Friday Investors Club: India's election surprise & positioning in India equities
CIO head of India equities Premal Kamdar joins Wayne and Jon to discuss post-election opportunities.

Thought of the day

US Treasuries and stocks were little changed ahead of Friday’s release of the May labor report, which will provide guidance on the Federal Reserve’s path toward rate cuts. The yield on the 10-year US Treasury stood at 4.28%, after falling 34 basis points over the past week, while the S&P 500 was just 0.02% lower than the 25th record high this year it made on Wednesday.

Market optimism over the Fed’s rate cuts has gradually increased in recent days, after a slew of economic data pointing to a cooling labor market, slowing growth, and moderating inflation. Fed funds futures are now pricing almost two full Fed cuts (49 basis points) by year-end, compared to 35 basis points a week ago.

But while investors may tread cautiously before clearer guidance from the Fed at its policy meeting on 12 June, recent data has been in line with our base case that the Fed will start easing policy in September.

Recent jobs data suggest further cooling in the labor market. The consensus forecast is that today’s nonfarm payrolls will add to evidence that demand for labor is cooling, with job creation for the month of 185,000-down from a recent peak of 353,000 in January. This would be consistent with data from the ADP Research Institute earlier this week suggesting that hiring at US companies in May grew at the slowest pace since the start of the year. April’s job openings and labor turnover survey (JOLTS), also published this week, showed US job openings falling to the lowest level since February 2021. Separately, the number of Americans filing new claims for unemployment benefits rose to 229,000 for the week that ended on 1 June, while unit labor costs rose by less than previously thought in the first quarter.

Inflation has likely resumed its downward trend amid a slowing economy. While the latest ISM survey of services sector firms was stronger than expected, other indicators have pointed to a slowdown in economic activity and a likely return of disinflation-which reversed in the first quarter of this year. The ISM manufacturing PMI fell further into contraction, first-quarter GDP growth was revised lower, and the Fed’s preferred gauge for inflation (the core personal consumption expenditure price index) rose by the lowest number in four months. With the savings rate still at half its pre-pandemic level and wage growth slowing, spending is unlikely to grow faster than income. The result should be relatively modest growth in consumption that helps to reduce inflationary pressure over time.

ECB’s decision shows that the threshold to cut does not hinge on a specific number being hit. The European Central Bank went ahead with its first cut Thursday despite an acceleration of underlying inflation in May. It also raised its forecast for core inflation for both this year and next. However, President Christine Lagarde stressed that confidence had increased over the path for inflation. This echoes comments made by Fed Chair Jerome Powell that policymakers were looking for more confidence that inflation is moving toward its target, rather than hitting a specific figure before the central bank moves.

So, we continue to expect the Fed to join the global easing cycle this year. With the return on cash deposits set to decline, we recommend investors consider bond ladders and structured investment strategies with capital preservation features to manage their liquidity. We also believe the macro backdrop is favorable for quality bonds.