Investment Institute
Macroeconomía

Keeping the Landing Soft

KEY POINTS
The balance of “transatlantic risks” is the same as at the beginning of the year: the Fed may well end up “doing too much” and the ECB “too little”.

The Fed’s choice of starting its easing process with a 50bps cut is bold, but the new forecasts associated with the policy decision make it plain that, according to the FOMC, a total of 200bps worth of cuts is what could be needed to “keep the soft landing soft”, which is clearly what the central bank is focused on, now that it deems the inflation battle won. As an – important – aside, the FOMC believes that, probably partly because it chose to “start with a bang”, it won’t have to take policy rates into properly accommodative territory in this cycle. Indeed, we do not think it is a pure accident that the level at which the Fed Funds rate lands at the end of 2026 coincides with their new estimate of its “long-run level”. We think it is an important clue the bond market should not miss. 

Now, a central bank’s forecasts should be received more as a “statement of intent” than as a proper “plan of action”. In retrospect, the June dot plot was too hawkish, over-reacting to the rebound in services inflation in early 2024. Symmetrically, the September one may be overly reactive to the disappointing payroll prints of the summer. To gauge the probability of the latter materialises, and to characterise the contrast with the ECB, we look into some of the missing information in the Fed’s decision function. A lot will depend on the outcome of the elections in November, and we think the Fed may have to reserve judgement on the quantum of cuts it should still provide if Donald Trump is elected. Conversely, we think that the outlook is clearer on the Euro area side. The only factor which could support the hawkish case are the lingering adverse developments on labour supply, reflected in the still high level of hiring difficulties reported in the business surveys. We offer a quantification of their impact on wage developments, and find that they played a visible role, but not a crucial one, in the pay developments of the last two years, opening the door to a continuation of the wage deceleration despite a still constrained labour supply. Given the external conditions, and the perspective of fiscal retrenchment next year – more certain, in terms of direction of travel, than in the US – the ECB may well be forced into an acceleration of its easing effort. We would be back to the “mirror risk” which we highlighted at the beginning of this year: the possibility the Fed would end up “doing too much”, and the ECB “too little”, at least initially

Download the full article
Download Macrocast #240 (502.29 KB)
Multi-faceted Balancing Act Needed
Macroeconomía

Multi-faceted Balancing Act Needed

  • by Gilles Moëc
  • 30 Septiembre 2024 (10 min read)
Investment Institute
Busy September
Macroeconomía

Busy September

  • by Gilles Moëc
  • 09 Septiembre 2024 (10 min read)
Investment Institute
Pre-emptive vs Reactive
Macroeconomía

Pre-emptive vs Reactive

  • by Gilles Moëc
  • 02 Septiembre 2024 (10 min read)
Investment Institute

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), 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.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.