2024 promises to be another interesting year, where we are likely to see more global central bank cuts than hikes, the potential for a new credit cycle to drive inflationary pressure earlier and from already higher prices, and geopolitical tensions that could escalate.

Emerging markets, particularly ex-China and within LatAm, could be poised to continue outperforming, while developed markets, and in particular the EU and UK, could stall and see some of their recent momentum give way to pressure as their central banks remain more resolute in their hiking. 

In the US, the Fed’s apparent dovish pivot gave way to a significant bid across bonds, equities, and commodities, but bonds and commodities aren’t both likely to stay bid for long at the same time. Nevertheless, the perception of a new credit expansion cycle starting has boosted animal spirits and optimism that a ‘soft landing’ can be navigated.

Within China, the country continues to struggle with its slow-motion real estate crisis, a consumer that refuses to get off of the bench after years of episodic lockdowns breaking confidence, and foreign investors that are reluctant to allocate, with 2023 bringing the first year that FDI ever fell in China. We expect China’s struggles to continue until they force the PBoC to become more stimulative. 

Asian EMs that are more dependent on China could continue to struggle until that pipeline of stimulus, one the markets have been waiting for since Nov ‘22, begins to open up.

Japan, content to play the part of the rebel, could be one of the very few developed country central banks that starts a new tightening cycle. But, their version of tightening is likely to look more like ZIRP + abandoning the 1% 10Y JGB reference point, rather than anything that looks too much like policy normalization.

Commodities, led by energy, are likely to have a decent bid in 2024, particularly as we get into the second half of the year. We’re also constructive on components of agriculture and precious metals. 

This could give a boost to commodity currencies, like the AUD and CAD. We may also see the JPY outperform should BoJ truly move towards ZIRP and abandon the 1% reference level.

Summary Outlook for 2024

1. Lower Global Growth

Deceleration in global growth, particularly for the first two quarters, brought about by weaker labor markets, and the effect of supply-side shocks decline as demand destruction takes hold from rate hikes. This will set the tone for the second half of the year.

2. Core Inflation to Subside

Lower growth will lead to a deceleration in inflation at the core level. We expect some re-acceleration in headline numbers due to food prices and possible energy price volatility, but this will likely be de-emphasized by most DM Central Banks.  

3. DM Rate Cuts

DM ex-Japan rate-cutting cycle begins in 2H-2024 once slowing growth and weaker labor markets lead to lower core inflation, below 3% by the second quarter of 2024. The Euro Area starts cuts in June, the US starts cuts in July, and the UK starts cuts in September. We forecast 75bps of cuts for the ECB and 50bps for the US and BoE. Balance sheet run down continues at the same pace and could be tapered for the US by the end of the year.

4. Softer Landing for the US

The Fed's pivot and dovish stance lead to a softer landing than expected as real incomes continue to remain resilient in the US and will jump-start corporate credit and mortgages. This is what reduces the probability of a recession.  

5. Recession probability higher for EA and UK

Recession still remains a possibility. We see the US at 50% probability of recession while for the Euro Area and the UK, we assess the probability at 75%. This will be largely led by rate-sensitive sectors. Nevertheless, with fiscal spending waning and subsidies & stimulus packages rolling off, the consumer also becomes significantly weaker. Even if DMs enter a recession, this will likely be reported by Q3, 2024, by which time an easing cycle would have already started.

6. Japan’s Policy Change

Japan moves out of NIRP and YCC in a gradual and predictable fashion starting in the first quarter and holds at ZIRP for the rest of the year. Yen strengthens and stabilizes attracting further investments in equities, particularly from domestic markets. The carry trade unwinds but very slowly with a stronger yen, and expectations of higher rates. While nominal yields rise, real yields still remain negative for the rest of the year as inflation remains broad-based.

7. China’s Weak Stance

China’s stimulus is likely to continue to be lackluster, but as we approach the second half of 2024 the Government likely become more concerned about reaching its 5% GDP target. We believe that this may lead to an increase in stimulus, but that stimulus may target infrastructure and other spending, or the “4th rail” of the Chinese economy, outside of real estate, consumption, and exports.

8. Emerging Markets

EM ex-China continues to ease but slows the pace of easing to remain higher than the Fed and to accommodate volatility in inflation due to food and energy prices, where the effects remain stronger. A weaker US Dollar should help with growth. EMs with more direct exposure to China in South Asian economies may see slower growth until the Government stimulus ratchets higher, but LatAm is likely to continue to show strength that leads EMs in both growth and equity performance.

9. Liquidity

Global liquidity is likely to rise during the year ahead, as led by EM central banks and followed on by DM central banks (with the noteworthy exception of BoJ, and PBoC following on in size reluctantly later in the year). This is likely to continue to support risk appetites in equities and commodities.

10. US Fiscal Policy

During 2024 US government spending is likely to increase in both defense and non-defense spending, led by defense spending. Interest costs are expected to rise, but they may not rise as much as is expected if indeed the Fed is intent on cutting 2-3 times next year, affording the government some potential budget excess it can allocate into areas of spending that may be somewhat more stimulative for the economy. Nevertheless, we do not expect this to contribute to robust growth, but instead mitigate the odds that the GDP does not slip into a negative growth rate.

11. US Treasury

Treasury issuance increases after the FY24 budget is passed, and more issuance occurs on the longer end as the Fed is driving down the short end with its dovish tilt, attracting more buyers to longer tenors. As a result, this could start the push higher in yields, which could be further exacerbated by the potential for inflation to come back later in 2024.

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Contrarian Calls for 2024

As with all forecasts carry risks and none of us have a crystal ball. With our contrarian calls, we lay out some possible alternative scenarios to our Global Outlook for 2024. Some of these may seem outrageous and perhaps they are. But, we’re still looking at these possible risks that cannot be discounted.

1. US Hikes before they ease

Easing of financial conditions and early start to a new credit cycle as some of the hiking cycle is undone by the expectation of premature rate cuts. The rekindling of animal spirits reinvigorates growth alongside a strong labor market and accelerated government spending into elections. As a result, inflation rises significantly, and the Fed has to hike again before thinking about cutting. Yields shift higher and we see the great bear market in bonds resume, along with a strong bid in commodities.

2. Elections increase volatility and fiscal spending

2024 is an election year for over 20 countries covering over 60% of global GDP and nearly 50% of the world’s population. This could be the cause of sporadic volatility but it also ushers in the possibility of looser fiscal policies from reigning governments, as they try to spend their way to being re-elected.

3. China Returns to Growth

China achieves above-target growth through outsized stimulus measures, strongly reflating the economy and exporting inflation worldwide, re-igniting another hiking cycle globally.

4. Japan moves to positive rates

BoJ makes strong changes to policy moving into positive interest rate territory swiftly, pushing up global yields to offset part of the easing from Central Banks and causing risk assets to come under pressure. Higher rates lead to a much stronger Yen, in an environment of a weaker USD, attracting even further flows back into the country and the carry trade unwinds swiftly by mid-2024, causing a bond rout in the US.

5. Small Caps replace Mag 7 for US Equities

The US equity markets rotate into a broader number of equities. Small caps and equal weight outperform and the "Magnificent 7" fall out of favor in the US markets as funds look to diversify their picks. The Fed's soft landing and pivot euphoria fuel a rally in small caps for the first half of the year with the Russell 2000 and S&P 500 equal-weighted index breaking out to new highs until reality starts to set in that debt needs to be refinanced at higher levels and cash flow negative companies buckle under the weight of still-high interest rates. We prefer small-cap value to small growth because of this reason.

6. Geopolitical Tensions cause Supply Chain disruptions

Future escalations to geopolitical tensions remain an ongoing threat to forecasts, particularly within the Middle East and Europe. These tensions, if they escalate, could lead to episodic increases in key commodity prices, such as oil, agriculture, and gold. Further, we may see supply chain disruption as a secondary impact. The combination of the Fed’s dovish tilt driving back demand and inelasticity of supply is likely to cause a resurgence of inflation. Any supply chain disruptions could further exacerbate that outcome.

7. The UK cuts sooner

Bank of England gets spooked by a deep recession and starts cutting in mid-2024, sooner than the Fed.

8. Oil prices stay elevated

Brent Crude prices stay above $100/bbl based on strong growth in China, stronger Yen, SPR Refill, and new credit cycle in Developed Markets. A new commodity Supercycle takes hold as supply inelasticity meets growing demand.

9. Geopolitical tensions boil over

Russia defeats Ukraine and begins expanding its operations into other ex-Soviet bloc countries that are not protected by NATO. The Israel-Hamas war escalated to nearby countries, such as Syria and Lebanon. Iran’s participation, utilizing proxies such as the Houthi rebels and forces in Iraq, increases. US involvement becomes more entrenched and as a result, the conflict takes a new, more long-term form as it spreads. One that begins to look more like a regional war. The combination of these situations leads to a significant bid across commodities and a risk-off regime in equities for several months. Rates on the long end drop and gold is bid to new all-time highs. Oil surges to $200/bbl.

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