USA and Europe converge | Financial markets

The maxim that the United States (USA), as a global locomotive, is ahead of the European economic cycle, has been an economic cliché over time. Generally speaking, this is the case. However, since the end of 2023 there has been a separation in the paths of both cycles, to the point of leaving the two shores of the Atlantic in a moment of clear decoupling… until now.

Before talking about convergence, barely glimpsed, it is worth remembering where we come from. And we are not referring to a few years ago, or even a few months: just a few weeks is enough. What we were observing was a US that systematically presented data on economic activity, growth and employment that was significantly better than the European average – here Spain is an exception. They also presented higher inflation data, something natural in an openly more dynamic economy. In that context, the basic reasoning was that Europe could start lowering rates – which it has just done – while the US should wait a little longer. There we have the divergence.

Without removing a single comma from the above, in recent days we have been collecting a series of macro data that tells us that we may have started on the path towards greater synchronization. This synchrony would be given both by a moderation of the American economy and by an acceleration of the European one.

In the case of the United States, the underlying deflator data for American personal consumption – the Federal Reserve’s preferred price measure – moderated by one tenth in monthly terms, stabilizing at 2.8%. The ISM for manufacturing also falls to levels of 48.7, which suggests a clear slowdown in supply, although it is an indicator that has been marking contraction levels for several months, without a worsening of economic conditions. Americans. As far as employment is concerned, it is beginning to show signs of some tension. But, although from time to time we have data contrary to this trend – in general, data that refers especially to the services and consumption sector – and, of course, we do not foresee a collapse of the US economy, it does seem that we have evidence that North America, gently, slow down.

In the case of Europe, we have just the opposite: inflation is more contained, but the latest published data suggest some rise in CPIs, due to the increase in electricity and fuel prices. Additionally, growth is much more lax than in the US – Spain, again, as an exception – although we observe a recovery in almost all of Europe, still lukewarm in Germany, but in the right direction.

If we compare the two previous paragraphs, we clearly sense the convergence we refer to in the title of this article. This convergence should benefit from the fact that Europe has lowered rates before North America, which should somewhat favor the growth of the Old Continent, while giving more room to the United States to continue reining in its inflation. The idea is that, once the positions of the two sides of the Atlantic come closer, the movements will run more in parallel. A bit like two floating objects, separated, but moving in time with the same waves.

Naturally, the markets are very attentive to all this. At first, the normalization of European debt should precede that of North America, which makes our bonds more attractive to investors than American bonds, in the short term. Additionally, the greater European growth – not in magnitude, but in direction and direction – and the better exit valuations, also make the European stock markets an asset with more mileage than the American ones, a priori.

In any case, we must not lose sight of two very important points. Firstly, the obvious fact that the central scenario discussed may not come true. In other words, we don’t see convergence. If so, probably the weakest link in the chain would be that the US economy accelerates above forecasts, something that, although positive in many factors, could lead to higher inflation and, with it, a change in bias with respect to to possible rate cuts…even new increases, although this is unlikely. This could be positive for equities, within an order, to the extent that it infers upward corporate profits. For fixed income it would be very negative, in the first instance.

The second aspect to take into account is the November election in the United States. The change of tenant in the White House could entail very substantial changes that would have an effect on the markets. Specifically, candidate Trump’s program infers greater deficits, not so much through spending as through tax cuts. Very important point for American debt. In the geopolitical sphere, a more lukewarm attitude towards Russia would be expected – probably good news in the short term for the stock markets, another thing is the long-term strategic impact of assuming something resembling a Russian victory – and a tougher attitude towards Russia. to China, in the commercial field. That is, more inflationary, due to higher costs in supply chains.

In summary, the usual uncertainty is qualified by the fact that we are beginning a new cycle (lower rates) within a new era (less liquid, more inflationary international markets, geopolitical blocs, etc.) that returns prominence to fixed income compared to other investment alternatives, which constitutes a radical change compared to what was seen during most of the past decade. From there, convergence, the subject of this article, is not only possible, but openly desirable.

Pedro del Pozo is director of financial investments at the Mutual Society

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