13 Jun 2024 | News & Feature

Global Macro Panorama, Part 3 – USA, Trampled under Thucydides Global economic outlook in the shadow of US-China struggles, 12 Jun 2024

  • The chances of a Fed rate cut in 2024 are growing ever slimmer, as US inflation shows no sign of converging towards the Fed’s 2% YoY target. Indeed, fundamental (“supercore”) inflation is starting to rise again, underlining the difficulties of setting too-low of an inflation target against a backdrop of an energy/geopolitical crisis.
  • The current US economic expansion has many peculiarities that skew the usual business cycle indicators—including classic recession signals like the yield curve. Above all, the high interest rates have been a net positive for the upper- and middle-classes, who benefit from higher financial incomes and one-off tax-loss harvesting. Their strong demand, especially for services, partly explains the resilience of US growth and labor market.
  • But a high-rate environment is a net negative for borrowers, including low-income households and the federal government. Declining living standards among the former explains why Trump is now favored to win the 2024 Election, despite solid macro numbers.
  • The US real rates will eventually have to turn negative, given the high level of federal debt and the need to finance its industrial policies. But there is less certainty over what would constitute the “pivot point”, with several possible scenarios (those we deem more likely are in yellow):
    • Trump’s triumph: As president, Trump would exert greater control over the Fed and direct it towards weak-USD/low-rate policy which he favors
    • Gradual slowdown: The US economy is cooling down as the tax-loss harvesting effect fades, but it may only warrant a rate cut in 2025
    • Banking crisis: While credit risk is rising (esp. from CRE), liquidity has improved since the regional bank crisis of 2023
    • Sovereign bond crisis: While US rivals (esp. China) are de-risking from US Treasuries, the situation is manageable for now due to robust demand from elsewhere and a shift towards short-term bills issuance
    • “Passive pivot”: The Fed does not cut nominal rates meaningfully, but is simply overtaken by rising inflation