Monthly House Views - Central banks out-of-sync - April 2024

Modest spike in volatility on the back of rate pressures and geopolitical tensions. Recent data from the United States have surprised on the upside for both inflation and economic growth, raising fears the Federal Reserve (Fed) may rethink its rate cuts. Meanwhile, renewed tensions in the Middle East are unnerving already jittery markets. Despite these concerns, we stand by our scenario of positive global growth, albeit with regional disparities, and inflation falling in the world's developed economies. However, we no longer expect the major central banks to cut their rates in sync; rather we now anticipate the rate cut cycle starting later in the US than in Europe. The disparity in policy timing could widen further if tensions in the Middle East worsen and push up oil prices. An oil price surge plays differently either side of the Atlantic. For the United States, a major oil & gas producer, the big risk would be inflation. For Europe, however, the threat would be to growth. Faced with different risks, the Fed and ECB might well diverge policy further.

Overweight to developed market equities maintained. Buoyant business indicators encourage us to keep our risk exposure to equity markets. We remain Overweight European markets, which still offer good value, and US markets, mainly because of the booming American economy. We also remain constructive on sovereign and investment grade corporate debt. Both continue to pay attractive yields and offer good diversification should market tensions rise. The likely – in our view – desynchronisation of the central bank rate-cut cycles has also led us to move to Overweight on the dollar against the main European currencies.

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