Interest rate cuts in Europe before the US

Interest rate cuts in Europe before the US

Markets & Investment Update
6 May 2024
This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.

At a glance 
The Fed in a wait-and-see mode before cutting interest rates
Given the recent upside surprises in inflation, the market was somewhat relieved that the US Federal Reserve (Fed) Chair Powell made clear that the central bank is not considering raising rates. Powell only confirmed what we, and many others, had suspected: interest rate cuts are not that imminent anymore. Last week’s disappointing and slowing services activity data in the US came after a good period of growth. One data point doesn’t make a trend, but the moderation in US economic growth, which is our base case, should warrant some rate cuts later this year. However, we believe it will take several inflation and labour market reports pointing to inflation moderation and a less ‘hot’ labour market for the Fed to start cutting rates. We haven’t had the former just yet, but got tentative signs of the latter, with the latest labour market data showing some cooling off. In the meantime, the other good news is that the Fed will slow down the reduction of assets it holds on its balance sheet (the so-called quantitative tightening). This should alleviate some of the tensions recently seen in the bond market as private-sector investors will have to absorb fewer Treasury bonds than before, perhaps allowing them to deploy their balance sheets into riskier assets such as equities. As the rise in US Treasury yields starts to look capped, this could extend to other developed bond markets. 

A positive growth-inflation mix in the Eurozone
The Eurozone economy showed modest signs of recovery in the first quarter of 2024, as the economy grew 0.3% compared to the last quarter of 2023. This was above expectations and the fastest rate since the third quarter of 2022. As we had expected (recession, then gradual recovery), the bloc is now out of the mild recession it experienced in the second part of last year. Southern countries such as Italy and Spain, and Ireland, outperformed again, but France and Germany recovered too. April’s purchasing managers’ indices and other consumer, business and investor surveys have all improved, marking a good start to the second quarter for the Eurozone. Inflation, meanwhile, continues to soften. We expect the European Central Bank (ECB) to start cutting interest rates in June, before the Fed. ECB rate cuts should improve investment and credit growth and prove to be an additional tailwind for European equities, which have risen 5-7% so far in 2024. That said, before considering an increase in exposure, investors will likely look for further confirmation that economic and earnings growth is more durably on a solid footing and that geopolitical risks, for the time being, remain moderate. The story is the same in the UK, with the FTSE 100 closing at record highs again last week. This week, the Bank of England reconvenes (Thursday) and, while we expect it to keep rates unchanged, it’s likely to follow the ECB with a first rate cut during the summer. The day before, in Sweden, the central bank might consider lowering interest rates, too, though this remains an open debate in the market, with some forecasters expecting a cut and some unchanged rates for a while longer.

Good economic conditions are good for equities
Growth is good for risky assets, so good economic news should be good news for markets. This wasn’t the case in 2022-23 because inflation was much higher than it is today, and so central banks were hiking interest rates. The disinflation trend, though bumpy, is still in progress. Lower interest rates are still the baseline scenario over the next 6-12 months. However, the cutting cycle has been delayed in parts of the world and could be shallower than initially thought. This is why we’ve seen equities posting solid returns so far in 2024 despite the reduction in interest rate cut expectations. April was somewhat challenging for equities. Moderate inflation fears resurfaced alongside some short-lived geopolitical tensions, but a strong earnings season (c.80% of US companies did beat analysts’ forecasts) helped equities stage a rebound since late April. 

How we’re positioned in flagship portfolios
A well-diversified approach
We are staying balanced for equities and bonds, mirroring our long-term strategy. Recently, we brought our US equity exposure back to neutral, given the strength of the US economy, while keeping a lower Eurozone equity allocation and a higher allocation to smaller companies (global small-caps). We also own more high-quality European corporate bonds, and less government bonds and riskier credit.

Important Information

Information correct as of 6 May 2024.

This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG. 

This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.

The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources. 

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns. 

The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly.  Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. 

This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used:

© Brown Shipley 2024