Inflation/Deflation

We consider the outlook for CPI inflation over the next 12 months. Our baseline forecast calls for core CPI to hit 2.40% during this timeframe and for headline CPI to fall between 1.74% and 2.49%.

At first glance, France has moved to the far left. However, this coalition is fragile, and Macron’s allies still hold the balance of power. What are the assets that will benefit from this new political setup, and those that will not?

Our labor market indicators have softened meaningfully during the past month but aren’t yet signaling an imminent recession. That said, the Fed can no longer ignore the labor market with the unemployment rate above 4% and rising.

The new Labour government will have flexibility to respond to macro shocks, which is positive for the UK in general, namely GBP-EUR, and also gilts in absolute terms. But over the long run, tax hikes will likely surprise to the upside, which poses a risk to corporate earnings.

Does the incipient slowdown in European data herald a soft landing and a goldilocks period for equities? We have our doubts.

Our Portfolio Allocation Summary for July 2024.

Concerns about the global economy have shifted from sticky inflation to faltering growth. Tight monetary policy is finally starting to bite. We suggest increasing portfolio defensiveness.

The Labour Party’s comeback in the UK is widely expected and will lead to fiscal stimulus consisting of increased public spending with minimal tax hikes. But a sweeping single-party majority will reduce social unrest only at the cost of higher taxes over the medium term. The paradigm has shifted away from the Thatcherite low-tax regime of the now-discredited Tories. v