The disinflation trend appears intact in the US and in the euro area. While economic growth in these regions could ease, we believe solid labor markets should support consumption. Markets are poised for rate cuts. The timing of the central banks’ moves remains uncertain and, very possibly, a potential source of volatility. In China, very different variables are at play. A protracted downturn in the property market and subdued consumer spending are impeding the economy's recovery. Despite positive data surprises in exports and Purchasing Manager Indexes, insufficient domestic demand still remains a challenge.
USA & CANADA
DISINFLATION TREND INTACT
- A few lighter-than-expected inflation prints could usher in a soft landing and a weaker US dollar, in our view.
- Domestic consumption and a strong labor market continued to drive the cycle in mid expansion.
- The Bank of Canada began its easing cycle. It saw no need to wait for the Federal Reserve (Fed) to act as Canada’s softening growth and inflation dynamics justified the move.
LATIN AMERICA
GDP GROWTH REBALANCING TOWARD LONG-TERM TREND AS POLITICAL RISKS RISE
- While growth in 2024 will likely be mildly lower than in 2023, underlying drivers still remain healthy, including generally low unemployment, rising real wages and continuing solid terms of trade.
- We believe Latin America is well-positioned to benefit from nearshoring and distance from current geopolitical tensions. However, Mexico’s surprise election result could disrupt the investment case for who may be the main beneficiaries.
- Central banks are cautiously cutting rates from very restrictive levels. While core services inflation still remains sticky, similar to the US, there has been substantial disinflation for headline CPI and inflation expectations are broadly in check.
UNITED KINGDOM
GENERAL ELECTION FRONT AND CENTER
- The UK economy continues to improve, though the pace has slowed a touch.
- The upcoming election will likely bring significant shifts in fiscal and regulatory policy, which we think can be growth-supportive.
- The Bank of England has hinted at rate cuts, but we think the cutting cycle will be quite limited, as evidence of price pressures remains.
EURO AREA
RECOVERY CONTINUES IN THE EURO AREA
- The recovery evident since early 2024 continues to gain momentum, but large pockets of weakness still remain.
- We think fiscal and regulatory action are becoming more likely, and could be important components of an acceleration in the recovery.
- As expected, the European Central Bank cut rates. It indicated future cuts would be at a gradual pace—we see the potential for the key rate to fall by 100 basis points.
- Risks to the inflation target will likely remain to the upside, but the reduction in inflation volatility is very positive, in our view.
CHINA
PERSISTENT DEFLATIONARY PRESSURES AND UNEVEN FRAGILE GROWTH
- Our 2024 growth forecast remained unchanged at 4.5% (Bloomberg consensus: 4.8%).i
- May activity data continued to show sector growth divergence: solid manufacturing/exports; softening consumption and weak property. Going forward, we expect stable below-trend growth.
- Loan growth may stay lackluster as sectors outside the scope of policy support continue to have limited credit appetite.
- The latest housing rescue marks a step in the right direction, in our view. However, we believe that the plan is not enough to prompt an imminent rebound, and the execution is uncertain.
CENTRAL AND EASTERN EUROPE, MIDDLE EAST, AND AFRICA
(CEEMA)
WAR AND TAIL RISKS IN SOME AREAS STAND IN CONTRAST TO POSITIVE MOMENTUM ELSEWHERE
- The war in Israel/Palestine continues, with myriad risks of escalation swirling, particularly after the latest operation in Rafah. Domestic political dynamics are also a focus in Egypt, Jordan, Saudi Arabia and Israel.
- The African National Congress's (ANC's) loss of its outright majority in the recent South African election was a potentially constructive development. While markets initially feared a minority ANC would turn to radical parties as potential partners, President Cyril Ramaphosa's call for a government of national unity effectively opened up a path for cooperation with the market-favored Democratic Alliance. The upshot is that prospects for reform in South Africa may be better than markets previously expected, even as the energy and logistics crises appear to be easing. While risks still remain high—notably vis-a-vis the final stages of government formation—we believe that there are grounds for cautious optimism in South Africa.
- Markets continue to reward Turkey's apparent return to economic orthodoxy. The evolution of external balances and inflation are key things investors will be watching over the course of the summer.
JAPAN
BANK OF JAPAN UNCONVINCED IT SHOULD HALT RATE HIKES
ASIA PACIFIC
CENTRAL BANKS TO STAY DEFENSIVE
- We expect central banks to remain vigilant on currency defense. Should their currencies come under pressure again, tools in their kits could be rate hikes (Indonesia), foreign exchange reserve drawdowns (India) or moral suasion (Malaysia).
- Growth has been holding up better than expected despite no monetary easing. We attribute this to resilient domestic demand and tailwinds from the technology upcycle, which has been gradually gaining more traction.
End Notes
i As of 24 April 2024.
Disclosure
Views as of 11 June 2024. This marketing communication is provided for informational use only and should not be considered investment advice. The forecasted views and opinions expressed reflect those of the Loomis Sayles Macro Strategies Group and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. All statements are made as of the date indicated and are subject to change at any time without notice. Descriptions assume normal market conditions. Numbers are approximate.
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