2024 Outlook: Global And Local

Feature Stories | Dec 20 2023

Soft landing? Recession? Inflation falling? Central banks easing? There remain questions as to how 2024 will play out.

-Fed pivot changes the tone
-Soft landing a popular expectation
-Can China recover?
-Fiscal impacts in Australia

By Greg Peel

The Feds decision to leave rates on hold again at its December meeting was exactly what markets expected. What was not expected was a clearly dovish shift in rhetoric.

While the Fed has now left its cash rate on hold at four of the past five meetings, the language has remained that of theremay be more work to do yet to bring inflation down to target.

Jerome Powell offered the slightest glimmer of hope at the November meeting the hiking cycle may now be done, while still warning it may not be. But that press conference, and subsequent US data, were sufficient for the market to decide the Fed was indeed done, and rate cuts would begin next year. Maybe as early as March.

November saw the US ten-year yield crash from just over 5% to around 4.25%. The adage is dont fight the Fed, but clearly the market was now pricing in rate cuts the Fed refused to be drawn on. The expectation at the December meeting was that Jerome Powell would push back on such a move, and remain stubborn in not flagging any rate cuts in the near term.

But he didnt. Instead, Jerome Powell indicated rate cut talks have begun. The FOMC dot plots showed a consensus expectation of -75 points, or three cuts, in 2024. The Fed pivoted, and came to meet the market, rather than the other way around.

The market immediately priced in four 2024 rate cuts. The ten-year yield fell close to 4%. Now the market is pricing in as many as six.

In writing their 2024 outlook reports, ahead of the December Fed meeting, brokers/researchers/economists were largely working on the assumption the Fed was done hiking, and that 2024 would bring rate cuts. As to how many and exactly how early they would begin, views varied.

There are two reasons the Fed can begin cutting rates in 2024, and Powell acknowledged this at his December press conference. Typically a cutting cycle begins because the economy has slid into recession, and needs rescuing. But rates can also be cut in order to normalise policy, if the need to be as restrictive eases. That would be driven by falling inflation.

The latter case implies a soft landing for the US economy an expression that has been bandied about all year. While it is the Feds ultimate goal to bring the economy in for a soft landing, which would be considered a Goldilocks achievement, there is no strict definition as to what a soft landing actually is.

The popular definition is one of a slowing economy, but not an actual recession. Others assume a mild recession is a soft landing, compared to a deep recession or hard landing.

Still others suggest 2023 has seen the US economy in a rolling recession some sectors have hit hard time while others havent, but are now coming out. Or it can be considered the US economy, as of December, is already in the middle of its soft landing.

Not that any of it really matters.

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