A recession in the US remains likely, while Europe is better positioned. Once rates are cut, a new market cycle will begin – although inflation and rates will remain higher than the past decade
Equity markets have been strong recently, as the equity risk premium has fallen. The consensus expects more than 150 basis points (bps) of US interest rate cuts in 2024, which is more than the Federal Reserve (Fed) has indicated. The US high yield credit spread, the best indicator of risk appetite, shrank from 600bps to 350bps over 2023. Monetary policy works with a lag: we have not yet felt the full effect of restrictive policy.
US inflation is falling: the Fed forecasts core inflation of 3.2% at end-2024, and 2.4% at end-2025. Just as it takes a long time for rises to have an impact, so it will for cuts. The Fed forecasts restrictive policy even in 2025.
Capital expenditure and employment trends will determine whether the US will see a mild recession. Regional bank surveys point to cracks in capital expenditure and we are close to triggering the Sahm Rule, the Fed’s indicator of when a recession is starting.
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The short-term picture may be challenging with defensive stocks outperforming. But what about when aggressive interest rate cuts begin? Download our full European Macro Update for February 2024 to learn more.