Monthly House Views - Central banks into the deep end - July 2024

Central banks into the deep end

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Disinflation trend confirmed.

With inflation continuing to fall on both shores of the Atlantic, the major central banks could now start scaling down the restrictive nature of their monetary policy. We now expect their next moves to be both gradual and synchronised, with the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England all cutting rates once each quarter until the end of 2025. The economic background should remain favourable. Growth looks set to slow in the United States but only after several quarters of strong economic growth. Europe's economic growth shouldremain more muted and with a more uncertain pace, helped by falling inflation and the prospect of lower interest rates.

We maintain our equity Overweight and add fixed-income exposure.

The prospect of still positive growth and falling interest rates leads us to maintain our Overweight to equity markets in developed economies. US markets continue to ride the robust American economy and European markets still look good value. At the same time, we have tweaked our exposure to bond markets to play the upcoming easing of interest rates, by extending the duration of our sovereign bond positions and adding exposure to high-yield corporate debt, where we have gone from Underweight to Neutral. Finally, we have switched to Neutral on the USD/EUR and USD/GBP currency pairs as our scenario now sees all three central banks easing policy in synch.

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