Friday Investors Club: Post-debate uncertainty and the French election (9:56)
CIO's Teck Leng Tan and Jon Gordon on FX opportunities, US growth, and French and US elections.

Thought of the day

Markets entered Friday in a positive mood, with the S&P 500 standing at an all-time high, while US data released before Thursday's Independence Day holiday pointed to a gradual cooling of economic activity. Today, investors are awaiting the publication of the labor report for June for further guidance on the likely timing and pace of rate cuts from the Federal Reserve.

Job creation was stronger than expected in last month's release for May. However, more recent releases have provided further evidence that the US economy is headed for a soft landing.

The labor market has moved into a better balance. The June ADP employment report published earlier this week showed that businesses added 150,000 new jobs, the smallest increase in five months. While the number of job openings in May were higher than market expectations, according to the latest Job Openings and Labor Turnover Survey (JOLTS), the quits rate remained at pre-pandemic lows, suggesting workers’ willingness to leave jobs voluntarily has abated relative to 2021-2022. In fact, with the unemployment rate at its highest level since January 2022, Fed officials noted in their policy meeting in June the risk of the job market slowing much faster than anticipated. “Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past,” according to the minutes published on Wednesday.

Inflation has resumed falling. Another highlight in the minutes of the Fed’s last meeting was the central bank’s acknowledgement of “diminishing” price pressures. Policymakers pointed to “a number of developments in the product and labor markets” that supported their judgement that inflation was falling, including declining nominal wage growth, price cuts at various retailers, and companies’ reduced pricing power.

On the hard data front, May’s core personal consumption expenditures (PCE) price index, the Fed's favorite gauge of inflation, rose just 0.1% month-over-month, down from April’s 0.2% and marking the smallest advance this year. The annual pace, at 2.6%, was also the slowest in more than three years. May’s core consumer price index (CPI) was equally encouraging, with the smallest monthly increase since August 2021. We expect the downward trend in core inflation to continue.

Growth is moderating. Both the manufacturing and services sectors of the US economy contracted in June, with the ISM Purchasing Managers’ Index coming in weaker than expected. Retail sales growth has slowed in recent months, and real consumption growth for the June quarter is shaping up to be a modest rate of around 1.5%. Other recent data including preliminary durable goods orders and pending home sales have also been in line with our base case of moderating economic growth.

So, while the Fed is still looking for additional information to gain greater confidence that inflation is moving sustainably toward its objective, we believe the transition toward looser monetary policy is underway and see a likely first interest rate cut in September. Investors should consider redeploying excess cash or money market funds into quality bonds, and build a diversified fixed income allocation with selective exposure to higher-yielding areas of the asset class