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In the United States, the deterioration of the purchasing managers’ indices has extended to services activities, while services activities remain astonishingly robust in Europe. This is the view of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

Manufacturing sector weakness continues to weigh on global economic growth. In the United States, the deterioration of the purchasing managers’ indices has extended to services activities, “although the indicators are still above the critical 50-point threshold separating expansion from contraction, both for industry and services”, explains Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “For the second quarter, most analysts are expecting US GDP growth of 2% maximum, which would represent a marked economic slowdown, although the threat of recession remains contained.”

Services activities remain astonishingly robust in Europe

In Europe, services activities remain astonishingly robust despite the persistent weakness of the industrial sector, thereby staving off a deterioration in the job market for the time being. In China, growth seems to be stabilising, with the less dynamic industrial activity being offset by the continuing vigour of retail sales. In Japan, the economy’s heavy dependence on exports limits the potential for growth. “Unless the trade tensions between the United States and China ease significantly, the manufacturing sector will find it difficult to recover.”

Federal Reserve: cut in the federal funds rate seems highly likely

As expected, the US Federal Reserve’s monetary policy committee, the FOMC, left its key interest rate unchanged in June, keeping the upper limit of the federal funds rate at 2.5%. Nevertheless, during the press conference, Fed Chair Jerome Powell eschewed the word ‘patience’ with regard to the next interest rate adjustment, emphasising greater economic uncertainty due to trade tensions and the global economic slowdown. “In light of these words, a cut in the federal funds rate at the FOMC’s next meeting at the end of July seems highly likely”, says the Luxembourgish economist. At the ECB's annual forum, its President Mario Draghi suggested further expansion of monetary policy due to a more sombre economic outlook and the declining trend of inflation. “Another interest rate cut and renewal of the quantitative easing programme before the end of Mario Draghi’s term at the helm of the ECB at the end of October cannot now be ruled out.”

S&P 500 has recorded its best first half since 1997

After the correction in May, equity markets resumed their bullish trend in June. The likelihood of monetary easing on both sides of the Atlantic provided a considerable boost to equity prices. The main indices all went up. The flagship US index, the S&P 500, reached a new all-time high during the month, and ended the first half of the year 17.4% higher, recording its best first-half since 1997.

Guy Wagner, Managing Director

An economics graduate from the Université Libre de Bruxelles, Guy joined Banque de Luxembourg in 1986 where he was head of the Financial Analysis and Asset Management departments. He was appointed Managing Director of BLI – Banque de Luxembourg Investments in 2005.

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