Weekly Buzz: ✂️ No rate cuts, no worries

The US Federal Reserve (the Fed) has now left rates unchanged for the sixth meeting in a row, as it continues to grapple with stubbornly high inflation. While some in the market were hoping for early interest rate cuts – which could mean a boost to the economy – leaving rates alone isn’t that bad. Here are three reasons why:

1. The Fed’s likely done with rate hikes. Despite some ongoing uncertainty about how to lower inflation to its 2% target, most Fed members now think policy rates are high enough, and are instead calculating when to lower rates and by how much. So, the real question isn’t “if”, but “when” we’ll see cuts – and how steep they might be
2. Inflation is much tamer today. Two years ago, inflation was rampant and widespread – prompting the aggressive run of rate hikes. What’s more, there was a mismatch in the US labour market then, which pushed wages up. Now, wage gains are back in line with pre-pandemic trends.
   
3. The US economy remains strong. The Fed knows it’s got the luxury of delaying rate cuts. The International Monetary Fund (IMF) recently forecasted that the US economy will grow by 2.7% this year, much greater than the pace expected in other major developed economies, which hover around 0.8% across Europe and 0.9% in Japan.
   

What’s the takeaway here?

You don’t have to sweat it if the Fed’s taking a while to decide on rate cuts. Inflation is still proving sticky; but if the Fed’s holding its ground in the belief that its economy is doing well, that’s actually a good thing for corporate earnings and, in turn, for the stock market.

In fact, an environment with slightly elevated inflation still works for stocks. Historically, annual inflation rates between 3% and 5% (which is where we’re at now) have been followed by an average return of 8.5% in the S&P 500. Moreover, inflation’s only one part of the bigger picture; growth’s now coming back, and our investment framework, ERAA™, has reoptimised for it.

📰 In Other News: Asian markets are roaring

Asian equity markets are experiencing a significant uptick, driven by a mix of strong regional GDP figures and continued anticipation for US interest rate cuts.

In Indonesia, strong first-quarter GDP growth of 5.1% has beat expectations, lifting both the Jakarta stock exchange and the rupiah. Similarly, Taiwan’s economy posted a blistering 6.5% GDP growth rate in the first quarter of 2024, coming off the back of a surge in tech demand. Meanwhile, Malaysia's equity market saw its biggest influx of foreign investment in two years, boosting its key index to a 52-week high.

The latest surge in Asian markets reflects shifts in global investor sentiment and monetary policy projections. When the US eventually starts cutting back on interest rates, we’ll likely see an increase in capital flows as cash is freed up (see our Simply Finance below), benefiting Asian emerging markets.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Capital flows

Capital flows refer to the movement of money across international borders. It's the financial world's version of the tides – capital sloshes in and out of countries as investors seek the most attractive returns.

When an economy is thriving, you can expect a flood of foreign cash. Conversely, during times of uncertainty or instability, that money often beats a hasty retreat in search of safer harbours. These ebbs and flows provide insights into global investor sentiment and can act as an economic barometer of sorts.