Friday Investor's Club: Insights from the UBS Asian Investment Conference (13:36)
CIO's Jon Gordon brings you key findings from the AIC on generative AI, US elections, and geopolitical risk.

Thought of the day

Markets were in a holding pattern ahead of today’s release of the personal consumption expenditure (PCE) index for April, the Federal Reserve’s preferred gauge for inflation. The S&P 500 shed 0.6% on Thursday, while the yield on 10-year US Treasuries fell 7 basis points to 4.55%.

Following encouraging prints in the latest producer and consumer price indexes, we expect core PCE to rise by around 0.2% month-over-month in April. That would be the smallest increase so far this year.

But while this is unlikely to be enough to justify an imminent Fed rate cut, we think recent data continue to underpin our base case soft landing scenario. This should allow the US central bank to start policy easing later this year, most likely at its September meeting, in our view.

The US economy has shown signs of slowing. The second reading of first-quarter GDP showed the US economy grew at a 1.3% annualized pace, weaker than the preliminary figure of 1.6%. This marked a deceleration from the fourth quarter of 2023’s 3.2% expansion, and the slowest growth since the second quarter of 2022. According to the Bureau of Economic Analysis, the latest GDP estimate primarily reflected a downward revision in consumer spending to 2%, from 2.5%.

Inflation pressures are easing. April’s consumer price index-released earlier in the month-suggested the US disinflation trend will likely resume its course, with data on new rental leases reinforcing our expectation of more favorable inflation prints in the coming months. In addition, slowing wage growth should also help to ease inflation pressure. According to the Fed’s latest Beige Book survey of regional business contacts, US consumers continue to push back against higher prices amid “heightened price sensitivity.”

The Fed’s next move remains more likely to be a cut. New York Fed President John Williams on Thursday said he expects inflation to continue falling in the second half of this year, as elevated borrowing costs are restraining the economy. Despite recent headlines focusing on Fed officials’ higher-for-longer stance on rates, we believe the more important message is that policymakers believe current policy is sufficiently restrictive. Williams added that the economy has come into better balance and that a rate increase is unlikely, echoing Chair Jerome Powell’s comments after the most recent Fed policy meeting.

So, we continue to expect a total of 50 basis points of Fed rate cuts this year, creating a favorable environment for quality bonds, and providing a positive catalyst for US small-cap performance to catch up.