Softer Landing (Baseline)
Probability: 60%
Consumers/activity remain at or below trend-growth amid a still largely resilient labor market, with inflation staying on a gradual path toward 2%
Likely
Causes
Companies and consumers more resilient to higher rates amid lower leverage/termed out debt
2024 Fed Response
Gradual 75-125bp of cuts, starting in Q2 2024
Rates Market Reaction
Rates gradually bull steepen
Real and nominal rates remain elevated, but gradually drift lower
Harder Landing
Probability: 35%
Consumer spending decelerates
Likely
Causes
Company profit margins compress
Labor market softens and wages slow
Higher real rates weigh on lending
2024 Fed Response
150bp or more of cuts, starting in May
Rates Market Reaction
Curve bull steepens rapidly
Real and nominal rates move rapidly lower as the Fed cuts rates faster
No Landing, Inflation Remains Sticky at Higher Levels
Probability: 5%
Likely
Causes
Core inflation remains sticky amid service sector strength
Growth remains above trend
R* likely higher than expected
2024 Fed Response
Fed postpones cuts, trimming rates by 25-50bp.
In extreme scenario the Fed threatens more hikes.
Rates Market Reaction
Real 10y rates test top end of 2.25-2.50% range
Front-end sells off as cuts are pushed out, curve re-inverts
Breakevens rally
Softer Landing
Harder Landing
No Landing
Source: TD Securities