Dear Investors,
2024 Market Expectations – (Another year of strong returns?) Edward Jones
2024 economic views
US economic growth to soften in the first half of 2024, falling below trend but potentially staying positive, and likely reaccelerating later in the year.
As consumption slows, manufacturing and housing could start rebounding, providing a buffer.
A slowdown in demand, a better-balanced labor market, and higher productivity should help inflation return to target sooner and support the start of a loosening in Fed policy.
Six rate cuts in 2024
The drop in yields and rally in stocks the last two months of the year have eased financial conditions, raising the chances of the economy achieving a soft landing.
But markets have now gone a step further, pricing in six rate cuts in 2024, which is more than twice as much as Fed officials are projecting.
There is some scope for the Fed to cut more than three times, but the push and pull between aggressive market expectations and Fed messaging could trigger volatility early in the year.
Nonetheless, the Fed pivot to a more neutral stance is market positive.
2024 inflation updates (market expectations)
The disinflation trend will continue as wage growth softens and used car prices, along with housing inflation, cool further.
Housing represents about a third of the CPI weighting, the most of any other consumer good or service, and remains by far the biggest contributor to inflation.
Without it, core CPI has already reached the Fed’s 2%. It might be later in the year, but housing inflation should start moderating at an accelerating pace, as suggested by the more timely data for new leases and home prices.
Dollar to find its way lower again – (10 Dollar Updates) RBC
Usd elevated for longer
The US dollar has remained elevated for longer than expected.
Elements that were supportive of the greenback are starting to fade, however, and there are signs that fiscal concerns and a slowing economy have started to weigh on the currency, which sits more than 20% above fair value.
As this process unfolds, RBC forecasts that the dollar will weaken against major currencies such as the euro and Japanese yen.
They are relatively more cautious on emerging-market currencies in the short term, though they are likely as a group to benefit over the longer term from a persistent decline in the U.S. dollar.
Us dollar rallied in the fall of 2023
The US dollar rallied 7% between July and October, recording its high for 2023 in early October and reinvigorating the debate about whether the greenback could continue to strengthen.
Even before the rally, the dollar was extremely overvalued.
Purchasing-power-parity (PPP) models Currency markets Dollar to find its way lower again Daniel Mitchell indicate that the currency is 21% rich on a trade-weighted basis and the overvaluation persists relative to most currencies.
US dollar prospects vs economy slowdown (market expectations)
For investors to truly embrace the US dollar sell-off, however, they will need to see greater economic momentum in the rest of the world rather than simply a less severe slowdown.
While it’s true that a weaker US economy will dampen prospects for the dollar, the direction and magnitude of changes in the greenback are driven to a greater extent by economic conditions outside of the US.
The dollar tends to weaken more when the global economy accelerates because economic optimism draws capital away from the US.