Dear Investors,
Here you can find other Macro articles:
- How to view the US Inflation regime in 2024 (Macro Update)
- Clear Market Expectations trends in 2024 (Macro Update)
- How to approach the Financial Markets in 2024 (US presidential election year)
What’s real in store for 2024? – (Macro Update) Oliver’s Insights
4 Big worries for 2024
Inflation is still too high in most major countries – so central banks could still have another hawkish turn if it proves sticky above targets.
The risk of recession is high reflecting the lagged impact of rate hikes.
It’s hard to see the biggest rate hiking cycle since the 1980s not having a major impact & the risks are already evident in tighter US lending standards, falling lending in Europe and stalling consumer spending in Australia.
Geopolitical risk is high and Risk around the Chinese economy and property sector remain high.
3 Macro reasons for optimism
Inflation has eased sharply to around 3% in major industrial countries and around 5% in Australia and is likely to continue to fall as.
Central banks in the US, Canada and Europe likely start cutting rates in March or the June quarter.
Recession is a high risk and markets are no longer priced for it unlike at the start of 2023 and if it does occur it should be mild.
Implications for macro investors
Global shares are expected to return a far more constrained 7%.
The first half could be rough as growth weakens and possibly goes negative and valuations are less attractive than a year ago.
Shares should ultimately benefit from rate cuts and lower bond yields and the anticipation of stronger growth later in the year and in 2025.
Bonds are likely to provide returns around running yield or a bit more, as inflation slows and central banks cut rates.
The main things to keep an eye on in 2024 are sticky inflation, central banks & the risk of recession.
More news for the bond market – (Impressive Macro Insights) Raymond James
Macro soft landing in 2024
The probability of a recession has eased considerably as economic growth remains more resilient than expected.
Consensus now expects a soft, non-recessionary landing in 2024, economist still has the ‘mildest ever’ recession penciled in this year.
The expectation is that borrowing costs will growth, rising credit card debt and a weaker job market to dampen, but not derail consumer spending.
This should drive the economy’s growth rate from a 2.3% pace in 2023 to a below-trend rate of 1.0% in 2024.
It should also drive inflation lower, building a case for less restrictive Fed policy in the coming months.
A continuation of this favorable macro backdrop of moderating growth (slowing, but still at a level to avoid a deep recession) and cooling inflation should provide support for the bond market and lead to lower yields in the months ahead.
Fed balance sheet prospects
Treasury issuance is likely to remain elevated for the foreseeable future, however Fed officials (i.e., Logan, Waller) have started discussing when it may be appropriate to slow down the pace of the Fed’s balance sheet runoff.
Since quantitative tightening began in June 2022, the Fed’s balance sheet has declined from $9T to $7.7T.
Although no official announcements have been made and the timing remains uncertain, the signaling from officials suggests that a tapering of the Fed’s balance sheet is on the horizon.
Treasury as a boost
If the Treasury’s QRA (Quarterly Refunding Announcement) continues to lean toward more short-term issuance, then an earlier than expected taper could be in the cards.
This would be welcome news for the bond market
Why? Because it would reduce the amount the Treasury Department needs to borrow from other investors.
With the Fed currently reducing its Treasury holdings by $60B/month ($720B/year), any reduction in the Fed’s QT program should alleviate upward pressure on bond yields from increased Treasury supply.
This, plus the prospect of Fed rate cuts, should give Treasurys a boost