AXA IM: Central banks at a crossroads: Pre-emptive cuts or patient waiting?

3 september 2024

Centrale bank Monetair beleid

As summer winds down, the financial landscape has evolved, with key shifts in market expectations for central banks, writes Gilles Moëc, AXA IM Group Chief Economist and Head of Research.

Acording to Moëc, the Federal Reserve, under Jay Powell’s leadership, has signaled readiness to cut rates aggressively if necessary, aiming to pre-empt economic downturns rather than merely reacting to them. However, the Fed might not need to act as decisively as anticipated, given that U.S. economic indicators remain stable. While Powell’s approach at Jackson Hole marked a departure from gradualism, the Fed’s next moves will hinge on upcoming data, such as the August payroll report

Gilles Moëc emphasizes: “The Fed's readiness to cut rates aggressively is providing a level of insurance that supports current market positivity, but it’s not yet clear if such decisive action will be necessary.”

The European Central Bank (ECB) finds itself in a contrasting position, he says. After taking bold action in June with a rate cut, the ECB’s stance has become more cautious. Recent data supporting inflation control makes a September cut likely, yet some policymakers remain wary, emphasizing a gradual approach. This divergence in strategy between the Fed and ECB highlights differing economic outlooks across the Atlantic, with the ECB more concerned about potential growth risks in the Eurozone.

'The early August equity market turbulence, triggered by hawkish surprises and weak U.S. payroll data, has mostly settled. However, the shifts in market dynamics over the summer have left lasting impressions, with the Fed’s dovish turn supporting equities. Despite this, uncertainty lingers as the economic data remains mixed, particularly with U.S. 10-year yields dipping below the 4% mark, partly influenced by political developments, including Kamala Harris’ lead in the U.S. presidential race.

In Europe, the ECB’s cautious outlook is tempered by ongoing concerns about growth, particularly with the Eurozone’s two largest economies, Germany and France, underperforming. Business surveys reflect a struggling manufacturing sector, and despite some resilience in services, there is little to suggest a robust recovery is imminent. As global demand weakens and fiscal policies tighten, the ECB faces challenges in balancing its policy moves.

Political uncertainty in France adds another layer of complexity to the Eurozone’s economic outlook. The search for a new Prime Minister has accelerated, but the outcome remains unclear. Whoever takes the helm will need to navigate delicate policymaking waters, particularly with potential budgetary challenges looming in 2025.'