Week from the 24th to the 28th of June

Most Outstanding Points of the Week

  • In the United States, the stress tests applied by the FED to different financial institutions showed that they could face the scenario of a severe recession.
  • In the United States, the latest revision of the 1Q24 GDP showed that the economy grew 1.4% annualized, slightly better than the previous estimate.
  • In China, industrial company profits barely managed to grow 0.7% on a monthly basis in May, mainly due to the benefit of higher raw material prices.
  • In line with expectations, the Bank of Mexico left the reference rate unchanged at 11%.

Important Events in the Coming Weeks

  • In the United States, there will be FED minutes and jobs data 07/03 – 05
  • In the U.S., there will be a holiday for the celebration of Independence Day 07/04

Monitor

Catalysts for the second half of the year

As we approach the start of the second half of the year, we highlight the strong performance of the S&P 500, which has accumulated gains of approximately 15%. This performance primarily reflects optimism around artificial intelligence (AI), resilience in corporate earnings, and expectations of a potential Federal Reserve (FED) reference rate cut. Here are the key events that investors will be watching closely for the remainder of the year:

2Q24 and 3Q24 Earnings Season: Second-quarter earnings season is scheduled to begin during the second week of July, led by JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). Annual earnings growth of 8.8% is estimated for S&P 500 companies, marking the highest rate since the first quarter of 2022 (+9.4%). For the third quarter (3Q24), potential growth of 8.2% annually is forecasted, which could lead to an 11.3% annual increase in corporate earnings for the full year 2024.

Other Geopolitical Events: The United Kingdom will hold early elections on July 4, determining the composition of its Lower House, and ultimately the country’s next government. In France, the second round of parliamentary elections will be held on July 7, where the far-right Rassemblement National (RN) party won a historic 31.4% of the vote for the European Parliament, beating the 14.6% obtained by Macron’s party.

Boom in Artificial Intelligence (AI): More than 18 months after the launch of ChatGPT, the growing adoption of AI has significantly boosted the markets. Companies such as Microsoft, NVIDIA, Apple, Alphabet, Amazon, and Meta have contributed 64% of the global stock market’s total return since then. In June, NVIDIA became the world’s largest publicly traded company. This growth suggests that capital expenditure (CAPEX) in AI could continue in the coming months, further strengthening earnings growth for the sectors involved, such as semiconductors, which could grow 50% this year and 25% by 2025. As the AI ecosystem grows, it is estimated that CAPEX for developers could reach US$331 billion by 2027.

Interest Rate Cuts: Slower economic growth and expectations of a slowdown in inflation could lead to further rate cuts by central banks such as the Swiss National Bank, ECB, and Bank of Canada. On the other hand, the Bank of England’s first cut is projected to be in August, and the FED is expected to implement its first 25 basis point cut on September 18.

U.S. Presidential Elections: On November 5, U.S. voters will decide the outcome of the presidential election. Democratic President Joe Biden and former Republican President Donald Trump will face off in key debates scheduled for June and September. Current polls show a slight advantage for Trump, although a significant proportion of voters are still undecided. Historically, election years have tended to generate positive returns in the markets, with the S&P 500 posting an average historical return of 10.1% since 1937.

Some key dates for the second half of 2024

Source: UBS

Week from the 17th to the 21st of June

Most Outstanding Points of the Week

  • In the United States, it was a short week for the markets, where the main economic standout was that retail sales for May grew marginally by 0.1%.
  • In the U.S., several FED officials emphasized the need for more evidence of a decline in inflation before lowering interest rates.
  • In China, the People’s Bank of China left its reference rates unchanged.
  • In Mexico, the private sector announced the development of new investments for US$42bn during Claudia Sheinbaum’s six-year term. 

Important Events in the Coming Weeks

  • In the United States, consumer confidence will be published 06/25
  • In the U.S., final revision of the 1Q24 GDP to be released 06/27

Monitor

Global central banks adjust their strategy 

By the end of 2023, global central banks were poised to initiate significant interest rate cuts. However, as the year progresses, persistent inflation and economic resilience led to a reassessment of these expectations. In this context, we share some of the perspectives they recently conveyed to the markets.

Federal Reserve (Fed):

• Revised projections: Fed Chairman Jerome Powell noted earlier this year that initial projections of multiple rate cuts were too optimistic. The new expectation is for only one or two rate cuts by the end of 2024, rather than the three previously anticipated.

• Economic resilience: Despite inflationary pressures, the U.S. economy and labor market showed resilience, which implies closer monitoring prior to implementing cuts. 

European Central Bank (ECB):

• Monetary policy tightening: The ECB recently made a modest rate cut, although it emphasized a cautious perspective due to continued inflation and economic uncertainty. In particular, its members warned of “bumps in the road” as they navigate these challenges.

• Geopolitical concerns: Events such as French President Emmanuel Macron’s decision to call early parliamentary elections added uncertainty, influencing market expectations and possible forward-looking decisions by the ECB. 

Bank of England (BoE):

• Rate cuts delayed: The BoE postponed on several occasions the anticipated rate cuts, which could materialize in the third quarter of the year, in line with consensus forecasts. This is despite a significant reduction in headline inflation, as steady wage growth keeps the BoE cautious.

As can be seen, the desired 2024 monetary easing cycle has lost momentum, largely due to persistent inflation, particularly in sectors such as services and robust economic activity. Central banks have therefore found it necessary to recalibrate their strategies to a more cautious approach, which could involve more gradual adjustments to short-term interest rates, so that this move allows them to bring inflation consistently toward their long-term targets.

Expectation for the monetary policy of Central Banks in Developed Countries

Source: Capital Group

Week from the 10th to the 14th of June

Most Outstanding Points of the Week

  • In the US, the FED kept the reference rate range unchanged at 5.25 – 5.5%. On the other hand, it shared its macroeconomic expectations, where it highlighted that now only one 25bp cut could be seen for the remainder of the year, which contrasts with the three cuts expected in March.
  • In the United States, May inflation slowed to 3.3% annually from 3.4% expected and from the previous month.
  • In China, inflation advanced 0.3% annually in May, in line with April’s figure.
  • In Mexico, the virtual president-elect, Claudia Sheinbaum, agreed with President López Obrador to immediately open a broad dialogue related to the reform of the Judiciary.

Important Events in the Coming Weeks

  • In China, retail sales and industrial production will be published. 06/17
  • In the U.S., we will know the retail sales and FED members will speak 06/18

Monitor

Foresees one rate cut for the remainder of this year

Prior to the Federal Reserve (FED) announcement, it was reported that May’s inflation decelerated to 3.3% annually, compared to the expected 3.4% and the previous month’s rate. It is important to note that, on a monthly basis, inflation remained unchanged. Core inflation also improved, coming in at 3.4% annually compared to the expected 3.6% and the forecasted 3.5%. In this context, the FED made the unanimous decision, widely anticipated by the market, to maintain the target range for the federal funds rate at 5.25% – 5.50% (its highest level in the last 22 years).

The statement reiterated that the latest employment indicators have shown solid performance, while inflation has decreased over the past year, although it remains elevated. It highlighted that there has been modest progress toward the Committee’s 2% inflation target in recent months. Therefore, the Committee reiterated that it does not expect it to be appropriate to reduce the target range of the reference rate until there is greater confidence that inflation is moving sustainably toward its objective, while remaining very attentive to inflation risks.

On the other hand, the FED updated its macroeconomic outlook, significantly adjusting expectations for possible cuts to the reference rate. It now anticipates only one cut of 25 basis points (bps) for the remainder of the year, down from the March estimate, which suggested the possibility of three cuts (the market had been expecting two cuts). Thus, the federal funds rate would end the year at an average of 5.1%, compared to the current 5.4% and the previously anticipated 4.6%. For 2025, the new estimate suggests that the rate would stand at 4.1%, up from the previously forecasted 3.9%. Regarding the economic outlook, the GDP growth expectation remains at 2.1% for 2024 and 2% for 2025. The unemployment rate did not undergo significant changes for either year, remaining around 4%. However, estimated core inflation (excluding volatile components such as food and energy), measured through the Core PCE, rebounded slightly to 2.8% from 2.6%, while the estimate for 2025 rose slightly to 2.3%.

During his press conference, Jerome Powell commented that monetary policy is well-positioned and that if the economy remains strong and inflation persists at elevated levels, the FED would be prepared to maintain rates within the current range. He also emphasized that the FED’s estimates are not necessarily indicative of the decisions the Committee might take. Finally, Powell stressed the importance of seeing consistent improvement in inflation before applying a rate cut. He reminded that the baselines for inflation on an annual basis for the remaining months of the year will not be easy to surpass, which could result in continued elevated readings.

FED Indicators Update (June vs. March)

Source: Federal Reserve

Week from the 3rd to the 7th of June

Most Outstanding Points of the Week

  • In the U.S., non-farm payrolls increased by 272,000 jobs, while the unemployment rate rose to 4% from 3.9%.
  • In the U.S., ahead of the FED’s next announcement, the consensus widely discounts that the federal funds rate range will remain unchanged.  
  • In China, May manufacturing activity advanced at its fastest pace in about two years. 
  • Claudia Sheinbaum Pardo, representing the ruling coalition, will be the first female president in 200 years of independent life in the Mexican Republic.

Important Events in the Coming Weeks

  • In the United States, there will be a FED announcement 06/11 – 12
  • In China, inflation figures to be released 06/11

Monitor

Initial impressions of the election results in Mexico

With an advance of approximately 95% of the votes counted, Claudia Sheinbaum Pardo, representing the ruling coalition (Morena, PT and Green Party), will be the first woman president in 200 years of independent life in the Mexican Republic. In this sense, it is noteworthy that her victory was overwhelming having counted ~59% of the votes, which represented a difference of more than 30 points against the opposition candidate. With this, Claudia Sheinbaum registered more votes than López Obrador obtained in the 2018 elections and becomes the president with the most votes in Mexico’s history. Claudia Sheinbaum was previously head of government of Mexico City (2018-2023), head of the Tlalpan mayor’s office (2015-2017) and secretary of the Environment (2000-2006). On the other hand, citizen participation ranged between 60% and 61.5%, lower than that seen in 2018 which was 63.4% and the average of the last five elections which stood at approximately 65%.

In this context, the ruling coalition won 7 of the candidacies that were at stake, with an outstanding victory in Mexico City, as well as the victory in the state of Yucatan, which was governed by the opposition for many years. Regarding the new conformation of the Congress, it is expected that the ruling coalition will reach the constitutional majority in the Congress of Deputies and by a very small margin will obtain a qualified majority in the Senate. Therefore, the Morena party consolidates for the third consecutive time (2018, 2021 and 2024) as the first force in the Congress of Deputies and for the second time in the Senate of the Republic (2018 and 2024). The new Legislature (LXVI) of the Congress will begin its functions on September 1, 2024, where President López Obrador’s mandate will come to an end on the 30th of that same month. That said, the new legislature will coincide with the current president for 30 days. The inauguration of the new president will be on October 1.

Finally, some of the challenges that this new government will face during the first half of its six-year term will be related to reducing the budget deficit (around 6%, the highest in 25 years), the elections in the United States, the review of the T-MEC, capitalizing on the opportunities linked to nearshoring, avoiding institutional weakening and reducing insecurity rates in the country.

Recomposition of states governed by the ruling coalition (Morena and allies) vs. opposition bloc (PRI – PAN) and Movimiento Ciudadano.

Source: Holland & Knight with information from INE

Week from the 27th to the 31st of May

Most Outstanding Points of the Week

  • In the United States, the second revision to the Q1 2024 GDP showed an annualized growth of 1.3%, lower than the initial revision of 1.6%.
  • In the United States, PCE (core) inflation for April, the indicator mostly monitored by the FED, advanced 0.2%, in line with expectations. Thus, annually it rose to 2.8%. 
  • In China, the IMF raised its estimate for the country’s economic growth to 5% from 4.6%.
  • In Mexico, on the eve of the presidential elections, the candidate of the current government, Claudia Sheinbaum, is widely leading in voting intentions. 

Important Events in the Coming Weeks

  • In the United States, the ISM services and manufacturing will be published 06/03-04
  • In the U.S., employment figures to be released 06/07

Monitor

Consumption perspectives in the United States

The importance of the consumer within the U.S. economy cannot be underestimated, being the main engine of growth, accounting for ~70% of its Gross Domestic Product (GDP). For this reason, we present some perspectives because, so far, the consumer has shown resilience, supported by a strong labor market, excess savings in the wake of the pandemic, and wage increases. However, some deterioration has begun to show, which could imply some challenges in the short-term. Important points:

  • Deteriorating consumer sentiment and record indebtedness: Consumer confidence has now fallen for three consecutive months in the face of high interest rates and persistent inflation. On the other hand, household debt reached a record US$17.7 trillion in the first quarter of 2024, with default rates rising, especially on credit card debt. Despite this, debt servicing costs remain manageable because 75% of households have a mortgage with a 4% rate, compared to the current rate of around 7%.
  • Caution in consumption patterns, with healthy balance sheets: Consumers, especially in the lower income segments, are becoming more cautious with their spending. This trend was evident in recent retail sales reports, as well as in the recent quarterly reporting season, where companies such as Amazon and Pepsi emphasized a preference for more economical options. For their part, household balance sheets prevail strong, supported by a rising stock market, rising home values and higher interest rates on savings accounts, allowing families’ net worth to increase. The mix of these elements has been a key component in the resilience of consumer spending.
  • Real wage growth: The combination of healthy labor markets and the disinflationary process have contributed to growth in real incomes over the past 12 months. While there are some concerns that this favorable trend may stall as the labor market cools and inflation remains stable, there is reason to believe that this dynamic in wages will continue.
  • Increased signs of defaults: In this regard, the FED in New York cited that nearly 1 in 5 borrowers are now “maxed out” on their credit cards and that the percentage of balances moving into serious default (i.e., 90 days past due) has risen to the highest level since 2011. While this is usually a worrisome sign for an economy driven by consumer spending, total outstanding debt at some point in default (~3.3%) is still quite low.

Under this context, economic growth estimates for this year remain around ~2.3%, supported by modest employment generation, the ability to continue witnessing increases in real wages and household net worth at record levels (US$156 trillion at the end of 4Q23).

Household debt service payment as a percentage of disposable income

Source: Raymond James