2024 Global Outlook: Ready, Set, Slow

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Looking through the second half of 2023, level correlations for a large number of markets hovered around 0.80-0.95, while correlations to weekly changes were around 0.50. Compare this to norms of 0.20 or less over the last decade or two. A risky feature for markets is that portfolio diversification at the moment is largely an illusion as we look to plant our flag in the often-times fool's game of year-ahead prognosticating. Let the buyer beware.

We expect the Fed to hike a further 100bps before mid-2024 - but there's a catch. Everyone has been lulled into a sense of nominal stability given the success (or dumb luck?) of central banks in sustaining inflation around 2% for several decades. In that world, the change in real versus nominal rates was largely a rounding error. However, it is real rates that matter for gauging the future effect of monetary policy.

While the Fed may leave the nominal fed funds rate unchanged, the 100bps fall in U.S. core CPI that we forecast is the same as actively hiking 100bps with unchanged inflation. While many have backed away from recession calls, this gives us confidence that quibbling over one more possible hike misses the elephant in the room.

We are still seeing an over-tightening in U.S. policy drive a recession. The real U.S. policy rate and its stable relationship with the ISM over the last 60 years is a better gauge for longer-term moves in the economy. While 2023 was a year supported by 800bps of excessive (real) easing, 2024 is on track for an over-tightening of 700bps.

Global Macro Outlook: Won't Get Fooled Again

The two biggest questions facing the global economy for 2024 are:

1. Will there be a U.S. recession?
2. Where is Chinese growth headed?

Answer these two questions correctly and — absent any major shocks — the market picture for 2024 starts to come into focus.

Real rates have tightened materially into restrictive territory and will weigh on economies through this year and next. We also believe that longer-term neutral real rates have shifted higher in recent years and have incorporated this into the outlook.

Central banks are likely to remain on hold until mid-2024 in most cases with the BoJ bucking the trend with hiking in the spring & autumn and the PBOC easing policy to help support growth. We expect more cuts than the market does, especially for the FOMC and BoE. We also expect QT to continue in the background as central banks cut rates; the one exception to this is the Fed.

Globally, while Europe and Canada may already be in recession, we see a U.S. recession by mid-2024 and relatively stable Chinese growth around 5%. Global demand will dip in 2024. Fiscal policy remains a dominant force in the U.S. and China. Any changes to policy will have important implications for growth.

Inflation will decelerate towards target globally over 2024. Major economies should see core inflation below 3% (with the target in sight) in 24H1.

Global Rates Outlook: Treasuries vs Everybody

Slower global growth will drive negative revisions to central bank expectations — most acutely in the U.S. — with Treasuries expected to outperform versus the rest of the DM space. U.S. cross-market spreads are expected to normalize while yield curves steepen notably in Canada, the U.K. and the U.S.

We expect wider term premia (TP), driven by increasing U.S. supply, weaker economic fundamentals, and elevated rate volatility, to partly mitigate rate cuts and flights to quality. Higher neutral rates will also put a floor to the rally.

In Canada, the U.K. and the U.S., we expect accelerated fixed- income buying from pensions while asset managers and ETFs will also influence the U.S.. BoJ policy remains a significant wild card for global FI flows, although we ultimately expect lower U.S. yields to cap the sell-off in JGBs.

Global FX Outlook: What Goes Up Must Come Down

The early stages of 2024 should reflect a handoff from 2023 drivers. We don't think the USD is breaking out and continue to forecast a notable pullback throughout 2024. Our core view is that the world is running at varying speeds and different policy settings, setting in motion more macroeconomic divergence. The FX market responds more to deltas than levels. In turn, while we see the U.S. economy slowing through 2024 leading to a modest recession and steep Fed cuts, the rest of the world is still muddling along.

The softer U.S. outlook should help to reprice some steep risk premiums built-in across markets and adjust asset allocation and market positions away from the USD. We think relative growth, equity performance and risk correlations will matter more than they otherwise have recently.

Our portfolio factors have seen a pivot away from inflation and rates towards growth through 2023. View-wise, a weaker USD is a tide that lifts all boats, but we see relative value in BRL over MXN,and CLP over COP, reflecting a mix of terms of trade adjustments and growth shifts between North America and Asia. We could also see AUD and KRW outperform CNH. CAD should lag across the board as it plays a proxy role for North American growth and the USD.

Commodities Outlook: Transcending the State of Resilience

With China's economy continuing to underperform, and the U.S. and Europe undergoing an interest rate-driven cyclical slowdown, the pace of crude oil, energy products and base metals consumption growth is set to moderate into 2024. But unlike during previous corrective cycles, a broad commodity rout is not expected. The negative impact of weaker demand dynamics and the highest interest rates in over two decades will be counterbalanced by very lean inventories, elevated extraction costs, supply rigidities and targeted Chinese stimulus. Geopolitical factors, such as the Israel-Hamas and Russia-Ukraine conflicts, and OPEC+ discipline are set to help place a floor under crude, the broad energy complex and metals.

These supportive supply-side fundaments, an anticipated Fed pivot to a less restrictive stance, and an eventual recovery will be catalysts for a more robust commodity price environment next year. It is likely that speculative capital flows will participate in a rebound well ahead of a macro turnaround.

Despite the Federal Reserve continuing to deliver a more restrictive policy stance in 2023, gold posted a very respectable performance where prices hit US$2,000 several times. We believe that the combination of an expected Fed dovish pivot by gold traders in late-2023/early-2024 and strong official sector buying should lift prices to US$2,100+/oz on a sustained basis in 2024. As the precious metals environment becomes favourable, silver is also projected to do well as it trends toward US$26/oz. The white metal will benefit from lower carry costs, improved industrial demand later in 2024 and primary market deficits.