Macro
While most of the headline data continue to point to a solid economy (well, weak GDP notwithstanding), under the surface there are underlying cracks forming. On the employment side, the wedge between the establishment (NFP) and household surveys is providing mixed signals on the jobs data. As for inflation, we do not believe that a few months of hotter price gains means that US inflation has turned and will continue to sustainably trend upward.
Given increasing underlying cracks in the jobs data, plus the burden of higher rates on the margin for various segments (i.e. lower-income households, small businesses, CRE/banks, even larger corps in the high yield sector), it’s only a matter of time before macro conditions worsen. Meanwhile, in our view the market has priced out rates cuts too soon and too fast. A lot can change in 3-6 months (as we just experienced) and having just two rate cuts does not account for major tail-risk events. Thus, our base case for the Fed is still around 100-125bps cuts in 2024, concentrated in 2H-2024.
We have also pushed back our first cut to July too. This would be a down-payment on the easing cycle (although the Fed wouldn’t initially call it that). Tweaking rates 25bps lower early in the summer allows them to gauge how the economy evolves and avoids the first cut being so close to the election.
This all sounds unrealistic given recent Fedspeak and US data (which again on the surface seems solid but is on a shaky foundation, in our view). But we are reminded that conditions can go non-linear at inflection points and that the Fed has flipped from dovish to hawkish back to dovish multiple times. In our view, the consumer is stretched (for the lower-income cohorts), excess savings have vanished, and consumers are piling into debt. Meanwhile, delinquencies are rising even with so-called full employment (what happens when things worsen).
Special Topics
- How does the current cycle compare to prior soft-landing & war periods?
- Policy Path and Rates Forecasts: Looking Beyond the May FOMC Meeting
Markets
Short-term US interest rate futures now have less than 2 rate cuts priced in for terminal 2024 rate expectations (down from over 6 at the start of 2024). This unwinding of Fed cuts, along with concerns about UST supply, have led to US rates pushing up to near-term 2024 high levels. If we look at risk assets, the technical picture isn’t as solid for stocks as it was at the start of 2024, and broader markets are displaying weakness internally along with high volatility. Meanwhile, in a circular reference kind of way, risk-off in credit and stocks might be the only thing that contains intermediate rates from gapping higher.
Please see the PDF report link above for the full write-up with charts and forecasts…
