Featured insights

Brian Levitt:

Welcome to the Greater Possibilities podcast from Invesco, where we put concerns into context and the opportunities into focus. Hi, I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. And we're talking about the mid-year outlook today with Chief Global Market Strategist, Kristina Hooper.

Brian Levitt:

Mid-year already. Quick.

Jodi Phillips:

It always is.

Brian Levitt:

Time's going way too fast.

Jodi Phillips:

It always does. And to be honest with you Brian, I'm trying to remember what happened in the first half. I scrolled through our market insights for the last six months to try to refresh my memory and it appears the big theme was waiting. We did a lot of waiting in the first half, waiting for rate cuts to begin waiting for elections to take place. But what am I missing, Brian? The first half wasn't all just sitting around waiting, was it? Does

Brian Levitt:

That make us Didi and Gogo from Waiting for Godot? We're just sitting under a tree.

Jodi Phillips:

Oh, nice reference. Nice reference. All right, so which one are you?

Brian Levitt:

You think I remember my eighth grade English? You're giving me way too much credit. The only thing I remember about the play is that Godot never shows, but I suppose that's a decent way to be thinking about the first half is that, you're right, the Fed never showed with rate cuts and that's from a start of the year where many people had been expecting six rate cuts. And so there's a bit of irony to it. We spent a lot of the first half of the year, 'we' being the royal we, talking about will they or won't they and when and by how much. And the reality is the market has just enjoyed good growth and no rate cuts, which is actually preferable, I would argue, to weak growth and plenty of rate cuts.

Jodi Phillips:

Well, good point. Good point. So, so far it's been fine for us to stand by the tree and wait for Jerome Powell. Unlike Godot I trust he will show at some point, but we haven't needed him just yet. But what about the second half? So now it's time to look ahead and Kristina is here to help us do just that. Welcome, Kristina.

Kristina Hooper:

Thanks so much for having me. If you don't mind my adding to the themes for the first half, I wouldn't say it's just waiting, it's reacting and overreacting. Because we got market reactions to almost every data point and reaction to a lot of “Fedspeak,” and I would argue some real overreaction as well. And so that took us on a bit of a roller coaster ride in the first half.

Brian Levitt:

I've been saying that too. It's like we go from, it's going to be hyperinflation to it's going to be an economic hurricane to things are okay to it's too strong, it's too weak.

Jodi Phillips:

Stagflation. That's what I'm hearing now, right?

Brian Levitt:

Yeah, stagflation and Kristina, I'm sure you remember Saturday Night Live from the '90s with Linda Richmond when she would say the Holy Roman Empire is neither holy nor Roman nor an empire or things like that.

Kristina Hooper:

Brian, I'm getting verklempt just listening to you say that.

Brian Levitt:

You're getting verklempt. Good use of Yiddish. My grandmother would be happy, but yeah, stagflation, it's neither stag nor flation. Discuss.

Kristina Hooper:

Discuss amongst yourselves I think was the exact... Yeah, I think that's absolutely right. We've seen quite good growth in the United States, certainly relative to expectations and we've seen continued disinflation. Yes, there was a stalling in the first quarter, but we seem to be making some progress again and we made a heck of a lot of progress last year, which Jay Powell has noted.

Jodi Phillips:

Kristina, you've been emphasizing this all year though and beyond, that the path of disinflation is going to be bumpy, it's going to be imperfect. So does inflation have to hit central bank targets exactly before cuts start or is it enough to just get some more confidence that we're going in the right direction?

Kristina Hooper:

Yeah, it does not need to hit. In fact, if central banks wait until the target is hit, they've made a huge policy error. I think of it as not different from that old Wayne Gretzky saying, I think I'm attributing, I'm no sports aficionado, but, "You want to skate to where the puck is going."

Brian Levitt:

That's right.

Kristina Hooper:

And similarly, the Fed is doing what it's doing in anticipation of what will happen. And so I think the reason it stopped hiking rates almost a year ago was because it recognized it had done enough. Now it hadn't shown up yet in the data, but we were certainly on that journey. And similarly, I believe the Fed will start cutting before we get near that 2% inflation target.

Brian Levitt:

So when you say they should do so, how worried are you if they don't? It seems like the concern is that the inflation numbers just stay a little bit stickier, prevents them from doing what they want to do, which is normalize the yield curve presumably. Do you worry that what does the policy mistake look like?

Kristina Hooper:

Well, that's the $64,000 question. We don't exactly know, but we do know that there can be very long and variable lags to monetary policy. Now this economic cycle has been altered. There have been, I would argue, artificial forces at play that have made it an unpredictable economic cycle, not conforming to tradition. So it's hard to guess, but we do know that the longer we sit with rates as high as they are, the more damage is likely to be occurring to the economy, which won't show up for a while. And so I don't think anyone thinks we've seen everything, the full impact to the economy of the Fed's aggressive tightening. And I think the longer we stay where we are, we just increase the risks of having a financial accident, of having an economy sent into recession. I don't think it is a coincidence that we saw an inverted yield curve. I think that was foreshadowing what could come and certainly is still a possibility if the Fed doesn't, in my opinion, start to cut.

Brian Levitt:

Do you think Jay Powell can be Wayne Gretzky if he's data dependent? That's the thing, it's like why be data dependent when you hire a whole bunch of economists? You should be modeling the future.

Kristina Hooper:

So I think it's very easy for them to just use that term 'data dependent', but the reality is they need to be thinking about where the economy's going to be and trying to at least do some modeling. And I think they're doing that and that is what made them comfortable with stopping hikes in July of 2023. And I'm hopeful that then leads them to start cutting soon. Now that doesn't mean I think they should be cutting dramatically, but I do think the start of rate cuts of a very gentle easing cycle is called for soon just because I think we run the risks after a very aggressive tightening cycle. Brian, you've often talked about the '94 and '95 Fed and what it did.

Brian Levitt:

Mid-cycle slowdown. Yeah.

Kristina Hooper:

Exactly. And how we'd love to see a similar scenario now because we would avoid that alternative of going into a recession. But in that case, the Fed only hiked 300 basis points and it kept rates at that peak for just five months before starting to cut. We are already at almost a year and it was 500 basis points of tightening. So I recognize that this problem arguably was bigger inflation was more significant, but that doesn't mean that the Fed can hold rates at these levels indefinitely. I think the longer they do that, the more risks arise. And I just think that there are, at a certain point, the balance changes and the greater risks occur from keeping rates this high recognizing that there are some sticky components of inflation. But that's part of an imperfect disinflationary journey.

Brian Levitt:

I just want it to be '94, '95, so I could be a senior in high school, freshman in college again, but I don't think that's happening.

Jodi Phillips:

So Kristina, obviously a lot of focus on the Fed, but not only on the Fed, wanted to just run through quickly some of your views and expectations for global central banks. Maybe we can start with the ECB, the European Central Bank, and what you're expecting to see from them in the second half.

Kristina Hooper:

I think that what we're likely to see though is a central bank that, like the others, is going to be very gentle in its easing cycle. So once one rate cut is done, the ECB, like other central banks, is unlikely to rush into another rate cut. I think it's going to assess the data. I think just letting a little air out of the tires is going to be enough and is going to provide some level of comfort and I think will be a boost to markets. So my expectation is maybe we'll see one or two more rate cuts after June, but I don't think it's going to be an aggressive easing cycle, at least not this year.

Jodi Phillips:

Okay. How about the Bank of England? Much different place for them.

Kristina Hooper:

Much different place. And while in inflation, the most recent inflation print showed progress, not as much progress as had been expected. And so I think the Bank of England is more likely to err on the side of caution and wait until August to begin rate cuts. That's not a sure thing, but I think it's a pretty sure thing. Again, I think it's going to be a gentle easing process, very gentle because it still is seeing some pretty sticky inflation on the services side and it wants to manage that carefully. I think Bank of Canada, we've seen some real progress on disinflation there. It's going to be hard to get timing exactly right, but the way I look at it is they're all moving in the same direction. It's all going to be about a rate cut starting the first-rate cut will start in 2024 and we'll have a gentle easing cycle for all those. With the exception of the Bank of Japan, that major central bank that's moving in the other direction, we're getting more hawkish comments from the Bank of Japan. The data is-

Brian Levitt:

Ironic.

Kristina Hooper:

Yes, and the data is indicating that the BOJ has achieved some of its goals and I think that it's eager given the situation with the yen to start hiking, and now it looks as though it's a good possibility that we see two more rate hikes this year, which I think was unheard of a few months ago.

Brian Levitt:

What a world.

Kristina Hooper:

Yeah, for the first time in 11 years, we saw the ten-year JGB yield go above 1%. So the times they are changing.

Brian Levitt:

Yeah, we're going to start seeing dogs and cats getting along.

Kristina Hooper:

Exactly. And so all these central banks are poised to begin new regimes in some sense of the word. And Bank of Japan is just one of them. It's just moving in the other direction from the rest.

Brian Levitt:

I like how you used the word “gentle” throughout the conversation because it's like investors have a recent idea of what rate cuts look like, and that's predominantly what we saw in 2020 and '08. And so I've gotten a lot of questions, "Well, why would they cut rates? Wouldn't something disastrous have to happen?" And the answer is, "No. There's been plenty of moments." You brought up '94, '95 and even 2019, which I think a lot of people forget where the Federal Reserve will try and fine tune this or the central banks will try and fine tune it, lower rates, but you don't have to bring it to zero. Those were two very distinct environments.

Kristina Hooper:

Oh, absolutely. And I think investors also need to recognize that we are in very restrictive territory for monetary policy, so we don't need to have any kind of significant weakening of the economy for the Fed to start easing. In fact, if we were to look at the San Francisco Fed gauge of the real feel on the Fed funds rate, which factors in other monetary policy tools like quantitative tightening that has the real feel of the Fed funds rate at about 620 or so basis points. And so that tells me, "Gosh, there's an awful lot of pressure on this economy." And again, we don't need to see economic weakness for the Fed to start that gentle easing.

Brian Levitt:

Are you sure to wear flowers in your hair when you look at the San Francisco Fed data?

Kristina Hooper:

Not at all, but that's certainly a good question to ask. I think if I did wear flowers in my hair, it would be primarily daisies and sunflowers.

Jodi Phillips:

Hitting the important points. Perfect for spring and summertime. So let's talk about the growth picture for a little bit. How is that picture developing? I know we've talked before about divergence really emerging is a second half theme. What is driving that divergence and what are you expecting to see?

Kristina Hooper:

Well, it's interesting. We've seen different types of divergence. For a while now the US economy has been performing better than other major economies and we've heard terms like, "US exceptionalism" And we could point to a few key factors, the very significant policy stimulus that the US received, especially direct stimulus like PPP, but also of course all those other forms of stimulus including monetary policy support. Also, beyond that, Americans are very good at spending. And so we saw Americans spending down their savings at a higher level than other countries like Germany. The savings rate is significantly higher there. And then finally, there's one other thing that's made the US unique, and that is that grand privilege of having long-term fixed-rate mortgages. The US learned from the 2008 global financial crisis, the epicenter of which in the US was housing to Americans have learned to have long-term fixed-rate mortgages. And so if we were to look at the data today on outstanding mortgages, more than 90% of them are long-term fixed-rate, either 15, 20 or thirty-year mortgages.

So you don't have to worry about variable rates for most of American households with mortgages. And of course the average mortgage rate on those outstanding mortgages. So it's nowhere near where it is today, it's at about 3.6%. So that has created a lot of breathing room that other households in other countries haven't been able to have. They felt more of the pressure, more of the crunch from rising rates. So that's why I think the US economy has done as well as it has. But of course, if we look at the Citi Economic Surprise indices, what we now see is that the eurozone economy is doing better and we're seeing emerging markets doing better, we're seeing China doing better. And that's all because the US, I think has already done a lot of its spending. It's gone through a lot of its savings and also it's feeling more of that pressure of high rates. At some point, I think we'll see convergence, they'll all be reaccelerating if we get central bank rate cuts sooner rather than later.

Brian Levitt:

So in aggregate, it's been a pretty stable global growth environment. The US perhaps looking to slow a bit and the other countries in the world picking up, that still seems like a pretty good backdrop for growth.

Kristina Hooper:

Absolutely, yes. Certainly on a relative basis, I think that's what's happening and I think we'll see a re-acceleration probably by the end of the year. I think improvement in real wages will be a positive for US households and will or help to cause a re-acceleration as well as the start of rate cuts. So I think the global growth picture is going to be a good one for 2025. So long as, and I have to give this caveat, we get rate cuts starting soon enough because that is the big risk that those long and variable lags of monetary policy.

Brian Levitt:

If we bring that all together, Kristina, it sounds like a good backdrop for risk assets. Again, assuming that the Federal Reserve doesn't commit the proverbial policy mistake, is there anything else beyond the Fed that has you worried? Any other risks to the outlook?

Kristina Hooper:

Well, it's interesting to see the kind of performance we've gotten from risk assets despite all the storm clouds around us. So we look at the geopolitical situation and there are a number of crises around the world, the Israel-Hamas war, Russia-Ukraine, and yet markets keep chugging along, they're more reacting to the expectations around the Fed than things like this. So I don't think we're going to see any kind of significant impact from geopolitics. We certainly have a lot of question marks around elections this year, but I think unless we see some kind of an outcome where policies directly impact markets, I suspect they'll have very little effect. And of course, Brian, you've done great work on why elections in the US just don't matter for markets. And I think that's really important for investors to keep in mind.

Brian Levitt:

I've been trying to push that boulder up a hill for years, but the questions keep coming back. Even geopolitics, I always try and think of markets from the perception of what's the economy doing? What's the Fed doing? And then if there's a geopolitical conflict, does that change the answer to either of those questions? And typically the answer is no, so long as it remains contained or regional. But I think investors generally assume the answer is yes. And maybe we'll use this as an example in the future as well to remind, you and I had spoken about the MSCI Poland index, and I know Jodi's going to want a source at some point, but the MSCI Poland index is one of the world's best indices since Russia went into Ukraine. It's just these things that people think are going to happen, tend to not, they think that something disastrous is going to happen to these markets. Tends to be the opposite in a lot of instances.

Kristina Hooper:

Absolutely. And we see investors react in different ways that I think can be healthy. So for example, you see a terrible event like the Hamas terrorist attack on Israel, and the response in markets is investors don't run out of risk assets. Instead, you see a number of investors adding to alternatives like gold, as I would say, a geopolitical risk catch. So I think there are important ways investors can separate out geopolitical crises and just terrible tragedies from portfolios and long-term investment goals. And I think that's important, especially in a year when we have so many major elections occurring as well as several wars.

Jodi Phillips:

Kristina, is there anything that we didn't ask you at this point that you think is important to highlight for investors looking ahead to the second half of the year?

Kristina Hooper:

So the one thing I didn't mention when you asked about risks was financial accidents. And I think that's part and parcel of the risks of any tightening cycle and certainly the risks of maintaining rates at a high level. The most positive thing I can say, and it's a significant comfort to me, is knowing that policymakers are very, very sensitive to the potential for financial accidents happening. We saw really rapid responses and impactful responses to things like the regional banking crisis in the United States, or I should say mini crisis. Similarly, we saw a very swift reaction and response to the guilt yield crisis in the UK. So I think policymakers recognize that that accidents can happen in an aggressive tightening cycle, and they're very, very laser focused on recognizing them quickly and then of course reacting to them in an appropriate fashion. So while that remains a risk, I think it's less of a concern for investors' portfolios.

Brian Levitt:

Good growth, moderating inflation, central banks perhaps shifting.

Kristina Hooper:

Policymakers doing their jobs well. All good.

Brian Levitt:

All good. Good backdrop for risk assets.

Jodi Phillips:

So you're feeling good about the second half, Brian?

Brian Levitt:

Yeah, I've been feeling good since inflation peaked, call it June 2022. So a little bit early with regards to markets. The market bottomed in October, but that was always one of my north stars when inflation peaks and finds its way back to a more reasonable level, historically, that's tended to be a good backdrop for risk assets.

Jodi Phillips:

All right, very good. Well then let's call it here with everyone feeling good about the second half. Thank you so much, Kristina for joining us.

Brian Levitt:

Thank you, Kristina.

Jodi Phillips:

Listeners who want to hear more from Kristina can follow you on LinkedIn and on X. They can find your latest commentaries at invesco.com/kristinahooper and Brian, where can listeners follow your thoughts in the second half and beyond?

Brian Levitt:

Yeah, this is going to sound similar to what you just said, Jodi. Visit invesco.com/brianlevitt to read my latest commentaries. Please follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

We like to make it easy for everyone. All right, thank you so much.

Brian Levitt:

Thank you.

Kristina Hooper:

Thank you.

 

Important information

You've been listening to Invesco's Greater Possibilities Podcast.

The opinions expressed are those of the speakers, are based on current market conditions as of May 31, 2024, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Should this contain any forward looking statements, understand they are not guarantees of future results. They involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance is not a guarantee of future results.

In general, equity values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

All data provided by Invesco unless otherwise noted.

Historical data about past Federal Reserve rate cuts sourced from the Federal Reserve as of May 31, 2024.

Data about Japanese government bond yields sourced from Bloomberg as of May 31, 2024.

References to the “real feel” of the federal funds rate given other monetary policy tools sourced from the Federal Reserve Bank of San Francisco as of May 31, 2024.

Data on the amount ot fixed-rate mortgages in the US sourced from the Federal Reserve as of April 30, 2024.

Data about the level of mortgage rates sourced from the Federal Housing Finance Agency as of April 30, 2024.

The MSCI Poland Index (US dollars) climbed 54.15% from the day Russia invaded Ukraine (Feb. 24, 2022) through the end of May, outpacing the S&P 500 Index over that period. Source: Bloomberg L.P., as of May 31, 2024. Indexes cannot be purchased directly by investors.

The Citi Economic Surprise indexes are quantitative measures of economic news, defined as weighted historical standard deviations of data surprise.

Stagflation is an economic condition marked by a combination of slow economic growth and rising prices.

Disinflation is a slowing in the rate of inflation.

Quantitative tightening is a monetary policy used by central banks to normalize balance sheets.

Monetary policy easing refers to the lowering of interest rates and deposit ratios by central banks.

A basis point is one-hundredth of a percentage point.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.

JGB stands for Japanese Government Bonds.

PPP stands for Paycheck Protection Program, which was a loan program designed to help businesses keep their workforce employed during the COVID-19 crisis.

The eurozone (also known as the euro area) is an economic and monetary union of European Union member states that have adopted the euro as their common currency.

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