Economic and financial risk insights indicate that central banks' focus on inflation and labor markets is becoming more pronounced, according to a new analysis by Swiss Re.
There has been a noticeable moderation in the US economy, the reinsurer reported. Despite a strong start to 2024 for the global economy, recent data shows increasing downside surprises. The June employment report in the US reflected strong job gains, but these were offset by negative revisions from the previous month and a rise in the unemployment rate to 4.1% from 4% in May.
Swiss Re interprets this cooling as part of economic normalization, supported by healthy consumer fundamentals. In Europe, cautious recovery continues, although medium-term uncertainty remains high due to recent election outcomes, such as the hung parliament in France.
The global insurer notes that inflation appears to be returning to a disinflationary path. Softer PCE inflation readings in June and CPI in July suggest the US is moving back toward its 2% target. In Europe, inflation has eased as expected.
Core services inflation remains elevated in both regions, but Swiss Re expects a gradual return to the 2% target in the second half of this year for Europe and early 2025 for the US. Japan has also seen eased inflation, with corporate inflation expectations anchored at around 2%, potentially allowing the Bank of Japan to normalize policy further this year.
Swiss Re also notes that the dual mandate of inflation and labor markets is becoming increasingly important. In the US, a rebalancing labor market and decreasing inflation bring the Federal Reserve closer to initiating a slow easing cycle, anticipated to start in September. Swiss Re notes that in the euro area and the UK, cautious rate cuts are expected, with labor market developments being key factors.
Political uncertainty and fiscal outlooks will become larger issues in many economies. France's medium-term deficit risks and ongoing uncertainty are unlikely to fully unwind the current risk premium on French bonds. Similarly, US Treasury yields may reflect more fiscal concerns in the medium to longer term.
Swiss Re expects further global growth moderation in the second half of 2024. As inflation slows and labor markets rebalance, more central banks are likely to join the rate-cutting cycle by the end of the year.
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