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Macro Monthly: Markets weighing up the timing of rate cuts

14 May 2024

Key takeaways

  • Economic activity remains solid, with global PMIs, retail sales and GDP growth faring well …
  • … but this is stoking concerns about inflation not sustainably returning to target; services inflation remains particularly sticky.
  • It is becoming increasingly difficult for central banks to balance risks of leaving rates higher for longer or cutting too early.

Markets have continued to push the timing and magnitude of central bank rate cuts further out in recent weeks on the back of better growth data and still-sticky inflation, particularly in key areas of services inflation. This repricing has caused ripples through financial markets, with some central banks responding to the USD strength, turning more hawkish, with a rate rise in Indonesia the clearest example. Equity markets have wobbled with the re-pricing of rate expectations.

Robust activity

Global activity is healthy with India the standout

For now, at least, the activity side of the global economy is proving robust (see Chart 1). April’s PMI data broadly improved, with better data in Europe offsetting a drop in some of the US data, while India continues to be a standout from a global growth perspective. Whilst Q1 GDP in the US disappointed on the face of it, the underlying components showed strong growth and labour market data, although cooling, remain robust.

Source: Macrobond

Source: Macrobond

There has been more good news on the trade and manufacturing front (aside from the US PMIs), which could help keep overall growth momentum healthy for the coming quarters. Key trade data (such as in South Korea) and business surveys (like the German ifo, see Chart 2) picked up again in recent weeks alongside some better export orders in the PMI data.

Inflationary concerns

Robust growth and wages risk stoking inflation further

The concern is that robust growth and still-resilient labour markets (see Chart 3) could stoke inflationary pressures further, or at least make the last leg towards targets more difficult. But it doesn’t appear to be so clear cut, with the biggest lifts in US inflation data coming from demand-agnostic areas, such as vehicle and health insurance (see Chart 4), while rental inflation remains elevated as it keeps catching up with historical moves in market rents.

Source: Macrobond

Source: Macrobond

In Europe, it’s a similar story, but with wage growth staying high and productivity subdued, there is a possibility the current rates of services inflation won’t fall much further, and we’re seeing an upturn in the sequential moves in services prices.

Balancing act

The timing of interest rate cuts is a delicate balance

As a result, it continues to be a tough balancing act for central banks thinking about when to start trimming interest rates. Cutting too soon could add fuel to the decent pace of growth, which could in turn lift inflationary pressures. But at the same time, cutting too late creates a risk this resilient global backdrop will start to turn sour. For now, there’s little evidence of anything sinister happening in the data, but each month we’re watching for signs of cracks appearing.

⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus

Source: Bloomberg, HSBC

Source: Refinitiv Eikon, HSBC

Related Insights

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