Plenty of Drama, But Same Story
As global macro trends of slowdown and disinflation persist, recent developments validate forecasts of substantial rate cuts. With the US Fed initiating its easing cycle, we anticipate clearer policy direction as elections approach in November.
For more than a year, we’ve been discussing two main global macro trends: slowdown and disinflation. We also argued that as those trends took visible hold, the next chapter in the global macro narrative would involve broad and substantial rate cuts. This was to be an exercise of calibrating policy rates lower in light of improving inflation dynamics, rather than any sort of panic-driven rush to cut rates to prevent a recession.
Several months ago, the US appeared to temporarily depart from the broad trend of disinflation and rate cuts. However, as we wrote in our June update “US inflationary pressures are increasingly narrow and, given the normalizing labor market and anchored inflation expectations, the disinflation process is set to resume.” We also forecast that “the Fed will joins the easing cycle later in the year and quickens it in 2025. The “different speeds, same direction” mantra we applied to global disinflation in 2023 applies to global policy easing in 2024-25.” It is good to see those views validated by recent developments as the Fed kickstarted its own easing cycle with a 50 basis point rate cut in September.
For the second quarter in a row, global forecasts are almost unchanged. This may seem at odds with considerable market volatility—we indeed experienced a fairly acute volatility episode in early August—but that simply speaks to lack of conviction on timing given contradictory data than on the direction of travel per se. If we are to count any surprises in the intervening period, we’d probably point to the steady retreat in oil prices, which has helped offset concerns around rising shipping costs. It also seems to consolidate perceptions of weak demand out of China. We have not changed our China growth forecasts, but we were already below consensus both for this year and next and remain so.
Elections remain a key source of uncertainty. With the US heading to the polls in early November, we should have a better sense of policy direction in our next update.