Source: Wall Street News

The slowdown in US inflation is pressing the “acceleration button” for central banks around the world to cut interest rates.

Nomura previously pointed out in the report that the global interest rate cut cycle is already underway. It is expected that from now until the end of June, the European Central Bank, the Swiss National Bank, the Bank of Canada, and the National Bank of Poland will cut interest rates, and many other central banks will adopt a dovish stance.

Goldman Sachs strategist Jan Hatzius pointed out in a research report released on May 20 that the G10 easing cycle is gradually expanding. Following the Swiss central bank and the Swedish central bank, it is expected that the European Central Bank, the Bank of England, and the Bank of Canada will all start cutting interest rates in June this year.

The report said that although prices and wage growth rates are still above the central bank's target level, more and more G10 central banks believe that as the risk of inflation cools down significantly, the high interest rate policy clearly needs to be adjusted.

The Federal Reserve will not be the first to cut interest rates, and the number of interest rate cuts may exceed expectations

Hatzius said that due to the continuous rise in core inflation in the first quarter, the Federal Reserve will not be among the first central banks to cut interest rates. That is, the rate at which US inflation is slowing is not enough to support the Federal Reserve to take the lead in cutting interest rates.

Based on CPI, PPI, and import price estimates, we expect the US core PCE price index to grow at a month-on-month rate of 0.26% in April, which is slower than the average of 0.36% in the previous three months, but if this growth rate continues in May and June, it may not support the Fed's decision to cut interest rates in July.

However, the market-based core PCE index (excluding portfolio management services, gaming, etc.) grew at a month-on-month rate of only 0.18%. If this rate continues, we expect to see two interest rate cuts in July and November.

The report added that the US PCE price index ranked first among the G10 economies, but considering that the month-on-month data is extremely susceptible to seasonal adjustments, the year-on-year data is also equally important. The growth rate is currently at the middle level of the G10 economies.

However, the report also said that at present, the US labor market is cooling down, and the performance of economic growth exceeding expectations is at its peak. If this trend continues, it may cause the Federal Reserve to adopt a “more active easing policy,” that is, to cut interest rates more than 2 times than expected during the year.

The report points out that despite strong GDP data growth, the tightness of the US labor market has returned to pre-pandemic levels (unemployment has risen slightly, and job vacancies, turnover rates, and labor shortages have continued to decline). Combined with a weak sales market, America's subsequent economic growth may be weak.

Considering that retail sales data for April fell short of expectations, we expect the US GDP growth rate to slow from 4.1% in the second half of 2023 to 2.2% in the first half of 2024.

For the rest of the G10 economies, we expect average GDP growth to recover from -0.4% in the second half of 2023 to +1.2% in the first half of 2024.

Focus on investment opportunities in emerging markets

The report said that no matter when the Federal Reserve cuts interest rates, the biggest opportunities for investors may appear in emerging markets, especially in Latin America, the Middle East, and Africa.

Why is the Fed's interest rate cut good for emerging markets?

The report explained that due to concerns about the depreciation of domestic currencies against the US dollar, the previous pace of interest rate cuts by emerging market central banks was only “experimental.”

And as the inflation situation in these emerging market countries continued to improve this year, the core inflation rate in April hit a new low both month-on-month and year-over-year, which caused the central bank's actual policy interest rate (excluding inflation factors) to a highly restrictive level.

Therefore, when the Federal Reserve begins to cut interest rates, the yield on dollar assets falls, and driven by a recovery in risk appetite, capital will flow into emerging markets with higher yields.

editor/tolk