The price of uncertainty

Attention has shifted dramatically from Europe to the US recently with markets forced to price in a high level of political and economic uncertainty in the run up to November’s Presidential election.

Before we get to November, however, the small question of when the US Federal Reserve (Fed) starts to cut US interest rates must be resolved. Following easier than forecast inflation data last week, markets now expect up to two interest rate cuts this year, with the first likely to be delivered in September. Odds on a first cut then rose above 90% as inflation emerged at a lower than expected 3.0%.

While two rate cuts are far fewer than investors were hoping for at the start of the year, they would represent a more dovish turn for monetary policy and markets have responded positively. The Fed has kept rates at between 5.25% and 5.5% all year, the highest level since 2001 and fears are growing that higher for longer rates will start to have a negative impact on growth, as we head into 2025.

Giving testimony to Congress last week, Fed chair Jerome Powell said he needed ‘more good data’ before the Fed could confidently cut interest rates. Last week’s consumer price index (CPI) seemed to clear that hurdle.

The other side of the pond

In the UK, the focus continues to be on the new Labour government’s policy agenda, and we will soon get to see its plans for the next year laid out in the King’s Speech. Top of the list of priorities for Sir Keir Starmer’s new government is getting the UK economy humming again, so we can expect measures that shake up the planning system and encourage housebuilding. There will also be details of the creation of Great British Energy and a National Wealth Fund to direct public money into long term investment.

So far, the markets have given Labour the benefit of the doubt, with the FTSE 100 broadly unchanged since the election just over a week ago and the pound edging higher to around US$1.30. Main economic data in the UK will focus on inflation figures, which are forecast to show a second consecutive month of prices rising at the Bank of England’s 2% target. It remains to be seen whether that will trigger a rate cut at the next meeting of the Monetary Policy Committee on 1 August.

Also on investors’ radar

In a busy week, there’s no shortage of other potentially market moving events. In China, a five-yearly meeting of top officials will be scrutinised for signs of stimulus. The week has already started on the back foot with economic growth emerging at 4.7%, below Beijing’s 5% target.

Over in Europe, the European Central Bank (ECB) will decide on Thursday whether to follow its recent interest rate cut with more easing this week. The consensus is that it will leave rates at 3.75% but restart the cuts in the autumn.

And US earnings season gets into its stride after the banks were, as usual, first out of the blocks last week. The current consensus is for profits to grow in the low double digits in the second quarter and for the full year as a whole.

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Please note that the views expressed in this article are my own.