US Macro2Markets Outlook: Risk-on is Whistling Past the Bond-Yard...

Macro2Market Views

In our view, we have entered the non-linear stage of the US business cycle, where data trends and events will start to move faster with each passing month. The labor market, which has been the one saving grace for the US economy, continues to shows signs of decelerating. We expect that to pick up the pace into the first half of 2024. Meanwhile, US inflation data continues to improve with the last month’s CPI registering a 0% for all items (given the decline in energy), but even the core measures softened versus expectations.
Then there is the consumer and real spending. Although we have entered the holiday shopping season, the lead in has seen retail spending start to soften. And we still think it’s inconsistent that consumer sentiment remains in the doldrums if “everything is awesome” out there. We believe the consumer will experience a “Sudden-Stop” shock as bills pile up and savings dry up. Lastly, we continue to think it’s a red flag that GDI remains decoupled from GDP.

Net, the hope trade is alive and well, as displayed by the quick 3-week reversal in most asset classes. We caution reading too much into these sorts of moves. Again, bear market rallies, especially in risk assets, are usually fierce (but tend to be short-lived). Meanwhile, in this world of fitting the narrative to price-action, all this can just as easily flip in a heartbeat. We believe the year-end rally was pulled forward and amplified by short positioning and thin markets. As our title suggests, risk-on shouldn’t be strictly based on rates. Historically, if this rates rally continued, it would be pointing to a more ominous outlook.

With year-end closing in, barring unforeseen events, there are few catalysts left. Yes, we still have the usual—one more NFP, CPI and an FOMC meeting. Speaking of the Fed, they have a dilemma. The backup in L/T rates was short-lived as was the market-based financial conditions tightening. Even though we believe (and have had the view ever since the last hike in July) they are now in a holding pattern, they need to remain hawkish (otherwise they see how fast markets price in cuts/risk markets rally). Thus, a move to a “hawkish hold” and talking tough could serve as a market moving event in December. Net, we view rates & risk-on as stretched, we would be short belly duration. 

Special Topics

• A Brief Review of Broader Bank Lending Activity: Banks remain defensive and in need of a steeper yield curve + normalized bond holdings
• A Quick Study of US Federal Deficits: Running crisis-level deficits (in an economic expansion) limits US fiscal flexibility in a downturn

Appendix: Rate Forecasts, CB Probabilities, Econ-Scenarios, Forward Calendar