Written by Shane Balkham

The European Central Bank (ECB) is expected to cut interest rates this week.  It is worth noting that both Europe and the US have experienced similar inflation dynamics since the pandemic.  What is different though, is the way inflation has become politicised in the US, while in Europe it is seen as a central bank issue.  As inflation has come down in Europe, the ECB has given a consistent narrative of following the data and, with inflation seemingly under control, we should see the cutting cycle commence.

In the US the inflation situation has become a lot more political, with attempts from opposition parties to directly blame the government for price moves.  This puts undue pressure on the Federal Reserve not to make any rate cuts until the US presidential election is over.  From the latest minutes of the Federal Reserve Open Market committee meeting, there was confirmation that the first-quarter US inflation data had increased the committee’s concerns about the pace and sustainability of lower inflation.  This has dampened the odds of a nearer-term interest rate cut; the expectations for the 12^th June, 31^st July, and 18^th September meetings are for nothing more than a holding pattern, waiting for data to corroborate a weakening labour market and consistent fall in inflation.

Noise surrounding the US election is increasing, as Donald Trump was found guilty of all 34 counts of falsifying business records.  The Democrats took this as an opportunity to escalate campaigning, targeting Trump directly.  In response, Trump’s campaign claimed that it had shattered its own fundraising record since the conviction on Thursday, raising a staggering $52m in online donations.  In a time of headline-grabbing rhetoric, it is a timely reminder that this should not be a signal to change your long-term investment plans.

In the UK, the Bank of England confirmed last week that due to the announcement of the general election on the 4^th July, there would be no press conferences or statements issued until after the election.  The Monetary Policy Committee’s meeting on 20^th June will still go ahead, with minutes issued, but no further narrative will be given to the markets.

While most equity markets ended the week in negative territory, Japan was an exception, as the Bank of Japan Deputy Governor signalled the end of the battle against inflation was in sight and that wages would likely continue to rise.  We remain positive on Japanese equities and continue to be overweight relative to our long-term Strategic Asset Allocation.

 

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The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.  

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 3^rd June 2024. 

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