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Wall Street has been buzzing with forecasts for the new year — where the S&P 500 will trade, how 10-year Treasury yields will act, and what path the US economy will take to influence markets.
And last week, Fed Chair Jerome Powell finally pivoted, signaling the path for rates will be down rather than up in 2024 while reiterating his view the US economy will perform well with unemployment staying reasonably low and inflation cooling off.
In other words, the Fed can see its long-fought-for “soft landing” coming into focus.
And according to the latest global fund managers survey from Bank of America published Tuesday, investors agree.
The survey, which takes responses from investors collectively managing nearly $700 billion, found that 66% of folks see a “soft landing” as their base case. Some 23% of investors see a “hard landing” incoming whereby the economy crashes into recession after the Fed’s aggressive rate hikes executed since 2022.
And just 6% of investors are expecting the seemingly impossible “no landing” to come through.
This outcome would see inflation fail to get back to the Fed’s 2% target while the US economy reaccelerates. And the evidence is mounting this could come to pass.
On Friday, we’ll get the Fed’s favorite inflation gauge, core Personal Consumption Expenditures, which is expected to show inflation ticked down to an annual rate of 3.3% in November, the lowest level since April 2021. But this annual reading flatters some more recent indicators of the Fed’s progress in returning inflation to target.
The three-month, annualized supercore services number — which includes healthcare, education, and hospitality — is stuck at 5.2%. Another metric that captures rent of shelter is similarly hovering around 5.7%. Disturbingly, the chart below shows these measures are also trending ever-so-slightly higher.
Several Fed officials have recently commented on the optimism markets have shown investors having about a soft landing and tried to walk back this messaging. At least to an extent.
Chicago Fed President Austan Goolsbee said in an interview this week, “I was confused a bit” by the market’s reaction.
Richmond Fed President Tom Barkin told Yahoo Finance on Tuesday that inflation and employment data need to stabilize, and investors shouldn’t jump the gun anticipating lower rates despite the Fed’s forecasts.
“I’ve got a perspective that inflation is a little stubborner than I think the average person is in there, and I hope I’m wrong on that,” he said.
And if the inflation dragon remains un-slayed, the primary risk to the 2024 economy is overheating — something very few investors are pricing in.
For a reminder of what a rapid repricing of an overheating economy looks like, just review the 2022 market action.
Jim Bianco, president of Bianco Research, points out that Q4 GDP in the US is currently tracking 2.7%, according to the Atlanta Fed’s GDPNow calculator.
“Is the narrative of a soft landing so powerful,” Bianco wrote on X, “and the desire for the [effects of a] soft landing (aka ‘everything rally’) [so] wanted — that no one wants to buck this and suggest a solid ‘no landing’ is happening that overstimulates the economy and reignites inflation?”
Food for thought in the year ahead.
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