Inflation/Deflation

Low inflation argues for the Fed to move relatively quickly toward rate cuts. Continued above-trend GDP growth poses a risk to this view, but leading indicators point to slower growth in the coming quarters.

The SIFI banks expressed confidence in their credit outlook for 2024 and expect that credit losses will crest soon, given the reserves they’ve already set aside. Their implicit embrace of the soft-landing narrative suggests to us that the consensus is getting closer to being set up for disappointment. We remain tactically equal weight equities and fixed income but think conditions may soon favor turning defensive.

Investors have taken comfort in the fact that unemployment has remained low in the major economies. But underneath the surface, there are clear signs that labor demand is weakening. The clock keeps ticking towards our H2 2024 recession call. After being bullish on risk assets last year, we are slowly turning more defensive.

An update to our outlooks for the Fed’s interest rate and balance sheet policies following this week’s remarks from Fed Governor Waller.