US Macro2Markets Outlook: Now comes the (real) hard part...

1st half of 2024 was easy (FCI), 2nd half is likely full of uncertainty (and risk off)

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As we look back at the first half of 2024, one would be remiss not to flag that if it were not for the nonstop rise in equities (and the easing of financial conditions - FCI), sentiment in US markets would have been much dourer and in line with the quickly weakening economic fundamentals. The “why worry?” crowd has been given a pass that likely expires as the second half of the year starts, as there are plenty of themes to be concerned over (such as global elections or geopolitical events before key US elections, the first Fed cut etc).
In addition to potential tail risks, the macro backdrop will likely continue to weaken into 2H-24, in our view. Recent US inflation readings have been very encouraging. Granted, OER rent readings remain sticky, but we do expect an eventual catchup of lower rental prices in CPI. And then there is the May jobs report which continues to show divergences between a solid NFP and weaker household survey data. We believe the truth lies closer to the household survey. Overall, economic activity remains mixed (but in deceleration mode).
In terms of the Fed, on the back of a more hawkish leaning SEP forecast and Powell’s hawkish presser performance, we had to push back our once long-standing first cut expectation from July to September. That said, we are still of the view the Fed should start rate normalization ASAP rather than having to cut aggressively later on (especially if the aim is to stick the soft landing).

Special Topics

  • The Real Story: Exploring Inflation-Adjusted Data: We found that the last few years of higher nominal activity has made the economy, earnings, and ultimately markets look better than they truly are.


US markets, especially a narrow set of stocks in the equity space, have moved from pricing in perfection (where every macro factor needs to line up) to the euphoria phase of the risk bubble (the melt-up). It’s at this stage where it is hard to pinpoint when risk taking momentum burns out. Eventually there will be an exhaustion point that sees assets return back to earth (and if FCI does drive wealth effect spending, we argue it matters more when it turns red).
While we wait for reality (i.e. real growth isn’t as robust & risk valuations are super stretched) to be reflected in assets, implied vols are too low in stocks and FX. Our view into Q3 is more aligned with a continued strong dollar, and we heed the warnings that a bull flattening, driven by L/T USTs, is signaling about the economy/Fed (i.e. the Fed is taking too long to cut, the economy cannot wait for it). Lastly, once economic weakness is apparent to all, credit’s “all-in yield” buying theme will be replaced with “spread widening matters”.

Please see the PDF report link above for the full write-up with charts and forecasts…

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