The mirage of the rate cut recedes (again!)

Economic growth is slowing, while inflation seems to be showing a slight upward trend.

Following a very good first quarter, the month of April was an opportunity for the stock markets to breathe a bit. Indeed, during the first three months of the year, most asset classes finished higher. The equity markets performed particularly well, with many indices breaking new historic records.

This is how during this fourth month of 2024, international stocks (MSCI World All Countries Index, in francs, Source Refinitiv) conceded a small part of the ground gained in previous months (-1.40%, in francs). The enthusiasm had been such for several months in a row that a correction was bound to come at one time or another, and this time it was the fear of yet another postponement of the start of the reduction in the key rate by the Federal Reserve American (Fed) which partly served as a pretext for some profit taking. Indeed, new economic statistics have dampened hopes of a reduction in the key rate by the Fed at its future meeting in June. As was already the case several times previously, expectations of a first rate cut have simply been postponed for a few months, perhaps it will be in September, or November, or even later…

The month of April began with a new speech from Jerome Powell, the president of the Fed, confirming that there would probably be a rate cut during the year, but that the institute must first be sure that the inflation level is heading towards the 2% objective. However, a few days later, the publication of American inflation for the month of March clearly did not take this turn, coming out at 3.5% over 12 months, compared to 3.2% for February. This disappointed the markets who interpreted this data as the definitive end to the potential for a first rate cut in June.

The publication of the first GDP estimate for the fourth quarter of 2023, at the end of April, considered disappointing in particular because it was down compared to the previous quarter, confirmed the FED’s dilemma. Economic growth is therefore slowing, while inflation seems to be showing a small upward trend, although still far from the highest levels reached in 2022. If the trend continues in the coming months, the Fed will be faced with a difficult choice, either lower rates despite an inflation level not yet on target, or accept a possible continuation of the economic slowdown. If we add to this the fact that the American elections are fast approaching, accusations of politicization of the central bank are likely to come from both sides of the political spectrum, making Jérôme Powell’s task all the more difficult.

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On the other hand, a seemingly surprising fact, but consistent with what has been happening for many months already, geopolitical events seem to have little influence on the financial markets. New tensions in the Middle East, this time involving Israel and Iran, have had a relatively minimal impact. On the night of Saturday April 13 to Sunday April 14, Iran sent several hundred drones and missiles to Israel in retaliation for the destruction by the Jewish state of an Iranian embassy in Damascus a few days earlier. Although the majority of the projectiles sent by Iran appear to have been intercepted by Israel and its allies, a few of them still hit their target. Since it was the weekend, the markets didn’t even have a chance to worry about it immediately, but they were still in an orderly decline over the following week.

In this context, defensive asset classes ended the month in a disorderly manner, with a decline of 0.7% for international bonds (FTSE World Government Bond Index, in francs, Source Refinitiv) and an increase of 6.23% for gold (LBMA Gold Price, in francs, Source Investing.com), the yellow metal thus reaching a new historic high. Commodities also had another positive month, with an increase of 3.90% (Rogers Commodity Index, in francs, Source Refinitiv), a priori does not bode well for hopes of a fall in inflation over the coming months…

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