Never knowing what to cling to when the rain comes in

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The US economy is slowing down, and that is becoming more apparent. it would appear this slowdown is encouraging the market to reassess their US interest rate expectations. Monday’s ISM manufacturing index contracted for the second consecutive month in May and for the 18th month out of the past 19. The Institute for Supply Management added that manufacturers are struggling with high interest rates and weak consumer spending. Further indications that higher for longer is now starting to bite, the latest US jobs opening data reported job opening fell more than expected.

 The 2-year US treasury yield, having flirted once again with breaking the 5% barrier, is back down to 4.75%. The bond market still sniffs trouble as the US yield curve remains well and truly inverted. The market is again starting to price in the possibility that the Fed could cut ahead of the US election in November. At present, the Vix fear gauge suggests investor sentiment is confident the slowdown will be just enough to encourage inflation to return to its gentle downward trend. Whilst the investor waits to see how the mix of growth, the Fed and interest rates plays out in the coming months, US equities may continue to mark time.  

One developed economy has already cut its interest rate this year, Switzerland. The latest report showed Swiss inflation had fallen to 1.4%. While the rest of the developed world was struggling with inflation rates closer to 10% at one point, Switzerland barely came close to 2%. I wondered why they buck the trend. The Swiss and UK economies have one thing in common: the split between the service and manufacturing sectors’ contribution to the economy is roughly 75%/25% in favour of services, so that can’t be it then. We seem to import more energy-related products than Switzerland, so maybe that’s an influence. The overriding difference is that despite the Swiss having almost full employment, wages hardly grow. Whilst wages have grown markedly in many developed economies, wage growth in Switzerland has been below 2% on average over the past few years.

Election fever is heating up all over the world, and last night, we had the first of the live debates between Sunak and Starmer. The most recent was the Indian elections, where, according to the polls, Narendra Modi was expected to win by a landslide. In the end, it was far closer than the pollsters had forecast, and Modi is now in the throes of putting together a coalition to support his government. Indian stocks fell sharply. This weekend, we have the European elections, where one may see more surprises.