Macro View
It’s clear from the news flow that macro fundamentals have taken a backseat to all of the election and now transition coverage. However, we still feel that “macro still matters” and that the economy remains very bifurcated and sensitive to financial conditions. The US has become in many ways a two-trick pony, highly dependent on government spending and rising risk markets driving wealth effect spending. The upcoming months will set the record straight if the election uncertainty was the only thing holding back consumers and corporates or is there more of a structural slowdown at play.
Fed View
Unless the upcoming jobs report sees back months revised higher and the jobs created in November come in well above 225k, we believe the Fed will cut in December, delivering on the remaining 25 bps penciled in the latest SEP estimates for 2024. However, we do expect the December meeting to be the last of the consecutive cuts, and expect it to be a “hawkish cut” where the December SEP dot estimates for 2025 are reducing from four to three cuts and the long-run dot moves towards 3%. We also expect to hear at the press conference chair Powell reiterate that the total 100bp of cuts in 2024 puts them in a good place to evaluate how the economy evolves in early 2025. After December, we expect them to skip in January after the inauguration, and then cut once per quarter in March, June, and September.
Post-Election Thoughts
While the uncertainty of US election has lifted, markets feel sort of adrift as there still are many questions that lie ahead in terms of policy implementation and the sequencing of actions. As much as we would like to believe that animal spirits are about to be unleashed, we have our doubts that such rosy sentiment alone will be a big enough catalyst to keep up the current market momentum. Starting points matter, for one there is less fiscal flexibility with US debt loads even larger now. Meanwhile, the economy Trump inherits (partially propped up by government spending) and not to mention financial markets (which are pricing in a lot of good news while valuations are stretched) is quite different than the setup that Trump walked into during his first term.
Special Topic: Divergent K-Shaped Economy - The impact on SMEs & Households
We have long stressed the idea of growing bifurcation within economic cohorts, as household wealth and income inequality have increased. Strong market returns have disproportionally helped those with financial assets and have substituted for savings, allowing excess cash to be used for consumption. Meanwhile, some cohorts have been held back as wages have not kept pace with post-pandemic price-level shifts. In our view, long & variable lags of higher rates will continue to hold back small businesses and lower to middle-income households. We expect the Fed to be mindful that rates remain restrictive and need to be cut.
Please see the PDF report link above for the full write-up with charts and forecasts…
