1) US election remains too close to call

VP Kamala Harris and former president Donald Trump will go head-to-head in November’s presidential election. The polls and prediction models suggest that the race to the White House remains close, although Trump now appears to hold a slight advantage in both the surveys and betting markets. While a Harris victory would largely ensure a continuation of the status quo, and a lower volatility environment in markets, we think that a Trump election victory could trigger a sharp rally in the US dollar and sell-off in risk assets, particularly should the Republicans win a clean sweep in Congress.

A second stint at the White House for Donald Trump would herald a return to many of the policies that he pursued following his election victory in 2016. Most notably, we would see Trump seek an extension of the 2017 Tax Cuts and Jobs Act beyond the 2025 end date, and the slapping of a minimum 10% tariff on imports from most countries (this would be much higher for China). In our view, Trump’s emphasis on a lower tax economy could lead to higher US inflation and Federal Reserve rates, while greater protectionism and higher geopolitical risk could trigger fresh safe-haven flows into the greenback.

2) Federal Reserve to deliver gradual rate cuts

Federal Reserve officials have made it clear that September’s 50 basis point rate cut is likely to be a one off. The US labour market appears to be in a much stronger position than initially feared, as the latest payrolls report not only showed much higher job creation in September, but there were also rather sizable upward revisions to the July and August data. US inflation is on the way downwards, and is now not far from the FOMC’s target. We have, however, seen signs of a re-acceleration in consumer price pressures, particularly in the three-month annualised core rate, which is now printing closer to 4% than 3%.

We think that the above warrants a relatively cautious approach to lower rates from the Federal Reserve. Another 50 basis point cut at the November FOMC meeting appears off the table, with a 25bp move far more likely. Indeed, we suspect that chair Powell will strike a relatively hawkish note at the next meeting, warning over risks to inflation and again talking up the resilience of the jobs market. This, we believe, would position the Fed to cut rates on roughly a quarterly basis in 2025, in line with the latest ‘dot plot’ of rate projections.

3) Euro Area economy stagnating, but reasons for optimism?

Recent economic news out of the Euro Area economy has taken a clear turn for the worse, and a period of stagnation appears likely once the Q3 GDP figures are released at the end of October. Arguably the best metric of expansion in the bloc, the business activity PMIs, have deteriorated in recent months. The composite PMI, a weighted average of activity in the services and manufacturing sectors, has slumped to just below the key level of 50 (49.7 in October), with the data consistent with no more than only very modest expansion in Q3.

That said, we think there are reasons for mild optimism, and we remain of the opinion that we’ll see a convergence in economic performance across the Atlantic in the coming months. Consumer demand should be buoyed, we think, by the continued easing in inflationary pressures, lower European Central Bank rates and fresh stimulus measures in China.

4) Bank of England to turn dovish?

Recent communications from BoE governor Bailey have been somewhat more dovish than markets had become accustomed to. Speaking in early-October, Bailey stated that the MPC could be a bit more aggressive on lowering rates should inflation continue to come down. Indeed, we think that the September UK inflation report has all but guaranteed another 25 basis point rate cut in November, which is now almost fully priced in by markets.

The risk of a dovish shift in the bank’s rhetoric has also risen, after UK inflation fell to just 1.7% last month, its lowest level in three-and-a-half years. Economic activity data, namely the business activity PMIs, have also softened, and H2 2024 growth looks set to slow relative to the first half of the year.

5) China economy struggling, but stimulus delivered

China’s economy continues to underwhelm, with the latest activity data suggesting that the government may struggle to achieve the 5% growth target for 2024. Help is on its way after authorities unveiled a number of measures to support the real estate sector and equity markets. The devil will be in the details, however, and markets will be paying close attention to news on the fiscal front in the coming weeks to decide whether or not these stimulus measures will be enough to allay the slowdown. We will be paying particular attention to any signs of an improvement in consumer confidence and domestic demand, which will likely be key to the rebound.