Financial Forecasts May 2024: EBC to go it alone

Eurozone: the situation appears to have brightened up in recent weeks, with a rebound by most indicators (GDP growth of 0.3% in Q1). Manufacturing in particular seems to be on the mend. We are revising our 2024 growth projection for the Eurozone to +0.8%. There has been confirmation that disinflation is taking hold, including for services and food. At 2.4%, which is already close to the official target, the CPI should near 2% by the time horizon monetary policy decisions are made. A 25bp cut on 6 June is a done deal, the uncertainty being over the number of cuts (four or five?). We still side with the optimists, with five cuts on the cards. Far too much importance is given to the Fed in the ECB's reaction function. The euro has remained fairly stable despite the depricing of four Fed rate cuts.United States: the economy is still resilient, but signs of a landing are multiplying, particularly on the employment front, with unemployment rising to 3.9% and the increase in average hourly earnings slowing sharply, invalidating the risk of overly sticky inflation. Our scenario remains for two cuts this year, with the first in September. The US election will ping ever louder on the radar, with Trump still in the lead in the swing states. Historically, the election has had little influence on Fed decisions, though Trump does want to replace Jerome Powell after 2026.China: official data out of this country has also been a touch better (GDP growth of 5.3% in Q1), but it remains in the grip of deflation, the real estate is still a drag, and its dependence on exports could be its undoing if protectionism rear its head (tariffs on steel and aluminium already raised threefold by the Biden administration, EU set to tax Chinese electric vehicles by the end of the summer). The elections in India are not a game changer as regards GDP growth, which we still put at 6.9% this year. As for Japan, our call on a BoJ status quo this year despite the weakening yen seems to unfolding to plan.Geopolitical risks still tower on high, with a possible ramping-up of Russian bombing this summer before Ukraine receives new weapons and munitions, and with Putin ordering the staging of nuclear exercises, while the Israeli offensive in Rafah is getting underway and Hamas is still refusing to release the hostages. Nevertheless, commodities (crude is hardly moving and gas is more correlated with temperatures) and the market (VIX below 15) seem to be coping.Markets: with the repricing of rates (from six to just one cut by the Fed), € rates tracked their $ counterpart despite the weaker inflation. A de-correlation is possible: we see the yield for the 10Y Bund easing to 2.25% at the year-end, with possibly five cuts by the ECB, and with the 10Y TNote at 4.35%. Despite an unfavourable interest rate spread, the euro is putting up a fight, and we see the EUR/USD at 1.085 at the year-end. As for equities, with earnings growth of around 5% for US companies, it is difficult to be negative on this asset class. We see the S&P testing 5,500.