Admitting that some Axa colleagues expected a drop of 25 basis points, “my personal opinion [sur la décision de la Fed] in September was 50 basis points,” said Chris Iggo, President of the Axa IM Investment Institute and CIO of the Axa IM core, at Axa Investment Managers, in an interview on October 1, 2024.
The Fed on track to steadily cut interest rates
“Economists have their point of view, which is based on their understanding of economics… I take my view from the market point of view. I look at it from the market’s point of view. In addition to assessing what is built into the prices, he explained that he needs to review his teams’ positions and assess “where shocks might occur.” When the 50 basis point reduction was announced, “there was no real drama.”
Looking ahead, Mr. Iggo expects two more cuts of 25 basis points each by the end of the year, “because the elections complicate things.” Beyond 2024, he noted that the market expects “a steady decline of up to 3%” for 2025, a neutral level consistent with his view and the Fed’s curve. He insisted that this level should be the final rate. “The real neutral rate is 1% and inflation is 2%, so that’s their nirvana, where the Fed wants to be. However, he added: “if the economy continues to run at 3%, it will be difficult to get down to 3% interest rates.”
US inflation: mixed pressure
Mr. Iggo views the US East Coast dock workers’ strike as a supply shock. Beyond the effects on the supply of goods to consumers and businesses and “some inflationary pressure”, Mr Iggo does not expect an impact on monetary policy, unless the strike extends into beyond a month. He wouldn’t be surprised to see “the current administration pushing for this matter to be resolved before the election.”
Until last week, “China seemed very weak and was sort of exporting deflation.” However, he stressed that it was too early to assess whether the plan – which he called a “circuit breaker stopping the downward spiral, hopefully” – will change China’s trajectory, much less whether it will have global implications. “They must revive domestic demand in China… [or] they replenish their savings and therefore do not spend.”
Long-term rates: the big gains are behind us
The 2-year and 10-year interest rate curve, which was flat just a month ago, has steepened, with rates now standing at 3.66% and 3.80%, respectively. “It will continue to go in this direction… that is to say, to move away and go higher,” Mr. Iggo predicted. He thinks it’s normal when the Fed cuts interest rates.
“Rates will likely rise due to imported inflation on tariffs…and further tax cuts that would stimulate the economy.
Chris Iggo, President of the Axa IM Investment Institute and CIO of Axa IM core, Axa Investment Managers
‘And [la Fed] increases to 3%, the 2-year yield should be around 3.20% and the 10-year yield will probably remain close to its current level’. According to an internal valuation model, Axa expects the 10-year yield to range between 3.75% and 4.00%. “It takes a recession to see them fall.
Recession on the horizon
Aside from the external shocks that led to the Great Recession of 2007-2009, for example, “the amplitude of business cycles has become much shorter…and gentler…compared to the 1970s and 1980s…extremes are less frequent …in normal economic cycles,” observed Mr. Iggo. Apart from perhaps the technology sector, he has difficulty seeing “what would be the trigger for a recession”. He therefore estimates the probability of a superficial recession at 25% and that of a deeper recession at 5%. If so, he would expect it to be “modest”, not falling below -0.5%.
Could a recession result from concerns over ever-increasing public debt?
“There is no correlation between debt levels and deficits and a recession, unless the US government cannot finance itself,” says Mr. Iggo. “It’s a real black swan because they can still print money.
Mr. Iggo noted that the Congressional Budget Office projected that the federal deficit would be about 6 percent of GDP for the next ten years and that the debt-to-GDP level would exceed 120 percent, a level that only the sovereign the lowest in Europe experienced before covid.
Impact of Trump’s potential election
«[Les taux] will likely increase due to imported inflation on tariffs… plus tax cuts that would stimulate the economy… and a risk premium [plus élevée] on the yield curve.” Additionally, Mr. Iggo noted that 30-year yields are trading at an 80 basis point spread (up from -20 basis points a year ago) to the 30-year swap yield. “This is generally a sign of a higher risk premium for government bonds, a long-term fiscal risk premium, while in Germany it is almost the opposite. Another reason could be related to the greater liquidity of swaps compared to long-term Treasuries.
Direction of travel for the ECB until the end of 2025 and long-term rates in the EU
“We expect a further cut of 25 basis points in December, then a decline to 2.5% [contre 3,5% actuellement] by the end of next year,” Mr. Iggo predicted. “We find the same problems as before, namely that Germany seems very weak. Spain is booming, but it’s tiny compared to Germany. France has its political problems. Will she have a budget? Italy seems to be on a better path at the moment. It is very difficult to have an opinion on the entire euro zone,” explained the British business leader.
Despite some wage pressures in Germany, he thinks that “inflation appears to be under control in Europe”, which should justify ECB rates gently navigating towards 2.50%.
Mr. Iggo notes that yields are higher for Spain and Italy, but he does not consider them attractive. As an EU indicator, French bonds are not expected to fall – within a range of 10 to 15 basis points – from current levels (2 years at 2.25%, 10 years at 2.80% ). In fact, yield gaps between France and Germany have increased due to fiscal uncertainty in France. “Until it is resolved, I don’t think we will see much improvement… We see significant movements in French yields usually because foreign investors enter or exit.”
EU: boring growth
“The eurozone may not be as weak as we thought, but it is not very strong either. Mr Iggo expects annual GDP growth to reach 0.5%, “maybe 1.00%”, over the next two years, thanks to the return of consumers helped by lower oil prices. ‘energy.
Three scenarios on the impact of Ukraine
“Things remain unchanged, which doesn’t really impact the situation. The second hypothesis is that “things get worse,” for example if Russia begins to invade neighboring countries to the West. “It would be bad for financial markets…bond yields would fall, stocks would fall, the euro would fall, but the dollar would benefit. In a third scenario, in which Putin disappears or a territorial deal is reached, he would expect a mini Marshall Plan that would spur activity.
Social cohesion in the West in danger
“Everywhere, we seem to be witnessing a breakdown in social cohesion,” comments Mr. Iggo. According to him, the polarization of politics in the United States also extends to the United Kingdom. “We have had a new government for eight weeks and already the press [jaune] asserts that the [premier ministre] Keir Starmer should resign.
He believes people are genuinely concerned about the cost of living, immigration and the “haves and have-nots…while governments don’t seem to be tackling these issues.” These developments do not affect financial markets for the moment, “but political upheavals could end up affecting them”.
Mr. Iggo fears that right-wing parties that take power in some countries will change their policies. “They don’t have the best economic policies, Mr. Trump being an example.”
Strong momentum in terms of climate change
“I think the momentum has shifted from the public sector to the private sector.” He noted that companies set targets in their sustainability reports. Mr Iggo believes some companies are setting net zero targets for 2030 “and they really need to stick to them, otherwise shareholders are going to question them”.
He expects the rapid expansion of renewable energy, supported by their biggest buyers in the United States, technology companies, to “drive down the cost of electricity for everyone.” Mr. Iggo reported the words of Axa’s climate expert, who had just returned from the United States: “The Americans do not play politics. They simply do it. They are simply investing in clean technology.
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