2 in April, according to preliminary data from the University of Michigan. This figure fell below all forecasts from economists surveyed by Bloomberg.

The decline in consumer sentiment was widespread, impacting various demographic groups across age, income, and education levels. Short-term inflation expectations rose, with consumers anticipating that prices would climb by 3.5% annually over the next year, up from 3.2% in April. Longer-term expectations saw a slight increase as well, with consumers expecting prices to rise by 3.1% over the next five to ten years.

Growing concerns about the labor market and rising interest rates further dampened sentiment. Despite the labor market driving economic growth over the past year, the survey results indicated a more pessimistic outlook for employment and spending. Joanne Hsu, the survey director, noted that household income strength has supported robust consumer spending, but if labor market expectations continue to soften, a reduction in consumer spending could occur.

In May, the measure of buying conditions for durable goods reached a one-year low, reflecting the impact of high interest rates. Only a quarter of consumers expected interest rates to fall in the next year, a decrease from 32% in April. The current conditions gauge decreased to 68.8, while the measure of expectations dropped to 66.5, both at six-month lows.

·????? The New York Fed Staff Nowcast model maintained its U.S. GDP growth forecast for Q2 2024 at 2.23% due to the absence of new data releases this week. In contrast, the Atlanta Fed's GDPNow significantly upgraded its estimate to 4.2% from 3.3%, as the earlier figure, released on May 8, did not incorporate all the statistics published last week.

Europe

·????? The eurozone's economy expanded at its fastest pace in nearly a year, driven primarily by growth in the service sector, according to the latest HCOB Eurozone Composite PMI data. The Composite PMI Output Index, which averaged data from both manufacturing and services, rose from 50.3 in March to 51.7 in April, marking an 11-month high. This increase in overall business activity indicated moderate growth, primarily due to a solid recovery in the services sector. The Services PMI Business Activity Index jumped to 53.3, its strongest in almost a year.

The eurozone’s service sector, which showed growth for the third consecutive month, underpinned economic expansion with rising output levels and stronger demand conditions. New business volumes increased at the fastest pace since May of the previous year, prompting job creation to accelerate to its highest rate since mid-2023. Despite a slight dip from March’s 25-month peak, business confidence remained strong, aligning with historical averages. Price pressures also edged higher, with input cost inflation increasing marginally from an eight-month low and output charges rising at a quicker pace.

In contrast, the manufacturing sector continued to decline, and demand for goods weakened. New orders across the eurozone rose for the first time since May last year, albeit modestly, as stronger demand in the services sector offset reduced demand in manufacturing. Despite a slight increase in backlogs of work, the depletion of incomplete orders slowed, signaling an easing of capacity pressures.

All five eurozone economies covered by the survey reported rising business activity, led by Spain, which reached a 12-month high with a Services PMI of 55.7. Italy saw growth for the fourth consecutive month, while Germany and France experienced their first rise in economic activity in 10 and 11 months, respectively, although their gains remained marginal. Overall, Spain outpaced other major economies, benefiting disproportionately from tourism while maintaining a looser fiscal policy.

Commenting on the data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that the service sector's improved activity and job growth reflected growing optimism. However, productivity challenges and rising labor costs could pose concerns for the European Central Bank, potentially impacting its future interest rate decisions. Nevertheless, service companies successfully passed on some of their increased operating costs, suggesting healthy market competition and strong demand conditions.

·????? Germany's economy showed signs of recovery, driven primarily by the service sector, which expanded significantly in April. According to the latest HCOB Germany Services PMI, the service sector recorded a 10-month high, with the Services PMI Business Activity Index rising to 53.2 from 50.1 in March. Strong domestic demand contributed to this growth, with backlogs of work accumulating for the first time in nearly a year. Employment also rose at a solid rate, surpassing historical averages.

Meanwhile, the HCOB Germany Composite PMI also reached a 10-month high, hitting 50.6 in April after 47.7 in March. This shift above the 50.0 threshold indicated modest growth in private sector activity, although the manufacturing sector continued to struggle. A continued decline in manufacturing output and subdued global demand weighed on the sector, but the contraction slowed, indicating a gradual improvement. In contrast, services experienced strong growth, which helped offset manufacturing's ongoing decline. New orders increased primarily due to the service sector, while manufacturing new business remained weak.

German factory orders unexpectedly fell by 0.4% in March, defying economists' expectations of a 0.4% rise. The decline was driven by major orders; without them, the figure would have increased by 0.1%. This decrease highlighted persistent fragility in Germany's economy, particularly in manufacturing, despite improving economic sentiment. Energy-intensive industries like chemicals struggled with high energy costs, while automakers, including Daimler, Volkswagen, and Mercedes-Benz, faced challenges in adapting to weaker demand. Nonetheless, some economists believed that improving global orders in the latter half of 2024 would bolster Germany's export-oriented manufacturers.

German industrial output also fell by 0.4% in March, with consumer and intermediate goods and energy leading the decline. Despite the contraction, this was better than economists' predictions of a 0.7% decline. Overall, this highlighted the enduring challenges facing the industrial sector, which remains a significant part of Europe's largest economy.

·????? Germany's residential real estate market continued to struggle in early 2024, despite signs of stabilization. According to the Kiel Institute for Economic Research, apartment valuations declined by 0.7% from January to March compared to the previous quarter. Prices for single-family homes remained flat, while multi-family home prices dropped by 10.5%, over double the decline of the prior quarter. The president of the institute, Moritz Schularick, noted that it's "still too early to call a bottom" due to the low volume of transactions, which stood at just 40% of the average level between 2019 and 2021. Investor appetite for large real estate deals remained subdued as the rise in interest rates continued to pressure property prices downward.

Meanwhile, Germany's construction sector experienced a downturn in April, as the HCOB Germany Construction PMI revealed a further contraction. The Total Activity Index fell to 37.5, a three-month low, indicating a sharp and accelerated decrease in construction output. This downturn was more pronounced than the average recorded since the contraction began in April 2022. Housing activity remained the weakest segment, declining sharply at a rate similar to the previous month. Commercial activity also saw a decline comparable to March's level, and civil engineering posted its largest decline in four months.

·????? The Bank of England (BOE) signaled a potential shift towards interest rate cuts, with Governor Andrew Bailey highlighting markets underestimating the pace of future easing. After a 7-2 vote to maintain the base interest rate at 5.25%, Deputy Governor Dave Ramsden and external member Swati Dhingra advocated an immediate cut, while other Monetary Policy Committee members required more data confirming subdued inflation.

Bailey emphasized that a less restrictive policy path could be considered if forecasts held. Although uncertain about a June rate change, Bailey's remarks garnered attention due to his previous hesitance to comment directly on investor expectations.

BOE estimates showed inflation, which peaked above 11%, should decline to the 2% target in the second quarter, driven by reduced energy costs. However, risks from geopolitical factors could disrupt this projection. The bank’s forecasts also predicted unemployment reaching 5.9% by 2026 if rates remained unchanged, compared to 4.3% currently.

The BOE forecast a 0.5% GDP growth for 2024, an improvement over its previous forecast. Average wages were projected to grow 5.25% this year, outpacing inflation. Real post-tax household income was set to expand 1.75%, exceeding the 2010-2019 average.

·????? The UK housing market and construction industry in April painted a mixed picture as house prices barely rose while the construction sector experienced a significant rebound

House prices in the UK rose by only 0.1% in April following a 0.9% decline in March, according to Halifax. This marginal gain left the average home cost at ￡288,949 ($362,330), which was still 1.1% higher than a year earlier. Mortgage lender Nationwide Building Society had previously reported a second monthly decline in prices, indicating that buyers struggled due to increased mortgage rates. Average two-year fixed mortgage rates climbed to 5.93% in April, compared to 5.5% in January.

The construction industry expanded at its fastest pace in 14 months in April. The Construction PMI jumped to 53.0, up from 50.2 in March, signaling growth above economists' expectations of 50.4. This improvement suggested that the economy continued to rebound after the shallow recession in late 2023. Growth was driven by civil engineering and commercial building, which increased for the first time since August. Although the housebuilding sector remained in contraction, strength in other sectors offset this weakness. New business volumes increased for the third consecutive month, while nearly half of firms anticipated increased output over the next 12 months.

The UK's economy rebounded strongly in the first quarter of 2024, growing by 0.6% compared to the previous quarter, according to the Office for National Statistics (ONS). This was the best performance since late 2021. The growth was driven by a 0.7% increase in services output, ending three consecutive quarters of decline, as retail sales and investment rose. While industrial production grew by 0.8%, construction output slipped by 0.9%.

Political implications loomed large with Prime Minister Rishi Sunak attempting to gain traction after local election losses, while Labour remained focused on individual voters' dissatisfaction. Chancellor of the Exchequer Jeremy Hunt hailed the figures as proof of economic recovery. However, challenges such as persistent inflation, affordability issues, and fluctuating mortgage rates continued to shape the economic landscape.

Asia

·????? In April, Japan's service sector experienced robust growth, accelerating to its fastest pace since August 2023. The au Jibun Bank Japan Services Business Activity Index rose to 54.3, up from 54.1 in March, signaling an increase in business activity for the eighth consecutive month. Strengthening demand and a supportive economic environment were key factors, with total new work rising at the quickest pace since June 2023. Export sales contributed positively due to increased inbound tourism. However, hiring challenges persisted, and employment growth plateaued from March.

Despite growth in the service sector, rising inflation affected wage growth. Real wages fell 2.5% year-on-year in March, marking a 24-month decline streak. Nominal cash earnings rose by only 0.6%, with a sharp 9.4% drop in bonuses. However, full-time workers saw pay grow by 2.3%, a positive indicator watched by the Bank of Japan (BOJ). S&P Global noted that bonuses distorted the data, but underlying scheduled pay remained strong. Unions secured significant pay raises, with large companies promising over 5% increases, the highest in 30 years, likely to reflect in wages over the summer.

Meanwhile, inflation continued to dampen consumer sentiment and spending. Household outlays fell by 1.2% in March year-on-year, extending a 13-month decline streak, even though spending increased by 1.2% from February.

·????? China's service sector expanded moderately in April 2024, marking the 16th consecutive month of growth. The Caixin China General Services Business Activity Index decreased slightly to 52.5 from 52.7 in March, indicating continued improvement despite a slight dip. Key factors driving this growth included a significant rise in new business and export demand. Foreign demand for China's services increased at the fastest rate in ten months, supported by improved global market conditions and tourism activity.

However, service providers continued reducing employment due to low capacity pressures, marking the third consecutive month of job declines. Business leaders cited resignations and redundancies as contributing factors to job shedding, reflecting reluctance to replace vacancies due to cost concerns.

Input and output prices rose modestly. Input costs increased primarily due to higher prices for raw materials, labor, and energy, though overall inflation remained moderate and below historical averages. Output price inflation, on the other hand, remained mild but surpassed the series average as firms transferred cost burdens to clients.

Despite challenges, business sentiment improved to its highest level since December 2023, as firms expressed optimism about market conditions and expected further growth in the coming year.

In the broader economic context, consumer inflation accelerated , maintaining positive growth for the third consecutive month. The consumer price index (CPI) increased 0.3% from the previous year, compared to a 0.1% rise in March. This exceeded the 0.2% growth median forecast from a Bloomberg survey. Factory-gate prices, however, continued to decline, reflecting prolonged deflationary pressures in the industrial sector. The producer price index (PPI) dropped 2.5% in April compared to the previous year, a more moderate decline than the 2.8% decrease in March.

This combination of rising consumer inflation and declining factory prices highlighted the economy's structural challenges. The government struggled to stimulate consumer spending amid a weak real estate market and a challenging labor market. Moreover, declining producer prices compressed corporate profits, reducing their incentive to invest. A survey of over 20,000 retailers revealed that despite growing sales, average order values contracted to their lowest level in nine months.

Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., noted that structural divergences between goods and services prices and between upstream and downstream sectors continued to hinder recovery. Utility and train fare hikes, coupled with rising natural gas prices across 130 cities and counties, contributed to inflation without stimulating demand. These administrative decisions were estimated to add up to 101 basis points to producer-price inflation and 72 basis points to the CPI.

·????? India's economy experienced significant growth across both its manufacturing and services sectors, supported by robust domestic and international demand, positive economic conditions, and strategic investments in infrastructure.

The Indian manufacturing sector commenced the first fiscal quarter on a high note, evidenced by the HSBC India Manufacturing PMI which, despite falling from 59.1 in March to 58.8 in April, indicated a strong improvement in operating conditions. This score was the second-highest in three and a half years, comfortably above the neutral mark of 50.0 and exceeding its long-run average of 53.9. New business intakes sharply increased, and production was scaled accordingly.

India's service sector maintained sharp growth at the start of the first fiscal quarter, supported by strong domestic demand and international business gains. Despite the HSBC India Services Business Activity Index falling from 61.2 at the end of the previous fiscal quarter to 60.8 in April, this was still among the highest growth rates seen in nearly 14 years. Finance and Insurance led the four monitored sub-categories, recording steep growth.

India's Chief Economic Advisor V. Anantha Nageswaran projected that the economy could sustain growth between 6.5% and 7% over the next decade, supported by investments in infrastructure and a conducive regulatory environment. India is better positioned to pursue non-inflationary growth and absorb challenges of overheating.

Prime Minister Narendra Modi's vision for India as a developed nation by 2047 would require economic expansion at an annual rate of over 8% for the next quarter-century. While an ideal growth rate would be between 9.5% and 10%, Nageswaran emphasized the importance of maintaining moderate growth over the long term. He also stressed the need for regulatory reform, investments in youth training and health services, and leveraging the nation's demographic dividend, as over half of its 1.4 billion population is under 30.

Foreign Exchange Markets

The Dollar Index, which reflects the value of the US dollar against a basket of major currencies, rose by 0.22%, primarily due to the Japanese yen weakening after a sharp appreciation in the previous week.

Commodities and Energy Markets

In the commodities sector, the majority of assets ended the week with positive movements.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (for the period until October 2025) shifted slightly upward by an average of 5 basis points.

Meanwhile, the U.S. Treasury yield curve remained largely unchanged, with 10-year bond yields holding steady at 4.50% and 30-year bond yields decreasing by 2 basis points to 4.64%.

Central Bank Insights

·????? In recent weeks, the Bank of Japan (BOJ) has been closely scrutinizing the impact of the yen's depreciation on inflation, signaling potential shifts in monetary policy. At the April policy meeting, BOJ board members explored scenarios in which a weaker yen could accelerate inflation, potentially prompting an earlier rate hike than anticipated. Governor Kazuo Ueda, in his first meeting with Prime Minister Fumio Kishida since March 19, acknowledged the challenges posed by the currency's weakness and highlighted the bank's vigilance in monitoring foreign exchange rates.

Board members recognized the need to manage government bond purchases more cautiously, considering the BOJ's substantial holdings that encompass nearly half of the nation's government debt. Some members proposed reducing the current monthly purchase of ￥6 trillion ($38.6 billion) and emphasized the importance of signaling the intention to decrease bond buying as part of the bank's exit from large-scale monetary easing. The BOJ maintained its bond purchase strategy for now, noting that reducing purchases will be crucial moving forward.

Governor Ueda's public comments reflected a notable shift after meeting with Kishida, emphasizing that the weak yen, while historically beneficial, had brought significant economic downsides, particularly the rising import prices due to increased energy and food costs. The BOJ anticipated that a 2.1% inflation rate could be reached by April 2026, bolstering expectations of quicker monetary tightening.

·????? The Bank of England (BOE) remains cautious about monetary policy adjustments, even as certain inflation indicators point to a potential slowdown. Chief Economist Huw Pill emphasized the importance of remaining vigilant about the more persistent pressures on prices, particularly those driven by wage growth and the services sector. Speaking after the Monetary Policy Committee decided to maintain interest rates at a 16-year high, Pill expressed concerns about being "seduced" by external factors temporarily driving down inflation.

Pill noted that while recent inflation developments have provided some comfort, he underscored the necessity of ensuring inflation remains on target sustainably. He emphasized that the BOE will continue focusing on fundamental inflation components, which are showing signs of easing due to restrictive interest rates. Despite these positive signs, Pill cautioned against prematurely relaxing monetary policy and indicated that the BOE would wait for stronger evidence of easing wage growth and labor market conditions before considering significant changes.

·????? The European Central Bank (ECB) is poised to reduce interest rates in June, following a series of internal discussions marked by differing opinions among policymakers. During a recent monetary-policy meeting, a "very large majority" of officials supported maintaining the deposit rate at 4%, while a few advocated for immediate cuts, believing the policy stance had become more restrictive as inflation moderated.

Chief Economist Philip Lane indicated growing confidence in the eurozone's ability to reach its 2% inflation target, bolstered by a reduction in inflationary pressures within the service sector. He also highlighted that recent GDP figures reinforced this optimism. However, he acknowledged the importance of considering new data before committing to future policies and noted that global factors, such as US monetary policy and Middle East tensions, must be closely monitored.

Gediminas Simkus, an ECB Governing Council member, suggested that a series of interest rate cuts could occur in 2024 if inflation continues its downward trend. He cautioned, however, that monetary policy should remain somewhat restrictive to avoid reigniting inflation through excessive wage growth or geopolitical instability.

Joachim Nagel, the Bundesbank president, warned that structural factors like geopolitics, decarbonization, and demographic trends could maintain inflation at higher levels in the future. He emphasized the need for vigilance to ensure inflation expectations remain anchored.

Other members like Pierre Wunsch and Robert Holzmann stressed the importance of balancing rate cuts with external factors, such as potential inflation from currency fluctuations. Holzmann emphasized the significant influence of the Federal Reserve due to the dollar's global role.

ECB Vice President Luis de Guindos and Executive Board member Frank Elderson also confirmed that the decision to reduce rates in June will depend on economic projections, while the path beyond remains uncertain. They reiterated the commitment to a data-dependent approach, advocating for caution and flexibility to adapt to evolving inflation dynamics.

·????? The Federal Reserve remains cautious and deliberate in its monetary policy decisions as inflation continues to exceed the central bank's 2% target. Throughout the week, various regional Federal Reserve Bank presidents have voiced their perspectives on current interest rates and their potential adjustments, underscoring the complexity of the economic environment.

Thomas Barkin, President of the Federal Reserve Bank of Richmond, highlighted the ongoing restrictive monetary policy aimed at curbing inflation, which remains a primary focus despite the robust labor market. Barkin noted that while the current high interest rates are designed to temper demand and curb inflation, there are concerns about persistent inflation in housing and services. This sentiment is echoed by Susan Collins, President of the Federal Reserve Bank of Boston, who pointed out the need for prolonged high rates to dampen demand and address price pressures, indicating a slower pace in the disinflation process than initially expected.

John Williams, President of the Federal Reserve Bank of New York, and Neel Kashkari, President of the Minneapolis Fed, have discussed the potential for future rate cuts, albeit under conditions of assured inflation control and economic rebalancing. Williams expressed optimism about the current policy stance and its alignment with the shifting economic environment, suggesting that while rate cuts are on the horizon, the timing remains uncertain. Kashkari, meanwhile, emphasized the likelihood of maintaining current rates “for an extended period of time” until inflation trends clearly towards the target, reflecting a strategic patience in monetary adjustments.

Various regional Fed leaders, including Raphael Bostic of the Atlanta Fed and Lorie Logan of the Dallas Fed, indicated that regional economic dynamics play a crucial role in shaping their outlook on monetary policy. Bostic remains hopeful about reducing rates within the year, contingent upon a slowdown in job growth aligning with inflation targets. Logan, on the other hand, highlighted the unpredictability of current economic resilience in the face of high rates, suggesting a cautious approach to any potential rate cuts.

Federal Reserve Governor Michelle Bowman and Austan Goolsbee, President of the Chicago Fed, provided a more long-term perspective on interest rates and inflation. Bowman is not anticipating rate cuts in 2024, emphasizing the need for a steady approach towards achieving inflation targets. Goolsbee noted that there is no substantial evidence of inflation stalling out at higher levels, advocating for a data-driven approach to future policy decisions.

You can find more articles in our Telegram channel at https://lnkd.in/euxNeUuZ