Reflecting on the latest market moves and volatility, Lindsay James, investment strategist at Quilter Investors, has shared her analysis as follows:
“Closely watched survey data in Europe and the US has over the past 24 hours signalled that global manufacturing continues to be mired in a downturn that has now extended for two years. This has been caused by shifting expenditure patterns, with the pandemic pulling forward spending on goods which then quickly dried up when consumers were once again able to travel and go out. This combined with lacklustre growth from China and the effects of tighter monetary policy has meant the manufacturing cycle has been synchronised across regions and is impacted by factors that extend beyond the usual suspects. However, this must be balanced with better demand signals evident elsewhere. The same survey in Europe points to strengthening activity in the services sector, which rose at the fastest pace in three months, buoyed by France and Spain in particular. In the US, the services economy has also gone from strength to strength, supporting US GDP to deliver an upgraded 3% annualised rate in the second quarter, despite the fading performance of manufacturing.
“With Federal Reserve policy rates expected to see falls of around 1 percentage point by year end, and 2 percentage points over the next 12 months, help is apparently at hand for this embattled sector. Meanwhile, economic growth has been resilient and corporate earnings growth is still reaching double digits in the US in 2024, with a further acceleration currently anticipated for 2025. Therefore, the return to volatility in recent days is a reminder that investor sentiment remains more fragile than overall economic data would suggest, with little stomach for any cracks appearing, perhaps partly because history tells us that cycles more often end in recession than a ‘soft landing’.
“With oil prices falling below $70 overnight, responding not only to the weaker manufacturing reports but also to the news that supply may soon flow again from Libya, inflationary pressures are generally continuing to ease. Cost pressures have also reduced in Europe in the past month, partly driven by wages, that will be well received by the European Central Bank. Similarly with US core PCE inflation, the Fed’s preferred measure, now at 2.6%, down from 3.9% a year ago, inflation is effectively no longer a problem. Whether the economy becomes one depends on how nimble the Federal Reserve is now willing to be. With the market expecting action, and fast, the pressure is now on them to deliver.”
