US rates grinded higher at the beginning of 2024 as the economy continued to prove resilient. Stronger-than-expected economic data, plus a Consumer Price Index (CPI) surprise, could point to a higher-for-longer outcome, in our view. The market’s anticipation for rate cuts has moderated with recent data and Federal Reserve (Fed) commentary. While Fed Chair Jerome Powell signaled that progress is being made on inflation and rate cuts are next, he did not endorse March as the date for the first cut. Rather, he emphasized that the committee needs to see additional progress—even though three- and six-month annualized core PCE[i] is below target. We continue to believe there will be a rate cut in the second quarter of 2024—of course, that view is data-dependent.

The European Central Bank (ECB) is expected to remain on hold in the very near term. Market pricing is aligned with rate cuts starting in the second quarter of 2024, but we think that is too aggressive given uncertainty around the path of inflation.

US ECONOMY GROWING MUCH FASTER THAN EXPECTED

• Fed Chair Powell signaled that progress was being made on lowering inflation.
• Recent employment data may have given the Fed pause; payroll employment rose by 353,000 in January 2024 and unemployment remained at 3.7%.[ii]
• Canada’s growth remains relatively stagnant and a recession is likely as high rates have hit interest-rate-sensitive sectors of the economy.
• The latest inflation numbers surprised to the downside—just inside the Bank of Canada’s target band.
• Barring any further weakness, we expect the Bank of Canada to remain on hold until June, when we expect them to cut by 25 basis points.

GRADUAL RATE-CUTTING CYCLES

• We see the Latin American region as well positioned to benefit from the trade implications of nearshoring and geopolitical tensions.
• After several years of upside surprises, we expect growth to downshift in 2024. That said, underlying drivers remain healthy given generally low unemployment, rising real wages and continuing solid terms of trade.
• Central banks are cautiously cutting rates from very restrictive levels, attentive to external risks. While core services inflation remains sticky, similar to the US, there has been substantial disinflation for headline CPI and inflation expectations are broadly in check.

SIGNIFICANT POLITICAL SHIFT LIKELY IN AUTUMN

• We see some evidence of an upturn in the UK economy.
• The Labour Party’s notable polling lead could lead to substantial policy shifts and market volatility, in our view.
• Prices are rising at an increasingly stable rate despite still-weak growth.
• The labor markets and wages remain fairly strong and above the Bank of England’s comfort zone.

HEADLINE AND CORE INFLATION FELL IN JANUARY 

• Weak growth in core economies continued, but we see some evidence of an upturn.
• Leading indicators continued to reflect weak demand, while pricing pressures persisted—particularly in the services sector.
• A recent Bank Lending Survey showed that the transmission of tight monetary policy continued to have an impact on financial conditions. However, the labor market remained strong and wage growth was still high.

STABLE BUT UNDERWHELMING GROWTH

• A protracted downturn in the property market, tepid export demand, and subdued consumer spending are weighing on the economy’s recovery.
• Despite the government’s clear intent to enhance growth, Beijing’s reluctance to adopt more aggressive easing strategies remains evident.
• A sluggish labor market could persist, hindering household sentiment and consumer spending, in our view.
• China is exporting excess capacity amid the longest and deepest deflation since 1998-99.

WAR AND RELATED TAIL RISKS CONTINUE

• The war in Israel/Palestine continues, with myriad risks of escalation swirling, notably on the Israeli/Lebanese border and in the Red Sea. Domestic political dynamics are also a focus in Egypt, Jordan, Saudi Arabia and Israel.
• The South African budget was an important signal of a commitment to policy discipline, but markets are now firmly focused on elections slated for 29 May.
• The Turkish turn toward orthodoxy has proven durable to a change in central bank leadership; we are mindful of market sentiment swinging to optimistic extremes as we watch for opportunity.
• Gulf Cooperation Council (GCC) oil exporters look to the non-oil GDP sector for growth. Its focus on economic diversification seeks to mitigate lower oil GDP due to moderate oil prices and, in the case of Saudi, unilateral production cuts.
• Growth in central and eastern European countries continues to improve as domestic central banks cut rates and disinflation continues. However, weak growth in trading partners has been keeping these export-dependent economies below their long-term potential growth rates.

EDUCED SPENDING CONTRIBUTES TO UNEXPECTED RECESSION

• High inflation weighed on spending in fourth quarter of 2023.
• A weak yen and higher food prices exacerbated anemic domestic demand.
• Macro developments complicated economic policy normalization and the Bank of Japan might hold off on lifting its negative interest rate policy in the first half of 2024.

STABILIZING GROWTH TRENDS

• Growth continues to stabilize at trend levels across most countries in the region. While we see green shoots in technology exports, this has yet to broaden out to other categories.
• Disinflation progress continues across most of the region, but central banks are wary to cut rates ahead of the Fed.
• During this exciting election year for the region, Pakistan’s election proved to be chaotic, while Indonesia’s was more peaceful and conclusive.
• Korean legislative elections are scheduled for April, Indian general elections are in May and Sri Lankan presidential elections are in October.

[i] PCE = Personal Consumption Expenditures Price Index, a measure of inflation.
[ii] Source: Bureau of Labor Statistics/Haver Analytics, 2 February 2024.

By The Loomis Sayles Macro Strategies Group

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