Fixed Income

The combined US credit impulse and fiscal thrust indicator will likely relapse in 2024, heralding growth weakness. Stalling US sales volume and falling inflation, combined with sticky labor costs, will herald a non-trivial profit margin compression. The recent increase in Asian exports will likely prove to be a mid-cycle improvement rather than a cyclical recovery.

The Fed faces a dilemma. Cut rates early to avoid a recession, but at the risk of not slaying wage inflation. Or, not cut rates early to ensure that wage inflation is slayed, but at the risk of a downturn. Faced with such a dilemma, the lesser evil is to slay wage inflation even at the risk of a downturn. Meaning that the market has overpriced early rate cuts. We discuss some other investment implications, and identify two rebound candidates.

Our Portfolio Allocation Summary for January 2024.

Following today’s US jobs data release, the Joshi rule real-time US recession indicator inched up to 0.18 and is now just a whisker from its recession event-horizon of 0.20.

A soft landing can be achieved but not maintained. We are cutting our tactical recommendation on stocks from overweight to neutral and scaling back our long-duration stance.

The market is excited by the idea that the Fed will cut rates early this year, even without a recession. But is that likely, with inflation still set to be around 2.8% mid-year?

In this, our final report of the year, we present our main global fixed income investment themes and recommendations for 2024.

Our outlook for the Fed’s interest rate and balance sheet policies in 2024.