From our New York studio: ElectionWatch: Investment implications of a rematch
Solita Marcelli discusses what the upcoming US election could mean for markets.

Thought of the day

Markets have been largely steady in recent days as investors cautiously await today’s personal consumption expenditure (PCE) price index that could provide fresh clues on when the Federal Reserve will cut interest rates. After making gains for 15 of the last 17 weeks, the S&P 500 is down 0.4% so far this week. It remains 6.3% higher than the start of the year.

With what’s already available from January’s consumer price index (CPI), producer price index (PPI), and import and export prices, we expect core PCE for January to come in at 0.4% month-over-month, above December’s 0.2% rate. The “supercore” reading, which measures core services without housing rents, and one that Fed Chair Jerome Powell has focused on, is expected to be 0.6% month-over-month.

If the monthly prints were to continue at these levels, the Fed would find it difficult to cut rates. However, we have reasons to hold onto our view that a first cut should come in June, with 75 basis points of total easing by the end of this year.

“January effect” appears to have inflated CPI. In the January data, the strength largely reflected start-of-year price increases for labor-reliant categories such as medical services, car insurance and repairs, and daycare. We expect inflation in these categories to be lower in February and March, therefore resulting in a slower rise in prices for core services.

Fed officials still point to rate cuts this year. New York Fed President John Williams said the US central bank will likely cut its benchmark lending rate “later this year,” and that he still believes three rate cuts in 2024 is “a reasonable starting point.” His comments on Wednesday echoed those from Atlanta Fed President Raphael Bostic and Boston Fed President Susan Collins, both of whom made the case for easing this year. Collins added that the path down to the Fed’s 2% inflation goal could continue to be “bumpy,” but it remains “appropriate” to begin policy easing this year.

Labor market has shown signs of cooling. While January payroll data topped even the most upbeat forecasts, we think the actual underlying trend in job growth remains downward moving, and we expect more modest gains in the months ahead. In addition, job openings and wage growth both suggest that the labor market is still cooling off. The latest available employment cost index (ECI) report showed the growth of hourly labor costs has cooled at a greater pace than economists had expected, while the private sector quit rate was the lowest since August 2020.

So, our base case of receding inflation, falling rates, and slower growth continues to underpin our preference for quality bonds and equities, as well as small-caps and emerging market equities that could benefit more from lower rates.