The global economic landscape presents a mix of optimism and caution as we navigate through 2024. Markets performed well in May, driven by strong corporate earnings, particularly in the US technology sector. This positive momentum extended to other regions and sectors, including the bond market.
The US economy continues to grow around its long-term trend rate, albeit at a slower pace compared to recent years. Manufacturing activity has been accelerating, offsetting some pressure on lower-income households. This balance of positive and negative indicators underpins a cautiously optimistic outlook.
Outside the US, promising signs have appeared in European and Asian manufacturing activity. However, the Chinese market remains a point of concern. Despite recent optimism in Chinese equities, international investors’ absence and the combined impact of falling property and equity markets on household wealth continue to dampen consumer sentiment.
Inflation is still a key focus for investors and policymakers alike. While headline inflation has fallen significantly from its peaks, wage inflation and strength in the services sector across most developed economies pose upside risks. This has led to a steady reduction in market expectations for rate cuts this year, with central bankers keeping a cautious stance.
The debate now centres on whether the decline in inflation rates is sufficient for central banks to justify cutting interest rates. Recent UK and US inflation figures in the spring and early summer show persistent stickiness, suggesting that the first interest rate cuts are still some way off.
This uncertainty around monetary policy timing could lead to continued market volatility as investors try to predict the timing of rate cuts. Additionally, there’s a possibility of diverging monetary policies between the Bank of England, the European Central Bank (which has already cut rates in June), and the US Federal Reserve, as economic data tells different stories across regions.
As we progress through 2024, investors should remain vigilant and adaptable. The interplay between inflation, interest rates, and economic growth will continue to shape market dynamics. While there are reasons for cautious optimism, the potential for market volatility and diverging regional economic performances underscores the importance of a balanced and diversified investment approach.
