Oddbean

The calm after the storm - J. Safra Sarasin - IFA Magazine ========== The financial market turbulences this week have highlighted that macro risks are shifting from inflation to growth; carry trades are vulnerable to sharp reversals in late cycle environments; expectations regarding the additional earnings potential from artificial intelligence (AI) have their limits as well. Downside risks to economic growth have increased as the global manufacturing sector has slowed again. We do not expect an immediate US recession or an emergency rate cut by the Fed before the September meeting. We now forecast three Fed rate cuts by 25bp this year instead of just one. Economic data in the euro area have disappointed as well, supporting our expectations for three rate cuts by the ECB and the BoE, and one cut by the SNB in the second half of this year. We forecast bond yields to fall further over the next 6 to 12 months. We expect the yen to push higher in the FX space. On the equity side, we retain our defensive stance. Financial markets received a wake-up call as markets corrected due to concerns about an imminent US recession, the unwinding of yen carry trades, and a more negative view about the earnings potential of US equities in a global slowdown. Geopolitical tensions in the Middle East contributed to the general risk-off sentiment. Macro data have disappointed over the previous weeks, mainly concentrated in the manufacturing sector. Markets put too much weight on the weaker US labor market report. The US labor market report led some market participants to conclude that the Fed is far behind the curve and needed to lower policy rates quickly and significantly. Some market participants are moderating their expectations regarding the earnings potential of AI and some companies are reporting fading consumer demand in the US and China, yet the Q2 earnings season in the US was solid. Markets and central banks will focus less on the still elevated inflation rates and more on the labor market and deteriorating economic growth perspectives. We expect three rate cuts by the Fed and confirm our expectation for three more rate cuts by the ECB this year. We have revised our forecasts for 2024 and 2025. Euro area and Japan inflation both up to 2.5% from 2.4%, UK GDP up to 0.8% from 0.7%, GDP growth in China down to 4.8% from 5.1%. For 2025, we have lowered our inflation forecasts for the US to 2.6% from 2.7%, for Switzerland to 1.0% from 1.1%, and increased it for Japan to 2.1% from 2.0%. We also increased our 2025 growth forecast for Japan from 1.2% to 1.3%. #Investments #LongRead https://ifamagazine.com/the-calm-after-the-storm-j-safra-sarasin/