Investment Institute
Macroeconomics

Saved by Supply

  • 08 April 2024 (7 min read)
KEY POINTS
“Interim meeting” for the ECB, with no decision expected. The dataflow still points to a June cut.
In the US, strong supply conditions continue to help contain inflation pressure despite strong job creation.

No decision is expected from the ECB this week. Last month Christine Lagarde had hinted at action in June, but of course the Governing Council will have the occasion this Thursday to report on an “interim assessment” of the Euro area’s macroeconomic situation.  The central bank’s decision to revise down its inflation forecast appears to be vindicated by the March print for CPI: disinflation continues at a faster clip than the market expected. The resilience in services prices remains a sore point though. The message from the surveys on firms’ price future price behaviour, and still anaemic domestic demand, are however reassuring for the quantum of inflationary pressure still in the pipeline. It seems the European economy is for now stabilising in low gear. True, acquired speed in nominal wages, contrasting with slower headline inflation, will support purchasing power, but fiscal headwinds are accumulating before the impact of the monetary tightening fades. We continue to think the ECB will not wait until inflation has fully converged to 2% and will cut in June, even if the Fed dithers.

The possibility of a lag between the ECB and the Fed is now the market’s baseline. While we maintain June as our baseline for the first Fed cut as well, it is undeniable that the dataflow is less clearly supportive of a monetary policy reversal in the US than in the Euro area. Job creation remains robust and its re-acceleration since the autumn of last year was confirmed again in the March batch of the payrolls. We note however that pay growth has stabilised at a pace which, assuming current productivity gains are sustained, should be consistent with a return to 2% inflation. Strong supply conditions, driven in particular by large net immigration, are helping. That the recent “Fedspeak” has turned remarkably prudent makes sense, but we still consider Kashkari’s hints last week at “no cut” at all in 2024 as an extreme scenario. That however the ECB cuts before the Fed is absolutely within our “plausibility range”. We note that the Euro exchange rate has barely softened despite a reversal in market expectations on policy rate differentials (still in early February the consensus was for more hikes by the Fed than by the ECB). This should embolden the ECB to take the right decisions for the Euro area irrespective of what the Fed ultimately does. 

Download the full article
Download report (511.47 KB)

Related Articles

Macroeconomics

What will it take?

Macroeconomics

Letter from China

Macroeconomics

Remember “Trumpnomics”?

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.