By Harry Robertson
LONDON (Reuters) – Investors were no longer bracing for a recession in the United States but are now positioning themselves to keep the world’s largest economy moving forward.
European growth is also better than expected a few months ago, a challenge for traders trying to guess how much central bankers will cut interest rates.
Here’s what the markets tell us about the global economy:
1/ WE ALREADY WANT
Many analysts have said this will be the year U.S. growth collapses, after the same predictions turned out to be woefully wrong in 2023.
But the American economy remains dynamic, maintaining pressure on prices. The Federal Reserve’s preferred inflation gauge rose to 2.7% in March from 2.5% in February.
Some signs of cracks are appearing: first quarter growth was much lower than expected, as were April’s employment figures.
As traders brace for higher and longer 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 rebounding in recent days.
Traders now expected six or seven rate cuts from the Fed at the start of the year, compared to two currently.
“We have gone from extreme optimism (on rates) to extreme pessimism,” said Aneeka Gupta, director of macroeconomic research at investment firm WisdomTree.
“We’re certainly seeing mixed signals… As far as the Fed is concerned, they’re likely to remain extremely cautious.”
2) WARM EUROPE
Britain and the Eurozone have been less impressive but are starting to recover, reinforcing the feeling that any rate cuts will be limited.
The euro zone economy returned to growth in the first quarter after a slight recession. British production increased in January and February.
With the European Central Bank expected to announce a rate cut in June, with inflation in the bloc at 2.4% in April, bets on a rate cut have also been reduced.
Still, a relatively stronger U.S. economy has pushed investors toward the dollar, sending the euro down more than 2% this year.
“In the United States, growth is above average, and in Europe it is almost zero,” said Seamus Mac Gorain, head of global rates at JPMorgan Asset Management.
“Growth is picking up a bit…partly because real incomes have recovered.”
3) PRODUCT VALORIZATION
Oil prices rose sharply in March and April due to fears of a broader conflict in the Middle East between Israel and Iran. Supply disruptions and recovery in global demand have also played a role in the recovery of raw materials, particularly copper.
Yet prices have cooled again, with the S&P Goldman Sachs commodities index down 4% since hitting a six-month high last month, a positive sign for central bankers trying to to control inflation.
Oil rose and fell on news of ceasefire negotiations in Gaza. Investors will also keep an eye on China’s economy, which grew faster than expected at 5.3% year-on-year in the first quarter.
4) Stocks wobble
Stocks in developed economies fell around 4% in April after hitting record highs in March, before rebounding again in May to around 1%…
