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Client Update - 12th April 2024

It is good to be back in touch, I do hope that you had an enjoyable Easter break.

Dialogue has progressed over the last few weeks with regards to possible interest rate cuts in developed markets and it would seem the solar eclipse seen in the United States on Monday was not the only thing to cast a shadow on the country. Based on recent data, US inflation is proving stickier than expected at 3.5%.

The US Federal Reserve (Fed) brushed off higher than expected inflation data in January and February as temporary "bumps in the road," attributing them to seasonal factors. However, a third month of higher than expected inflation suggests these numbers might be more than just a “bump” after all. This was the second blow to the Fed, after employment data outpaced expectations last Friday with 303,000 jobs being added to the US economy in March, suggesting interest rates may have to stay higher for a little longer.

These headline numbers are not telling the whole story and as always, the devil is in the detail. When we look at the modest uptick in inflation this year, 80% of the rise is due to just two factors, higher car insurance and higher rental costs. These are not the same broad inflationary forces we faced a year ago.

That said, the latest US CPI inflation report is a blow to President Biden’s re-election campaign. Currently in a neck and neck race with former President Trump for this year's US presidency, Biden would have greatly benefited from a more favourable inflation report that could justify interest rate cuts in June. This timing is critical as it represents the last opportunity for rate adjustments before the election. This would provide a much-needed boost to his campaign as he struggles to convince voters of his economic record. Recent polls show that Americans are not happy about his handling of the economy.

The economic situation in the US contrasts sharply with that in the EU and the UK, where inflation is on a downward trend. Both regions are anticipating interest rate cuts this summer, with the markets expecting the first rate cut for the EU in June and for the UK in August. The US authorities might be looking across at Europe with some jealousy at the moment.

This is not Biden’s only concern this week as he faces geopolitical struggles with China yet again. The US President welcomed Japanese Prime Minister Fumio Kishida to the White House on Wednesday as the two seek to showcase a strong and growing partnership focused on joint defence cooperation to deter an aggressive China. The pair were joined later in the week by the Philippine President Ferdinand Macros Jr for the first ever leaders’ summit between the US, Japan, and the Philippines, as Biden works to draw Pacific allies and partners closer.

As always, geopolitical and economic news continues to ebb and flow on a weekly basis, and we await a meaningful change – which will now surely be an actual cut in interest rates or a meaningful strengthening of inflation in the US. This news flow drives market volatility, that creates opportunities for our investment team and, year to date, they have done an excellent job of taking advantage. Do have a good weekend.

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