By Harry Robertson
LONDON (Reuters) – Investors have gone from bracing for a U.S. recession to believing the world's largest economy will continue to thrive.
European growth is also better than expected a few months ago, a challenge for traders trying to predict how much central bankers will cut interest rates.
This is what the markets tell us about the global economy:
1/ WE ALREADY WANT
Many analysts said this would be the year US growth would collapse after the same predictions proved completely wrong in 2023.
But the US economy remains buoyant and pressure on prices remains. The Federal Reserve's preferred inflation gauge rose to 2.7% in March from 2.5% in February.
There are some signs of cracks: first-quarter growth fell well short of expectations, as did employment numbers in April.
As traders brace for longer-term higher interest rates, bond yields have risen and prices have fallen, erasing all of last year's gains. The S&P 500 stock index fell about 4% in April before recovering in recent days.
Traders expected six or seven Fed rate cuts at the start of the year, but currently there are two.
“We have gone from extreme optimism (on interest rates) to extreme pessimism,” said Aneeka Gupta, director of macroeconomic research at investment firm WisdomTree.
“We're definitely seeing mixed signals… As far as the Fed is concerned, they're probably still going to remain extremely cautious.”
2) LOW EUROPE
Britain and the euro zone were less impressive but are starting to recover, reinforcing the feeling that any rate cuts will be limited.
The economy in the euro area returned to growth in the first quarter after a slight recession. British production grew in January and February.
While the European Central Bank is expected to cut interest rates in June as inflation in the bloc stood at 2.4% in April, rate cut bets have also been scaled back.
Still, a relatively stronger U.S. economy has led investors to flock to the dollar, pushing the euro down more than 2% this year.
The story goes on
“In the U.S. growth is above average, and in Europe growth has been around zero,” said Seamus Mac Gorain, head of global rates at JPMorgan Asset Management.
“Growth is picking up a bit… that's partly because real incomes have recovered.”
3) Raw materials fluctuate
Oil prices rose sharply in March and April as fears grew about a wider Middle East conflict between Israel and Iran. Supply disruptions and a pick-up in global demand also played a role in the commodity rally, particularly copper.
Still, prices have cooled again: The S&P Goldman Sachs commodities index has fallen 4% since hitting a six-month high last month, a positive sign for central bankers trying to curb inflation.
Oil prices have risen and fallen with news of ceasefire negotiations in the Gaza Strip. Investors will also be keeping an eye on China's economy, which grew a faster-than-expected 5.3% year-on-year in the first quarter.
4) Stocks fluctuate
Developed market stocks fell about 4% in April after hitting record highs in March, before rebounding in May to be about 1% below their peak.
Stocks and the economy have a volatile relationship: sometimes good US data has boosted share prices, sometimes they have put a damper on them. Some strategists believe the rise in U.S. borrowing costs is not yet fully felt.
Nevertheless, indices worldwide remain close to records. A Bank of America survey in April showed that fund managers are the most optimistic they have been in more than two years and believe central banks should still be able to reduce inflation without causing a damaging slump.
5) DOLLAR PAIN
The dollar is up nearly 4% so far in 2024, with bets on longer-term higher interest rates sucking money back into the United States.
Almost all other currencies have suffered. The Indian rupee hit a record low in April, while the Argentine peso, Brazilian real and others fell sharply.
A strong dollar makes it more difficult to service debt denominated in the U.S. currency and increases pressure on emerging market economies. It may also make imports more expensive, risking a return of inflation. Currency concerns could make interest rate cuts in emerging markets less likely.
However, the countries are fighting back. Japanese authorities appear to have intervened to lift the yen from its lowest level in 34 years and keep currency traders vigilant.
(Reporting by Harry Robertson; Editing by Jamie Freed)
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