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Asset Allocation Observatory: Latest inflation data & Trump’s NATO remarks

By Giorgio Broggi, Quantitative Analyst, Moneyfarm

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Goldilocks? Yes, still

This week, markets were fully focused on macro data. First, US inflation came in slightly higher than expected (YoY headline at 3.1% vs 2.9% and core at 3.9% vs 3.7%), with many subcomponents showing high stickiness and triggering a mini sell-off. The S&P has partially recovered from there, but markets seem more cautious about the number of cuts expected for 2024, with the implied number now at 3-4 cuts vs 6-7 at the beginning of the year. We think that US inflation will continue to renormalise, but the path to the 2% target will be a little more bumpy than what we think markets expect. On the other hand, more positive signals are coming from overseas, with UK inflation lower than consensus (YoY headline at 4% vs 4.2% and core at 5.1% vs 5.2%), potentially anticipating a stronger-than-expected slowdown in the Eurozone as a whole. Next Friday’s Eurozone Flash Inflation data will give more answers. Finally, on the growth side, markets seem to have struggled a bit on Thursday on the back of weak economic data from the US, with lower-than-expected MoM Retail Sales growth (-0.8% vs -0.1%). 

Overall, we believe we still remain in a good growth/inflation environment (mostly thanks to the US), and there isn’t enough data pointing to a recession, even if we continue to expect a slowdown in the economy and a relatively tough battle to the 2% inflation target.

Trump stokes political tensions… again

After a 2023 full of tensions, geopolitical risk hasn’t certainly decreased in 2024. The continuation of the war in Ukraine and Israel and the wider tensions in the Middle-East and in the Red Sea have now been joined by the US election saga. Trump has started coming out with some new strong declarations, making investors wonder about what the future world could look like if he won. In particular, the ex-US President has stated that he would be happy with Putin invading the NATO countries that are not meeting the organisation’s spending targets. Despite the strong reaction from the NATO Chief and Biden, highlighting the importance of fact organisation, and despite the institution spending more than ever this year, the comment is still quite scary. How worried should investors be? According to the Blackrock Geopolitical Risk Index, the global level of risk remains for now lower than during Covid and the Ukraine invasion, during which, by the way, markets rallied. 

The last months and years have taught us that geopolitics is very difficult to trade, and that very little can change the inevitable path of human progress. Even if Trump won, we don’t think he’ll be able to do that either. Tactically, if the likelihood of a Biden’s defeat increases, we’ll consider specific bets to protect portfolios against heightened geopolitical risk and increased economic isolationism, but the core of the investments will remain the evergreen, well-diversified exposure to the global markets as a whole.

Giorgio Broggi: Giorgio joined Moneyfarm as a Quantitative Analyst in December 2021 and he is a member of the Investment Committee. Prior to joining the company, he worked at Barclays Wealth Management and S&P Market Intelligence, gaining expertise in Funds Research and ESG Investing. Before starting his professional life, he successfully completed a double-degree at Eada and EDHEC Business School, obtaining two Masters in Finance and specialising in factor investing and portfolio construction. He is a CFA charterholder.

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