As he looks to 2024, US Economist Tom Simons believes that the extremely resilient post-COVID expansion is unlikely to continue for much longer. While the US consumer has defied nearly all expectations to this point, their sustained spending has largely been driven by under saving and consumers’ confidence in their ability to remain employed, leading them to spend a large portion of income. Although the business sector is currently confident enough in the consumer to avoid significant layoffs, Tom expects this confidence could begin to wobble as we enter 2024. While Tom expects some components of inflation will remain firm due to a lack of labor and a continually shrinking prime age workforce, he believes the overall reading should approach the Fed’s 2% target in 2H24. This, combined with increases in unemployment, should enable the Fed to make significant cuts to the Fed funds rate, which he sees bottoming at 3.0-3.25% in September. As a result of these cuts, Tom anticipates that the 1H24 growth slowdown will be short-lived, aided by both lower rates and a US consumer that is well-positioned for the long-term.
Chief Market Strategist David Zervos says the most recent FOMC meeting, and resulting Fed commentary, suggests that the risk of overtightening is in balance with the risk of being too accommodative. This was underlined by the additional 50bp drop in the updated Fed funds rate forecast for YE24, despite just a 20bp trim to the core PCE projection, which brought it down to 2.4%. David says this change implies that the Fed’s focus on inflation-fighting credibility no longer needs to take precedence over employment goals going forward. As a result of their policy-making successes, he expects the Fed to make a set of modest “Victory Cuts” beginning next year.
Global Head of Equity Strategy Christopher Wood says the key explanation for the resilience of the American economy in 2023 remains the extraordinary base effect from the historic expansion in M2 supply in 2020. That’s why the recent contraction in US M2, which was the third largest in 103 years, is notable. The markets remain fixated on the Fed’s recent pivot, which Christopher views as bearish for the US dollar and therefore positive for emerging market equities. From a US and developed stock market standpoint, it should also be more bullish for cyclical equities relative to growth equities. However, he continues to believe that US Treasuries are in a structural bear market, especially with both political parties in the US unlikely to embrace meaningful fiscal discipline.
