Global Economic Trends and Interest Rates
The Federal Reserve has decided to keep its target interest rate unchanged, as expected. This decision comes after the central bank revised down its expectations for economic growth and marked higher its outlook for inflation. The Fed is maintaining its call for 50 basis points in rate cuts for 2025, with a reduced median projection for next year. This move widens the departure from what the markets have priced in, with benchmark Fed Funds futures pricing in 43 basis points in cuts this year and 58 basis points in 2026.
A Divergence Between the Fed and Markets
The markets are firmly on the dovish side of the central bank, with priced-in inflation expectations tracked by "breakeven rates" falling in recent weeks. This divergence between the Fed and the markets may lead to changes in interest rates and economic growth. The Fed’s decision to resist rate cut pressure has put the focus back on global growth trends.
The Bank of England’s Monetary Policy Announcement
The Bank of England is expected to deliver a monetary policy announcement, with a pause expected after a rate cut last month. Markets expect the nine-member Monetary Policy Committee (MPC) to vote 7-2 in favor of a hold. Despite this, the markets think the bias at the BOE will remain dovish, with benchmark SONIA interest rate futures pricing in 44 basis points in further cuts this year.
UK Consumer Price Index Data
UK consumer price index (CPI) data showed that inflation has slowed to 3.4% year-on-year, as expected. This marks a modest downtick from the 15-month high recorded in April. The core rate excluding volatile food and energy prices came down a bit more than analysts predicted to 3.5%, marking a three-month low.
Global Recession Worries
Global recession worries may resurface if US PMI data disappoints. The US economic data flow has increasingly disappointed relative to baseline forecasts over the past four weeks. The closely watched gross domestic product (GDP) "nowcast" from the Atlanta Fed paints a similar picture: its running estimate of growth in the second quarter has moderated since mid-May. If this trend continues, worries about global recession may return.
S&P Global PMIs
S&P Global will release the first look at June’s purchasing managers index (PMI) data, providing a timely update on global economic growth trends. Baseline forecasts point to a familiar picture, with ongoing standstill expected in Japan, the UK, and the Eurozone, and a resilient services sector powering expansion in the US.
Conclusion
In conclusion, the Federal Reserve’s decision to resist rate cut pressure has put the focus back on global growth trends. The Bank of England’s monetary policy announcement and S&P Global PMIs will provide further insight into the state of the global economy. As the markets continue to price in rate cuts, the divergence between the Fed and the markets may lead to changes in interest rates and economic growth. Global recession worries may resurface if US PMI data disappoints, making it essential to stay informed about the latest economic trends and developments.
