The CEO Macro Briefing Book

Politics heats up, the economy cools down

30 Jul 2024

Authors

Jason Draho Paul Hsiao

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UBS Trending: Is the Fed too late?

With the recent market sell-off reflecting growth concerns, a more pertinent question for policymakers should be, “can we avoid a recession?”

Top of the Morning podcast

We spotlight the latest edition of the quarterly UBS CEO Macro Briefing book as we explore how a shifting macro environment and unprecedented election cycle has impacted the outlook for business owners. Featured are Jason Draho, Head of Asset Allocation Americas, and Paul Hsiao, Asset Allocation Strategist Americas, UBS Chief Investment Office. Host: Daniel Cassidy

Insights in brief

Executive Summary: Economy is landing softly, politics adding turbulence

Macroeconomic outlook

A cooling growth environment… Macro conditions have evolved into a very good environment for risk assets. Fast growth amid high inflation and a tight job market during the first half of the year sparked fears that policymakers will keep rates “higher for longer.” But recent data indicates a decidedly cooler job market and solid disinflation trend while growth has held up. We expect growth and inflation to moderate to benign levels.
…setting the stage for rate cuts. Considering better data, Fed officials have implicitly endorsed a September rate cut. However, markets may have run ahead of themselves by pricing in 65bp worth of rate cuts this year and more than 100bp in 2025 – an aggressive amount, especially if growth remains solid and inflation stays above 2%.

Operating environment

Moderating consumption and labor markets are a positive for policymakers. Consumer spending shows signs of moderation but not deterioration as it runs at a still-healthy trend, even as more cracks start showing for lower-income households. Various labor market indicators are back to pre-pandemic levels, easing inflationary pressure concerns for policymakers.
Higher chances of rate cuts easing financial conditions. Financial conditions are generally easing, buoyed by strong equity market performance, tight spreads, and higher probability of rate cuts as Fed’s SLOOS shows easing credit standards for firms. This will help the real estate market, but that may get worse before it gets better.

Markets & deal activity

After solid performance in 1H24, equity markets staged a stunning rotation in July. The leaders in the first half of the year like tech are the relative laggards this month, while previous laggards like small-caps have gone on a tear. This rotation was triggered by increasing probability of imminent rate cuts, greatly amplified by positioning. The rotation’s longevity is doubtful; data needs to be ‘great’ and not just ‘good’ for the recent rotation trade to persist.
Deal activity still waiting for rate cuts, and performance broadening out. The expected pickup in corporate activity has yet to really occur. M&A activity is still sluggish but within pre-pandemic ranges, while IPO and VC deals are recovering from a very low base.

Politics

A Trump win is more likely than not, but an unusually volatile election season may have more surprises before 5 November. Our probability of a ‘Red Sweep’ is 40%, with a ‘Red Divided Government’ at 15%. Kamala Harris likely replacing Joe Biden as the Democratic nominee has marginally increased the probability of a Blue win, with a ‘Blue Sweep’ scenario at 10% and a ‘Blue Divided government’ scenario at 35%.
‘Trump Trade’ effect not obvious yet. The impact of the Trump trade on the market rotation is hard to isolate and may be even more so in light of President Biden ending his campaign, but it’s likely limited overall and a distant third factor after economic data and Fed rate probability.