In the middle of the summer season, in the middle of the (relative) respite that markets and economic agents take during the summer days, it seems evident that the issues that have concerned us so far this year – inflation and growth, interest rates and geopolitics – will continue to be the main topics when we return from vacation.
However, it is worth noting that changes are evident in all of them. Changes of great significance, moreover, that can really transform the last third of the year into a significantly different scenario to the one we have experienced in recent months.
Starting in the order mentioned, first of all, the latest data on inflation and growth published in both Europe and the US show us a reasonably different macroeconomic environment. It is true that, if we look at it with a short-term perspective, we will see a still expansive cycle for the next six or twelve months, together with inflation that still does not meet the central banks’ targets (around 2%). But, with a little more distance, and assuming that prices will move at levels above the historical average of the last decade, the general idea is that inflation should be falling towards those target levels – the ECB places this moment in the latter part of 2025 or early 2026 – while growth… should converge on both sides of the Atlantic: that is, Europe accelerating noticeably and North America slowing down, also very moderately and, in any case, with absolute values above the European average (with the exception of Spain, which would continue to show a higher dynamism than its partners). In other words, we are seeing a macro world with greater synchronicity between developed countries and in which the fundamental concern of the post-Covid era, inflation, will begin to be definitively – to the extent that anything in the economy can be “definitive” – restrained.
Secondly, we have interest rates. After the European Central Bank lowered its reference levels in June – its reputation and credibility depended on this, almost independently of the macro- the latest data published in Europe and the US mentioned above suggest that the process of monetary normalisation, that is, the gradual reduction in the price of money, constitutes the basis of the new economic framework in which we are going to immerse ourselves, probably from September itself. It will certainly not be an accelerated process, as the markets were discounting back in December. But it does seem that it will have a reasonably coordinated development between the Eurozone and the United States that will avoid, in the process, excessive distortions on the exchange rates. In this sense, the next movements discounted by analysts involve two rate cuts, of 25 basis points each, this year 2024, by both the Federal Reserve and the European Central Bank. As we discussed with inflation, the new world order suggests that real interest rates will be above the average of recent years. But the time for exceptional measures, which led central banks to raise rates in 2022 and 2023, will no longer be a thing of the past, but will change in a few months.
We mentioned the new world order in the previous paragraph, which gives us the opportunity to fully enter into the third of the transcendental aspects that frame the change of focus for the last part of the year. We are referring to geopolitics and, even more precisely, to the main event, both in economics and geostrategy, that will take place on November 5: the US elections.
What we are presented with a priori are (from the European point of view) two systems with a very different approach in their management of major international events: Trump’s Republican Party, which has led the polls until recentlyrepresents a return to the isolationist model. A soul that, in the US, had not taken shape since the Second World War until Donald Trump’s first term. In essence, it represents a bilateral vision of the relations of the first power with third parties, which will avoid in any case interfering (leading) in any matter that does not bring an immediate benefit to American citizens. – a difficult question to pin down in a globalised world. In contrast, the Democratic Party is suggesting a more multilateral and active vision for the US in the world, including closer engagement with NATO and Asia-Pacific allies.
On the economic front, Trump could assume greater short-term growth (including corporate profits) due to a reasonably rapid fiscal expansion (lower taxes). This is a point in favour of the stock markets. The Democratic Party suggests greater fiscal control and, therefore, improved stability and prospects for bonds, in line with the normalisation of inflation and interest rates, mentioned above.
Given the current huge global uncertainties (Ukraine, the Middle East, China) the choice of one or another model – or candidate – becomes absolutely key. In fact, as the election draws closer, a key factor that can move the markets will be the results of the surveys that are published. If we combine this important point with the change in macro and monetary bias discussed above, we obtain a final part of 2024 that will be absolutely critical for the future of the world, strategically. This will have both short- and long-term effects on the markets, which we will follow in detail. In any case, structurally, we are at the threshold of a new stage, with all its problems and all its opportunities.
Pedro del Pozo is director of financial investments at Mutualidad
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