Weekly Winzer: Autumn fog

With autumn comes more frequent fog across the country. Appropriately, the economic outlook is also becoming increasingly cloudy. The government shutdown in the US, which has been ongoing since 1 October, is preventing the publication of important economic reports.

After all, there are reports from private organisations and the Federal Reserve, which has its own budget. In addition, companies’ quarterly reports are currently providing valuable information. But with each passing week, it is becoming more difficult to assess the economic environment. We are not flying blind, but the fog is getting thicker.

Many scenarios possible

Many scenarios are possible – currently, several plausible narratives are competing for interpretative authority. On offer are:

• Weakness in the labour market and Fed interest rate cuts: Employment growth has slowed in developed economies, particularly in the US. This poses significant downside risks to the economy. Because the Fed believes that inflation risks have decreased at the same time, it cut its key interest rate (preventively) in September and signalled further rate cuts. Without productivity growth, lower employment growth inevitably leads to weaker economic growth.
• Resilience: Economic growth has been better than expected since the beginning of the year, as the immediate negative impact of US tariff policy has been less than anticipated. Growth is on trend both globally and in developed economies.
• AI-induced boom (productivity, investment, profits): The boom in artificial intelligence is increasing corporate investment, profits and productivity, but not employment.
• The bubble bursts: The new AI technology catches on, but as has often been the case in the past, there is exaggeration on the stock market.
• Persistent inflation: In the US, inflation is more likely to remain at 3%+ than at 2%+. This is because tariff increases are pushing up price levels. This argues against significant Fed interest rate cuts. If economic growth continues to trend upwards and inflation remains above 3% for longer than expected, the possibility of interest rate hikes could even be considered.
• Fiscal dominance and currency devaluation vs. gold: Central banks implicitly accept inflation rates of over 2%. Budget deficits and government debt are high, but the (geo)political and economic environment prevents measures to consolidate public finances. This puts pressure on the independence of central banks. Monetary policy remains too loose.
• Momentum: Market liquidity is high. Prices are rising because they have risen, the narrative seems coherent (AI, debasement, dollar weakening) and central banks are not being restrictive.
• Market prices are pricing in a Goldilocks scenario: this is just another way of saying ‘valuations are high’. The expectation is therefore for high earnings growth, steady economic growth, falling inflation, positive momentum and Fed interest rate cuts.

Resilience test

Our base scenario is resilience. For this to hold, either employment growth, productivity or investment activity must increase. This scenario generally describes a favourable environment for the financial markets. However, there is also some potential for disappointment on several levels. This is because a number of potentially negative events must not occur: in the US, the rise in inflation caused by tariff increases is likely to be only slight and temporary. A tariff war between the US and China is unlikely to take place.

The next resilience tests for the US economy are already waiting in the wings. On Friday, the US Consumer Price Index for September will be published by the Bureau of Labour Statistics, albeit with some delay. Although doubts about the quality of the data may arise, a sharp rise in inflation would put pressure on expectations for Fed interest rate cuts. Also on Friday, S&P Global’s preliminary purchasing managers’ indices (PMIs) for October will be published. These data will allow economic growth in developed economies to be reassessed. The focus is naturally on the US, where important economic indicators from government agencies are still pending. A decline in US PMIs would heighten economic fears. An escalation in the US-China trade conflict would likely weigh on sentiment. If the government shutdown continues, it would be impossible to answer the question of what this means for gross domestic product satisfactorily. There would be a lack of reliable data (GDP, labour market).

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.