The second half of 2024 began on July 1, and while “New Half-Year’s Day” is not an official holiday, it marks the start of a new phase. The first six months of the year were strong for most risk assets, with global equities, US equities, and emerging market bonds experiencing gains. Commodity prices, particularly energy and precious metals, also rose significantly.
Investors are hoping for a continuation of this market environment, especially with the expectation of Federal Reserve (Fed) easing remaining in place. Two important data points last week increased the confidence in the Fed and brought us closer to the start of Fed rate cuts: June core Personal Consumption Expenditures (PCE) and the final reading of the University of Michigan consumer inflation expectations for June.
Core PCE, the Fed’s preferred measure of inflation, has fallen to 2.6% year-over-year, moving closer to the Fed’s 2% target. The Fed also pays close attention to consumer inflation expectations, and after briefly rising, one-year ahead University of Michigan consumer inflation expectations dropped back to 3% from 3.3%.
In France, the first round of legislative elections took place on June 30, with Marine Le Pen’s far-right National Rally (RN) party and allies gaining the most votes. It is not clear that any party will gain a parliamentary majority, and the outcome of the second round on July 7 is far from clear.
The investment implications of the French election depend on the outcome. A temporary administrative solution would be the most positively received by markets, while a far-right or far-left majority would not be well received. However, the thesis for owning European equities remains, as their valuations are low and they have greater cyclical exposure.
In the UK, British voters are expected to usher in a Labour government after 14 years under Tory rule on July 4. This regime change should bring stability and certainty, allowing investors to refocus on fundamentals.
Looking ahead, important data will be released this week, including Purchasing Managers’ Indexes for various economies and US jobs data, which may give the Fed further reasons to begin cutting before the end of the third quarter. Despite investor fears, the environment is expected to remain supportive of risk assets globally, with a potential broadening to smaller-cap stocks and those stock markets that did not perform as well in the first half of the year.
