Theme 1
A globally synchronized downturn produces a globally synchronized policy easing.
Theme 2
The U.S. economy: Slowdown does not imply recession.
Theme 3
Central banks are determined to secure soft landings.
Key themes
Hover over each tile to read more about this quarter's key themes.
As global growth has weakened, policymakers have started to respond. The U.S. Federal Reserve is committed to avoiding recession, while China’s recent policy measures also raise the odds of a global soft landing.
Read more about this theme
Labor market cooling has triggered recession concerns, but the continued strength of consumer and corporate balance sheets implies that job layoffs, and therefore recession, can be avoided. A moderation to trend growth is likely.
The Fed is set to lower rates toward 3% and may frontload rate cuts if there are further signs of labor market weakness. The Fed’s commitment to a soft landing will be mirrored by other central banks keen to avoid overly strong currencies.
Theme 4
Equity markets confront valuation challenges, but Fed cuts should support continued gains.
Theme 5
Fixed income typically shines in a late cycle slowdown.
Theme 6
With potential gains across asset classes, staying in cash is the leading risk.
Historically, a Fed cutting cycle without a recession has resulted in a strong equity market performance. While stretched valuations suggest gains may be more limited this time, a broadening of gains beyond just tech presents opportunities.
Fixed income spreads are tight, but elevated yields continue to draw investor interest. Fed cuts, combined with strong growth, should reduce default risk, extending the credit cycle.
With the Fed’s rate cutting cycle now underway, the attractiveness of cash is rapidly diminishing. With stimulus lifting prospects for risk assets globally, investors should be optimizing this constructive environment.
Global economic growth finds support in central banks
Key takeaway
Global policymakers have responded to weakening economic growth, raising the odds of a global soft landing.
Slowing global demand has prompted a global central bank easing cycle to commence. In the U.S., growth is modestly slowing as the aftereffects of generous fiscal policy injections fade. Meanwhile, Europe has lost momentum and is retreating into stagnation as the industrial sector remains in the doldrums. In China, growth has continued to disappoint, raising concerns that it will miss its 5% gross domestic product growth target. Monetary policy conditions become more restrictive as inflation trends lower, putting the global economy at risk of an extended period of weakness. However, policymakers have responded with synchronized global central bank easing, tempering the downside.
The U.S. Federal Reserve has begun its cutting cycle with an aggressive 50 basis point cut. At the same time, China’s policymakers have recently signaled new momentum for fiscal stimulus in conjunction with monetary stimulus. Japan is one of the few global outliers, with policy rates moving higher in response to signs of a healthy reflation. The odds of a global soft landing have increased and provided inflationary pressures do not reignite, a mild cyclical upswing is possible in the second half of 2025. The U.S. presidential election remains a wildcard for the global outlook. The potential for more tariffs, dollar volatility, and geopolitical shifts could impact the global economy.
Federal Reserve: Committed to securing a soft landing
Key takeaway
The Fed’s initial 50bps cut shows a commitment not to fall behind the curve. We expect a series of reductions, taking rates down to almost 3% by end-2025.
The Fed’s decision to kick start its rate-cutting cycle with an unusually large 50 basis points reduction of the benchmark policy rate appears to have been driven by growing confidence around the inflation outlook and a desire to prevent job layoffs from materializing. It also indicates the Fed’s commitment to not fall behind the curve. Since the late 1980s, 50bps cuts have become associated with crises and recession.
As a result, moves of this size typically prompt major market angst as investors begin to price in economic and financial disaster. Today, however, there are no financial strains, no asset price bubbles and job losses. Against that backdrop, the 50bps cut has been rightfully received with market positivity and optimism. The Fed dot plot sees a further string of rate cuts which to that takes the policy rate down toward 3%, their estimate of neutral, by 2026.
Our forecast is for another 50-75bps of cuts this year, followed by a further 125-150 bps next year. We also see rates falling all the way to 3%, but with a more rapid cutting cycle, we expect the Fed to finish its cutting cycle by the end of 2025.
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Synchronized easing cycles to limit dollar downside
Key takeaway
As global central banks confront slowing growth and strengthening currencies, they will likely accelerate their pace of easing to match the Fed’s.
A synchronized global monetary easing cycle is underway. Such concerted efforts raise the odds of a global soft landing.
The initial stages of the ECB easing cycle were less intense than the Fed's, cutting rates at every other meeting. With the Euro area economic backdrop so stagnant and euro strength further challenging the struggling manufacturing sector, the ECB is unlikely to maintain its gradual pace. It will likely shift to back-to-back rate cuts during 4Q 2024, falling in line with the Fed's policy path. For the Bank of England, currency pressures and fiscal tightening will likely contribute to an acceleration of its rate-cutting pace in 2025.
With the People's Bank of China firmly in easing mode, the Bank of Japan remains the only outlier of the major central banks. Yet, the vicious unwind of the yen carry trade during early August as the BoJ announced a sharper-than-expected tightening of monetary policy has likely served as a warning signal. Going forward, the BoJ will likely adopt a gradual and cautious approach to hiking, limiting yen appreciation. With most central banks likely to match the Fed's pace of easing in 2025 and the BoJ tightening at a modest pace, the scope for further dollar weakness is limited.
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U.S. equities: Dependent on Fed soft landing success
Key takeaway
Fed success in piloting a soft landing should drive further positive gains in earnings and, therefore, U.S. equities.
Strong policy easing moves have helped U.S. markets recover and even hit new highs after having been whipsawed in early August when concerns about the U.S. economy spiked. History suggests that the Fed’s success in piloting a soft versus hard landing will play a key role in dictating the forward path for U.S. equities. For example, in 1985 and 1995, rate cuts supported strong equity gains as recessions were avoided, while in 2001 and 2007, even aggressive easing could not prevent steep market declines amid economic downturns. Today, the absence of glaring household or corporate balance sheet vulnerabilities means Fed rate cuts should be enough to prevent recession, supporting a positive backdrop for corporate earnings and, therefore, equities.
Although positive returns may be constrained by a more subdued performance from Magnificent Seven technology stocks, the broadening risk appetite and earnings growth across a variety of other companies, sectors, and cap sizes are meaningfully less stretched and provide reassurance about the diversity and resilience of the U.S. markets.
Learn more about the factors impacting markets and portfolios in the quarter ahead by downloading the full PDF.
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Realization of a soft landing could provide a lift to yields
Key takeaway
While history suggests Fed cuts should push yields lower, the improvement in economic outlook suggests some mild upward drift in long-end yields, resulting in a steeper yield curve.
The third quarter of 2024 saw an acceleration in expectations of global central bank policy easing amid growth concerns. As a result, sovereign yields declined through the quarter, with 10-year U.S. Treasury yields ending around 60bps lower than where they began.
With the Fed’s cutting cycle finally underway, history suggests there may be some additional downward pressure on U.S. Treasury yields. Yet, with significant Fed easing already priced into forward rates, the front end of the yield curve may already be close to its floor. A steepening of the yield curve is likely as the long-end should drift modestly higher as preemptive Fed easing engineers a soft landing. U.S. election-related volatility, plus market focus on fiscal sustainability as 2025 tax cut extension negotiations come into view, also likely limits the downside for bond yields.
Overall, fixed income has continued to deliver positive performance in 2024, as macro conditions remain largely solid. The total yield generated from fixed income today remains attractive relative to history, and credit continues to offer additional carry to U.S. Treasurys.
Cash is not optimal in a rate cutting environment
Key takeaway
Rate cuts are reducing the attractiveness of cash. With global stimulus lifting prospects for risk assets across the globe, investors should be optimizing this constructive environment.
With the Fed’s monetary easing cycle now underway and rate cuts potentially front-loaded, the attractiveness of cash has declined. Some $6.4 trillion is currently sitting in money market funds, potentially representing an important tailwind for risk assets.
Putting a number on the potential flow into risk assets is difficult. In recent years, some of the increases in money market funds have simply been a conversion of demand deposits such as checking accounts and savings, which investors will likely maintain in liquid, safe assets. Yet, with risk assets facing a fairly positive outlook, there will inevitably be some flows into equities and credit.
Equities not only offer exposure to important secular themes, such as artificial intelligence and technology, but in a rate-cutting, soft landing environment, there is strong potential for positive returns. Similarly, high yield credits should also benefit from a rotation out of MMFs as investors look to higher yielding assets. In addition, core fixed income can offer important income stability and a hedge against downside economic risk. The final quarter of 2024 will likely be beset by U.S. election volatility. Investors will need to keep cool heads, focus on the fundamentals, and resist the temptation to revert to cash.
global market perspectives
For Public Distribution in the United States. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.
Hard to be gloomy
4Q 2024
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Click through arrows below to learn more about our key themes.
As global growth has weakened, policymakers have started to respond. The U.S. Federal Reserve is committed to avoiding recession, while China’s recent policy measures also raise the odds of a global soft landing.
Read more about this theme
01
02
Theme 2
The U.S. economy: Slowdown does not imply recession
Labor market cooling has triggered recession concerns, but the continued strength of consumer and corporate balance sheets implies that job layoffs, and therefore recession, can be avoided. A moderation to trend growth is likely.
03
Theme 3
Central banks are determined to secure soft landings
The Fed is set to lower rates towards 3% and may frontload rate cuts if there are further signs of labor market weakness. The Fed’s commitment to a soft landing will be mirrored by other central banks keen to avoid overly strong currencies.
Read more about this theme
Read more about this theme
View next theme
View last theme
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Hear why Seema Shah, Chief Global Strategist, believes that despite global economic and geopolitical risks, coordinated central bank easing offers a prime risk-on investing opportunity.
4Q 2024
Global market perspectives
Seema Shah
Chief Global Strategist
Principal Global Insights Team
Brian Skocypec, CIMA
Director, Global Insights & Content Strategy
Benjamin Brandsgard
Insights Strategist
2Q 2024
4Q 2024
Download Full PDF
Synchronized easing cycles to limit dollar downside
Key takeaway
As global central banks confront slowing growth and strengthening currencies, they will likely accelerate their pace of easing to match the Fed’s.
A synchronized global monetary easing cycle is underway. Such concerted efforts raise the odds of a global soft landing.
The initial stages of the ECB easing cycle were less intense than the Fed's, cutting rates at every other meeting. With the Euro area economic backdrop so stagnant and euro strength further challenging the struggling manufacturing sector, the ECB is unlikely to maintain its gradual pace. It will likely shift to back-to-back rate cuts during 4Q 2024, falling in line with the Fed's policy path. For the Bank of England, currency pressures and fiscal tightening will likely contribute to an acceleration of its rate-cutting pace in 2025.
With the People's Bank of China firmly in easing mode, the Bank of Japan remains the only outlier of the major central banks. Yet, the vicious unwind of the yen carry trade during early August as the BoJ announced a sharper-than-expected tightening of monetary policy has likely served as a warning signal. Going forward, the BoJ will likely adopt a gradual and cautious approach to hiking, limiting yen appreciation. With most central banks likely to match the Fed's pace of easing in 2025 and the BoJ tightening at a modest pace, the scope for further dollar weakness is limited.
Download Full PDF
U.S. equity: Dependent on Fed soft landing success
Key takeaway
Fed success in piloting a soft landing should drive further positive gains in earnings and, therefore, U.S. equities.
Strong policy easing moves have helped U.S. markets recover and even hit new highs after having been whipsawed in early August when concerns about the U.S. economy spiked. History suggests that the Fed’s success in piloting a soft versus hard landing will play a key role in dictating the forward path for U.S. equities. For example, in 1985 and 1995, rate cuts supported strong equity gains as recessions were avoided, while in 2001 and 2007, even aggressive easing could not prevent steep market declines amid economic downturns. Today, the absence of glaring household or corporate balance sheet vulnerabilities means Fed rate cuts should be enough to prevent recession, supporting a positive backdrop for corporate earnings and, therefore, equities.
Although positive returns may be constrained by a more subdued performance from Magnificent Seven technology stocks, the broadening risk appetite and earnings growth across a variety of other companies, sectors, and cap sizes are meaningfully less stretched and provide reassurance about the diversity and resilience of the U.S. markets.
View next theme
View last theme
View next theme
View last theme
Download Full PDF
Realization of a soft landing could provide a lift to yields
Key takeaway
While history suggests Fed cuts should push yields lower, the improvement in economic outlook suggests some mild upward drift in long-end yields, resulting in a steeper yield curve.
The third quarter of 2024 saw an acceleration in expectations of global central bank policy easing amid growth concerns. As a result, sovereign yields declined through the quarter, with 10-year U.S. Treasury yields ending around 60bps lower than where they began.
With the Fed’s cutting cycle finally underway, history suggests there may be some additional downward pressure on U.S. Treasury yields. Yet, with significant Fed easing already priced into forward rates, the front end of the yield curve may already be close to its floor. A steepening of the yield curve is likely as the long-end should drift modestly higher as preemptive Fed easing engineers a soft landing. U.S. election-related volatility, plus market focus on fiscal sustainability as 2025 tax cut extension negotiations come into view, also likely limits the downside for bond yields.
Overall, fixed income has continued to deliver positive performance in 2024, as macro conditions remain largely solid. The total yield generated from fixed income today remains attractive relative to history, and credit continues to offer additional carry to U.S. Treasurys.
Download Full PDF
Cash is not optimal in a rate cutting environment
Key takeaway
Rate cuts are reducing the attractiveness of cash. With global stimulus lifting prospects for risk assets across the globe, investors should be optimizing this constructive environment.
With the Fed’s monetary easing cycle now underway and rate cuts potentially front-loaded, the attractiveness of cash has declined. Some $6.4 trillion is currently sitting in money market funds, potentially representing an important tailwind for risk assets.
Putting a number on the potential flow into risk assets is difficult. In recent years, some of the increases in money market funds have simply been a conversion of demand deposits such as checking accounts and savings, which investors will likely maintain in liquid, safe assets. Yet, with risk assets facing a fairly positive outlook, there will inevitably be some flows into equities and credit.
Equities not only offer exposure to important secular themes, such as artificial intelligence and technology, but in a rate-cutting, soft landing environment, there is strong potential for positive returns. Similarly, high yield credits should also benefit from a rotation out of MMFs as investors look to higher yielding assets. In addition, core fixed income can offer important income stability and a hedge against downside economic risk. The final quarter of 2024 will likely be beset by U.S. election volatility. Investors will need to keep cool heads, focus on the fundamentals, and resist the temptation to revert to cash.
Read more about this theme
Read more about this theme
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04
Theme 4
Equity markets confront valuation challenges, but Fed cuts should support continued gains.
Historically, a Fed cutting cycle without recession has resulted in a strong equity market performance. While stretched valuations suggest gains may be more limited this time, a broadening of gains beyond just tech presents opportunities.
Read more about this theme
05
Theme 5
Fixed income typically shines in a late cycle slowdown.
Fixed income spreads are tight, but elevated yields continue to draw investor interest. Fed cuts, combined with strong growth, should reduce default risk, extending the credit cycle.
Read more about this theme
06
Theme 6
With potential gains across asset classes, staying in cash is the leading risk.
With the Fed’s rate cutting cycle now underway, the attractiveness of cash is rapidly diminishing. With stimulus lifting prospects for risk assets globally, investors should be optimizing this constructive environment.
Read more about this theme
Download Full PDF
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Seema's Key Takeaways
Seema's Key Takeaways, 4Q 2024
Hear why Seema Shah, Chief Global Strategist, believes a shift toward easier financial conditions positions investors for potential outperformance during the remainder of 2024.
4Q 2024
Global market perspectives
Seema's
Takeaways
Christian Floro, CFA, CMT
Market Strategist
Jordan Rosner
Sr. Insights Strategist
Christian Floro, CFA, CMT
Market Strategist
Jordan Rosner
Sr. Insights Strategist
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