Franklin Templeton Fixed Income Macro Views: Stuck in a moment

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Executive Summary

Growth risks rising, but inflation is still top of mind: The US labor market is beginning to show some cracks, but layoffs remain low. Savings and credit continue to drive consumer spending, while real incomes have begun to stag­nate. Meanwhile, consumer prices in certain sectors continue to play catch-up to the sharp increase in market rates and/or input prices over the last few years. We expect just one interest-rate cut in December, unless disinflation resumes.

Continued optimism in the eurozone: Growth surprised to the upside in Q1 (real GDP), ending the stagnation that lasted for the previous five quarters. The growth rebound was driven by foreign demand, investments and private consumption. Employment expanded in line with real GDP, and the unemploy­ment rate stayed at historical lows. Both headline and core inflation rose. The ECB cut its policy rate in June, as widely anticipated.

Markets underpricing BoJ rate hikes? We see at least two more rate hikes by the BoJ in the remainder of 2024, taking the upper bound of the target range to 0.50%, whereas markets are only factoring one to 0.35%. We believe the BoJ cannot overlook yen weakness for very long as it will risk falling behind the curve again. Imported inflation is already rising and inflationary expectations are being tethered higher.

Download the full PDF to learn more about the topics covered in this publication:

• US economic review: The waiting game continues
• Euro area economic outlook: Getting there, but slowly

• Japan economic outlook: Bank of Japan (BoJ) in a dilemma