June 2024


Macro outlook 2024 and beyond

Our Markets and Financing Research Retreat offers a wide range of academic expertise and timely market insights.

2024 is a crucial year for multiple reasons. Almost half of the world’s population (3.3 billion) are voting to elect their governments, over 50 countries and 43 percent of the world’s gross domestic product are part of this exercise, and the outcomes of these elections could resonate across the globe – and markets are no exception.

The global economy is also at a pivotal point, with interest rates and inflation dominating financial discussions. Last year saw interest rate hikes, and despite recent rate stabilization, the market anticipates future cuts. At our Markets and Financing Research Retreat in Boston, Lee Ferridge, head of Multi-Asset Strategy in the Americas, suggested this expectation might be overly optimistic. With persistent inflation, labor market tightness and structural economic issues, the path forward is foggy.

Lower rate consensus

While inflation is on a downward trend, with the core Consumer Price Index (CPI) and core Personal Consumption Expenditures (PCE) showing slight declines, inflation pressures remain, said Ferridge. Economic indicators such as the Institute for Supply Management® Manufacturing Index and job openings are declining, feeding the dovish sentiment. Additionally, rising delinquencies and falling consumer confidence further reinforce this outlook.

“The economy is slowing. We can look at delinquencies, we can look at consumer confidence. All these things are pointing to a slowdown and leading to this consensus that the next move is a rate cut,” noted Ferridge.

According to him, however, media narratives too heavily favor the possibility of rate cuts over hikes, contributing to the market's persistent belief in an easing cycle.

The hike in the tail

The US growth outlook has evolved positively, which could shift the expected rate path. Persistent inflation and structural issues in the labor and housing markets suggest the potential for surprise rate hikes. A significant labor shortage, driven by an aging population and relatively low immigration (compared with elsewhere), has resulted in positive real earnings, fueling consumer spending, and adding to inflationary pressures. Limited housing inventory and high shelter costs are significant contributors to inflation. Homeowners' reluctance to sell due to high mortgage rates exacerbates the situation.

Policies and demographic challenges

Ferridge stressed that policy extends beyond interest rates, encompassing the balance sheet and the fiscal deficit. “While rates are above neutral at the short end, considering the current fiscal policy and the size of the balance sheet, it is difficult to argue the overall policy, including the long end, is restrictive,” he said. Touching upon demographic challenges, Ferridge opined issues such as an aging population are leading to higher wages and persistent services inflation across developed economies. However, the US shows stronger economic growth compared to its peers exacerbating the labor shortage.

What does it mean for markets?

Despite uncertainties, real money investors remain positive and equity weightings are at their highest in 16 years. This trend indicates a constructive, though not exuberant, market outlook. The US dollar appears strong, driven by holdings that significantly influence market dynamics. Holdings are elevated, but rate divergence is changing the hedging strategies for equities and other assets to the benefit of the dollar.

While the market anticipates rate cuts, persistent inflationary pressures and structural issues in the labor and housing markets suggest that future rate hikes remain a possibility. According to Ferridge, investors, policymakers and businesses must navigate this uncertain landscape with a nuanced understanding of the underlying factors. By staying informed and adaptable, stakeholders can better manage risks and seize opportunities in a volatile economic environment. As the economy continues to evolve, these insights will be invaluable for making strategic decisions and achieving sustainable growth.

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