Monthly House View - May 2024 - Download here 

In the wake of Iran’s missile launch against Israel on the night of 13 to 14 April, the financial markets grew concerned over a potential retaliatory attack. Historically speaking, geopolitical events have generally not had an impact on global economic growth over the medium-term, but they do create volatility in the short-term, especially when combined with other elements liable to weigh on the market, such as the current persistence of inflation. The “higher for longer” catchphrase coined by Federal Reserve (Fed) Chairman Jerome Powell in reference to key rates is likely to evolve into “lower for later”. After all, the latest inflation data (excluding the most volatile components, i.e. food and energy) came out at a surprisingly strong 3.8% year-on-year in March, a level dangerously close to doubling the 2% target inherent to the Fed’s mandate. Bear in mind that, at the end of last year, the market expected up to seven Fed rate cuts for 2024, but is now betting on just one. Moreover, there is a chance that this first rate cut will not materialise before the US presidential election in November. The Fed did not change its rate cut projections over the period, maintaining a target of three cuts. It is interesting to note that, given the context and relative to the market's expectations, the Fed appeared restrictive three months ago but now looks accommodative despite not changing its stance. Jerome Powell has always championed the cautious approach and stressed that the Fed would keep a close watch on inflation and economic activity data. This behaviour, considered as too conservative by the market early in the year, now appears more appropriate.

The question is to what extent the US economy can withstand this persistent inflation. The economy has been fuelled by massive post-COVID cash injections of a magnitude not seen since World War II, but is also facing its largest rate hikes in the last 40 years.

It is also important to remember that the governments of developed countries remain laxest when it comes to their budget. This is particularly the case in the United States, where the budget deficit may be on course to exceed 7% of GDP this year, a level rarely observed outside periods of war or recession. Major deficits in rich countries can largely be attributed to fewer tax revenues due to staff-cutting in profitable sectors such as Tech, and equity market slumps from mid-2022 to mid-2023. Government costs can also be explained by the persistently high expenditures undertaken in line with post-COVID measures. One example is the “Superbonus 110%” measure implemented by Italy in 2020 to encourage homeowners to improve the energy efficiency of their homes. The cost is estimated at over EUR 200 billion, i.e. 10% of Italian GDP. Lastly, in response to the war in Ukraine, many governments (particularly in Europe) have increased their military spending, in a way taking up the baton for measures aimed at countering energy price rises in 2022. Amidst this trend of rising costs in Europe, governments in countries such as France and England are attempting to rein in spending. The same cannot be said for the United States, where the upcoming presidential elections in November make it a bad time for belt-tightening.

Against this backdrop, we have slightly reduced the risk within our asset allocations while remaining opportunistic. I hope you enjoy reading this edition of the Monthly House View, as we take another look at a factor that helps explain the current state of the US economy: immigration.

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_{Monthly House View, 19.04.2024. - Excerpt of the Editorial}