Data-driven insights and analysis from our investment team every week.
We return this week to the outlook for US interest rates. Recently, sentiment has improved with respect to the number of interest rates cuts we can expect in the US this year. This has pushed both bond and equity markets up over the recent weeks. Last week’s soft inflation figure was a big driver of this but improving interest rate sentiment had started before this.
The chart below looks at the economic surprise index for the US. When it is below zero, the economy is performing worse than expected and vice versa when it is above zero. As you can see, the index has dropped below zero since May indicating that momentum is declining in the US economy. The hope is that this will translate into lower inflation and earlier interest rate cuts and thus the improvement in interest rate sentiment. This is good news for the bond market. For equity markets, it is more mixed. Lower growth means less profit growth but earlier and more interest rate cuts pushes up valuations. Hence, even when this index is below zero, the equity market can continue to rise. The key is that the index does not fall too low and the economy does not become ‘too cold’. Thus far we are not there.
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