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Tuesday 17 September 2024
Cross Asset
September 2024 | A series of weak US data in July questioned the market narrative of a soft landing and brought back fears of recession. The rise in the July unemployment rate to 4.3% (latest reading in August is 4.2%) triggered a significant market concern about a possible weaker-than-expected US labor market, raising the risk of an impending recession. We do expect a significant slowdown of the US economy, but not a recession. We expect a significant deceleration in the next few quarters, consistent with a broader weakening of many labor market indicators.
01 | The yen carry trade* is being unwound sharply due to weak US data and a hawkish surprise from the BoJ, with the yen's dislocation from its fundamentals remaining large.
02 | Weak global growth and the BoJ on diverging path from most Central Banks in the world are tailwinds for the JPY. A fast trade-weighted appreciation, though, would require 1) recession or 2) a persistent hike cycle from the BoJ.
03 | The repatriation of Japanese foreign assets is not a material risk for now, but its potential for a large market impact always warrants attention.
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Unless otherwise stated, all information contained in this document is from Amundi Asset Management as of September 12, 2024. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product or service. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not indicative of future results. Amundi US is the US business of Amundi Asset Management.
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The global macro backdrop – inflation scares, geopolitical tensions and recession worries – together with US economic resilience, have supported the dollar versus core currencies, but the latter are not weak relative to recent history. Moreover, the difference in market expectations of terminal rates in Europe are now substantially higher than before the pandemic, and not materially different from expected US terminal rates. This should limit any sustained weakness in European exchange rates.
In the aftermath of last year's global inflation surge and the subsequent tightening of monetary policies, the economic outlook now looks increasingly fragmented. The US is slowing down, the European Union is gradually recovering, China is in a controlled and policy supported slowdown, and countries such as India are experiencing strong growth. On the inflation side, price pressures are more persistent than expected, but gradually normalizing, allowing major central banks to start cutting rates. We believe investing will require confidence in the search for an asset allocation that can withstand different scenarios, with markets in some areas being priced for the best despite uncertainty stemming from geopolitical risks and the upcoming US elections.
We have markedly revised up our forecast for US growth, in particular for H1 2024. We continue to expect GDP growth to decelerate below its potential pace over the next few quarters, before recovering in 2025. Regarding inflation, although the downward trend in core consumer price index inflation has recently stalled, we think that the disinflationary process will continue, albeit along a bumpy road with stickier dynamics. The Fed will still be in a position to pivot towards rate cuts and we expect 75 bps of cuts in 2024 (vs 40 bps by markets) as: (1) monetary policy remains restrictive and will become more restrictive as inflation declines; (2) growth will slow down; and (3) recent inflation data have not altered our year-end projections.
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