Flash Macro: Market Update

August 2024
2 minute read

Given all the recent gyrations in the global capital markets, we wanted to provide an update on our latest thinking, including changes to our rates call. See below for details, but our key conclusions are as follows:

Growth will slow further, but we are not buyers of the hard landing thesis. In fact, we remain above consensus in our U.S. GDP outlook for 2024 and 2025. Let’s review the facts. We just published a 2.8% 2Q24 U.S. GDP print, and our forecast now calls for the Rolling Recession that ensues after the Rolling Recovery as part of our asynchronous global economic cycle thesis. Remember that our 2024 2.5% U.S. GDP forecast anticipates just 1.5% growth in both 3Q and 4Q, including discretionary goods spending running near zero growth over multiple quarters. Said differently, our forecasts have always assumed that growth would slow pretty sharply in the second half of 2024. For 2025, we think U.S. GDP growth will be at 2.0%. The other big part of the story we have been highlighting is productivity. Importantly, we have just printed a nice 2.4% productivity growth year-over-year, so that part of the story remains solid (which helps to offset slower headline hiring). Moreover, we do not see the type of slowdown from above-trend levels in cyclical areas of the economy (e.g., Equipment Capex and Inventories, Construction) that typically precedes a recession.
Monday’s market action was more about carry trade unwinds than a further weakening of macro fundamentals. Notably, despite an equity selloff, and a deterioration in market liquidity, credit spreads remained well behaved across geographies. In fact, we can’t think of a time that the VIX hit 60 and Credit spreads held so tight (Exhibit 1). Beyond decent fundamentals, it also speaks to the technical bid that we have been highlighting.
However, confidence will get shaken a bit, follow-on weakness will now result, and the Fed will get pushed into cutting faster. We move to three cuts this year from two cuts, while we move to six cuts from four next year. However, we now expect no cuts in 2026 versus three previously. Our bottom line: no change to our forecast for a 3.125% neutral rate, but there is now more pressure on Chair Powell to get there more quickly, as the steady growth in services sectors (e.g., Education/Healthcare) that has been powering the labor market is now slowing.
In terms of 10-Year yields, we stick to our targets of 3.75% near-term and 4.0% longer-term. We continue to believe that elevated term premia and hedging costs for foreign buyers will keep the 10-Year from rallying as much this cycle. However, we see yields remaining in the 3.5-4.0% range in the near term as the market deals with uneven/bumpy economic data.
Big shocks don’t typically lead to quick rebounds. In the interim, focus on Credit Spreads, not Equities. Credit aligns with financial conditions; Equities are often seen by central bank governors as a more speculative, coincident indicator. As we show, VIX spikes above 50 are positive for medium-term market outcomes, but it takes time.