US asset manager Payden & Rygel has just released its 2024 annual macro outlook.

Jeffrey Cleveland, chief economist at Payden & Rygel, highlighted this week how top 10 convictions emanating from industry last December might not work in 2024.

“Just consider financial markets and economics in 2023,” Cleveland said in a note. “If you asked a professional forecaster last year at this time whether the US economy would slump in 2023, nearly two-thirds would have answered in the affirmative.” 

“Similarly, at this time last year, the bond market was convinced, or at least many investors placing bets were, that the US Fed Reserve would end its rate-hiking campaign at 5 per cent and then cut rates two to three times by the end of 2023,” Cleveland said. “Moreover, many investors and pundits confidently stated that the only way inflation will subside is with a much higher unemployment rate.” 

Yet none of the above transpired. “Today, armed with another year of information, many investors are again utterly convinced they know what will happen next,” he continued. 

Cleveland dislikes the typical crystal ball-gazing approach to the macro outlook. With this in mind, she outlines below “top 10 confident views” from mid-December 2023 that could be wrong for 2024.

A recession is inevitable in 2024 
Coincidentally, this was also the top view espoused by many investors and most (65 per cent) of professional forecasters last year. A recession did not occur in 2023, but even with all the “soft landing” lip service, the professional forecasting community still puts a 50 per cent chance of one in 2024. Will consensus get it right in 2024? He doubts it. Cleveland thinks the chance of a downturn in 2024 is closer to 12.5 per cent. Instead, at or slightly above-trend GDP growth powered by the resilient US consumer. 

The US consumer is running out of savings 
“To steal from Twain, rumors of the US consumer running out of savings have been greatly exaggerated. The personal savings rate has declined as consumer spending patterns normalized post-pandemic. However, the aggregate US consumer still sits on trillions in savings. More importantly, consumer spending and, thus, overall US economic activity growth is driven by income growth, not savings. Income growth remained robust through November 2023,” Cleveland said.

US fiscal policy is fueling growth 
“Unrepentant economic bears refuse to believe the US consumer is in good shape, citing “fiscal policy” as the “real” driver of growth, which they think is unsustainable. While it’s true that the US budget deficit widened in 2023, the gap was primarily due to a slump in revenues following the stock market drop in 2022,” Cleveland continued. “Fiscal spending provided a modest 0.3 per cent boost to overall growth over the last four quarters, while consumer spending contributed to more than half of GDP growth in 2023. Net fiscal impact, a measure that combines the impact of government spending at federal, state, and local levels, all tax policies, and benefit programs, has been negative for the last three quarters. Further, politicians typically ramp up rather than slow down spending in election years.”

The US government will not be able to finance its massive deficit 
Cleveland highlighted that the US budget deficit has widened, but the appetite from US and global investors for Treasuries remains strong. Also, Treasury bill issuance financed much of the 2023 deficit, with US households and businesses enthusiastic buyers. And the US devotes less than 3 per cent of US economic output to paying US debt service costs, a manageable task for now.

Stubborn inflation may force the Fed to overtighten, tipping the economy into a recession 
While Cleveland was more amenable to such views at mid-year with the economy running hot at 5 per cent GDP growth, flash forward six months, she sees much more reason for optimism on the soft-landing front. While he doubts that the Fed will be quick to “declare” victory over inflation, he thinks it will take a few more months of data to seal the deal.

Cracks are appearing in global labor markets, and other central banks will follow the Fed and start cutting interest rates 
Except for the UK and Canada, other major developed countries have fared better than many think, he said. In addition, some central banks are even closer to achieving inflation goals than the Fed. For example, Canada’s core inflation sits just outside the central bank’s 1 to 3 per cent target zone. As a result, most central banks may cut less aggressively than markets predict, and the Fed will probably not lead the way, given the US labor market's strength. That said, a significant source of financial market stress of the last 24 months – central banks moving aggressively to tighten financial conditions – has been removed from the equation. Finally, the Bank of Japan shows little intention of tightening policy, another market dagger that may not materialize, Cleveland added. 

The ‘long and variable lags’ of monetary policy will soon bite 
“The “long and variable lags” Milton Friedman discussed may already have been felt. More importantly, US consumers and businesses “termed out” their debt and have withstood interest rate hikes, and banks are far less critical purveyors of credit than in decades past. Mortgage payments have not risen, and corporate debt service costs remain at historical lows. Again, economic bears searching for reasons to bet against the US economy may need to look elsewhere,” Cleveland said. 

Escalating geopolitical issues will derail the global economy 
While tragic and unfortunate, geopolitical events tend to have a short-lived impact on markets and economic trends. Absent of a sharp oil shock – a surge in oil prices that pinches the consumer pocketbook as we saw in 2008 – a severe downturn induced by geopolitical events remains a low-probability. 

If we blink, we’ll miss the opportunity to extend portfolio duration 
Going “long duration”– owning longer duration government bonds instead of cash – tends to work best when a) central banks cut rates more than is already priced in, b) inflation is below the central bank target, and c) the labor market is deteriorating. While Cleveland agrees rates have likely peaked, he believes that there may still be time to add duration. 

There’s no way credit/equities can rally from here 
First, fixed income is attractive based on absolute and inflation-adjusted bond yields compared with recent history. Second, the “soft landing” scenario – in which the Fed could fine tune interest rates, rate volatility subsides, the US dollar softens, inflation moderates, and the economy continues to grow – is a splendid recipe for credit sectors in the fixed-income market (equities, too!). Finally, to the question that tops bond investors’ minds – where are policy rates heading next year? She offers a range of possibilities depending on the future path of inflation. Ultimately, Cleveland expects the Fed to cut rates less than the markets predict, which might disappoint investors in the short term. As Fed Chair Jerome Powell said at the December Federal Open Market Committee (FOMC) press conference, the future can “evolve in many different ways,” Cleveland concluded.