Navigating the changing tides: Fed outlook on jobs and inflation

Jurrien Timmer’s Global Macro View - October 7, 2024.

This week Jurrien looked at the surprising strength of the U.S. labour market, its implications for the ongoing bull market and what to expect from the upcoming third-quarter earnings season. Here are the key takeaways from Jurrien‘s analysis and his perspectives on inflation, interest rates, global economic dynamics and investment opportunities.

Labour market strength and its implications

The latest U.S. job numbers have exceeded expectations, indicating a robust labour market. This development has significant implications for monetary policy decisions by the U.S. Federal Reserve (the Fed). With strong labour data in hand, the Fed now has the leeway to maintain low policy rates, while balancing economic risks and fostering growth. Jurrien emphasized that despite the strong labour market numbers, there is no immediate need for the Fed to make drastic rate cuts. Instead, it can pursue a more gradual approach to easing, ensuring stability and sustainable growth.

Inflation and interest rates: Approaching targets

Inflation is gradually nearing the Fed’s target, positioning the central bank favourably. Jurrien noted that core indexes like the Personal Consumption Expenditures (PCE) Index and Consumer Price Index (CPI) are trending toward anticipated levels. He highlighted that the Fed’s measured approach to rate cuts, avoiding large-scale reductions, allows for a balanced transition to a neutral policy stance.

China’s strategic stimulus and global impact

Jurrien also shed light on China’s strategically timed policy moves, likening them to a well-timed intervention that maximizes impact. As the global economy navigates a period of easing interest rates, China’s stimulus efforts could catalyze a broader economic expansion, reminiscent of the post-2008 recovery. This strategic injection of stimulus, coupled with declining interest and policy rates worldwide, sets the stage for potential global growth beyond the U.S.

Earnings momentum: Key to sustaining market progress

The third-quarter earnings season is a focal point for sustaining market momentum. Historical trends show that earnings expectations drive price-to-earnings (PE) ratios, making consistent delivery crucial. Jurrien emphasized that while the initial phase of the current bull market was driven by PE ratio expansion, recent growth in earnings has played a significant role. Moving forward, the earnings cycle’s maturation might slow the rate of price gains, allowing other global regions to showcase their economic resilience.

Global investment opportunities and dollar forecast

A notable aspect of Jurrien’s discussion was the potential for global investment opportunities due to a weaker U.S. dollar. Because other regions, particularly emerging markets, present attractive valuation spreads, investors might find lucrative options outside the U.S. The anticipated decline in the dollar’s value could open doors for investments in international and emerging markets, further promoting a global economic rotation.

Gold vs. bitcoin: Distinct roles in portfolios

Jurrien offered a useful analogy to describe gold and bitcoin, two popular alternatives to traditional assets, noting that gold is a more stable option, while bitcoin has the potential for “exponential” growth due to its emerging status in the financial system.

Emerging markets insights: Valuation and earnings quality

As well as looking at global markets, Jurrien also noted that emerging markets offer attractive valuations, due to their higher earnings quality and strength in certain sectors. While the U.S. is the most expensive market in the world, the emerging markets offer investors opportunities with different economic drivers and valuations.

Conclusion

From a resilient labour market in the U.S. to strategic economic stimulus in China, and the nuanced interplay of global currencies, the financial landscape is as dynamic as ever. Investors equipped with deeper insights and a broader perspective can navigate these changes more effectively, ensuring they capitalize on both immediate opportunities and long-term trends.