10 Macro Themes for 2024 – Breadth in rate cuts and markets

As we transition from 2023 to 2024, we look to what may be ahead. We identified 10 macro themes across global economics and investment strategy. Rate cuts from the Fed, the European Central Bank and other central banks that we expect in 2024 are a key driver of many of these themes. Cuts should help emerging markets and some commodities in particular. But there’s some debate among strategists about whether slowing growth may weigh on markets in the first half of 2024, thus our outlook for equities is mixed. 

1) A global shift to rate cuts

Head of Global Economics Claudio Irigoyen expects inflation to gradually move lower across the globe, growth to slow modestly, and the Fed and European Central Bank to start cutting in June. In our baseline scenario, we forecast global growth to experience a mild deceleration in 2024 to gradually recover in 2025. However, we still expect heterogeneous growth dynamics across regions. In contrast, we forecast inflation to continue moving gradually lower across most countries, with central banks accordingly moving into less restrictive monetary policy stances.

2) Michael Hartnett constructive once there’s a hard landing scare

BofA Chief Investment Strategist Michael Hartnett and team don’t think the bear market ends until Credit, Crude & Consumer threaten hard landing/credit events, triggering bearish Positioning, recessionary Profits & Policy panic, which in turn could trigger ’24 bull markets in Bonds, Bullion & Breadth. The upside risk is from elections which could lead to less geopolitical risk & lower oil prices but downside risk from elections could also incite premature policy panic & higher bond yields.

3) We expect U.S. Equity upside

Head of U.S. Equity & Quantitative Strategy Savita Subramanian finds five reasons to be bullish on U.S. equities: 1) bearish sentiment, 2) goldilocks, 3) Earnings Per Share > Gross Domestic Product, 4) election year, 5) U.S. exceptionalism. Savita maintains a cyclical bias. 

4) We expect Brent to avg $90; commodities to restock

As world GDP expands by just 2.8% in 2023, Head of Global Commodities, Cross-Asset Quantitative Strategies Francisco Blanch expects slower oil demand growth in ’24, but expects OPEC+ (Organization of the Petroleum Exporting Countries) to cut more production. Lower rates should boost gold and lead to restocking in industrial metals.

5) Japan inflation persists, strategy sees market upside

Japan Economist Izumi Devalier expects improvement in consumer spend and our inflation forecasts remain ahead of consensus, a positive in the case of Japan. Despite the current concerns in the market, the 2024 outlook is likely to be bright. We expect cost-push inflation to be replaced by wage inflation at the macro level and our Chief Japan Strategist, Masashi Akutsu sees progress with corporate reform and the number of companies raising fiscal year guidance is the highest in a decade.

6) Rate cuts and peaking dollar a positive for emerging markets

The dollar should peak in early ’24. This should be a positive for emerging markets (EM) and small caps, among others, according to Head of Emerging Markets Strategy David Hauner. EM should also benefit from a turn in the Asian export cycle, and growth in China should stabilize.

We also remind investors that emerging market returns in the 12 months after the last Fed hike tend to be highly positive and positioning is light across EM assets. 

7) Seek quality yield in credit

Rates, earnings and issuance are likely to challenge credit in 2024; we prefer quality. In U.S. high-grade, we see spreads widening slightly by year-end ’24. In U.S. high-yield, we see retail, healthcare, cable and TMT (technology, media and telecom) trading wider in 2024. Conversely, we expect U.S. high yield packaging, chemicals and transportation to generate above market returns.

8) Slowing investment spend a drag on U.S. growth

The U.S. Economics team forecasts consumption to slow down but not crash, investment growth to soften relative to the first half of 2023 as the effects of favorable legislation start to fade and a much lower fiscal impulse as the primary deficit contracts somewhat relative to 2023. The recent increase in debt delinquencies and the resumption of student loan repayments, coupled with higher real interest rates, are consistent with our softer consumption call, even if we still expect a resilient consumer ahead. As the economy starts feeling the effects of much tighter financial conditions, investment slows down as the impact of the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Inflation Reduction Acts dissipates, and the fiscal impulse turns slightly negative, we expect the soft landing to start showing in the data.

9) U.S. 10-year yield to remain elevated on deficits, geopolitics

U.S. Rates Strategist Mark Cabana is not as bullish as consensus on 10-year bond prices for year-end 2024 and 2025. Four factors worry us: 1) In an economy that avoids the kind of sharp slow-down we feared a year ago, duration risk and inflation risk have increased. 2) The U.S. fiscal stance has deteriorated, and net supply of government bonds will continue to weigh. This suggests the U.S. will need to pay a premium to attract inflows through a combination of a weaker USD and higher rates. 4) If there is an economy where r* (real neutral growth) may have moved higher, the U.S. could be it. All of these suggest risks to sustained high U.S. long rates.

Also, likely to contribute to deficits is the outlook for defense spending. Conflict in Ukraine and Gaza, as well as tensions between China and Taiwan, likely mean that defense spending is biased higher, another reason to believe deficits will be difficult to meaningfully reduce.

10) Policy uncertainty to rise, 60%+ of GDP faces elections

Claudio Irigoyen points out that presidential elections are always a source of volatility, but the uncertainty associated with presidential elections has been in crescendo in the last decade. The reason is pretty clear: political polarization and populism are on the rise, and this should add to policy uncertainty. Savita Subramanian points out that historically the median S&P performance in a presidential election year is better than in the typical year.