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Global Macroeconomic Outlook

Q1 2024

Global Fixed Income team’s view as of 12/13/2023

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Global Economy: Elusive Recession Is Likely to Appear in 2024

Consumers Feel the Pinch

We believe the surprising resilience that characterized the U.S. economy in 2023 will fade by early 2024, largely due to mounting pressures on consumers. Wage growth has slowed, borrowing costs have soared, and banks have significantly tightened their lending standards. Additionally, labor demand has slowed, and the unemployment rate steadily rose through 2023. Accordingly, consumer confidence sank into year-end, which likely won’t bode well for spending into 2024. Business confidence also waned, with corporations also facing higher borrowing costs and stricter loan standards.

The European Economy Is in a Rut

Following a year of weak to flat growth, Europe enters 2024 with fiscal and monetary policies destined to limit economic activity further. Record-high interest rates in the face of persistent inflation have stalled growth, consumer spending, business activity and loan demand. Manufacturing in the 20-country region remained in contraction territory for the 16th consecutive month in October. Germany, the region’s largest economy, has struggled amid high energy prices and weak demand for industrial goods. A similar backdrop — and even higher interest rates and inflation — have largely stalled the U.K. economy.

Uncertainty Clouds China’s Economic Outlook

Distress in China’s property sector remains a headwind for the nation as it attempts to engineer a strong post-pandemic economic recovery. Despite launching programs to aid homebuyers, the property sector has continued to struggle. Through the first 10 months of 2023, property investment dropped more than 9% compared with a year earlier. Additionally, risks surrounding local government debt, slowing global growth and geopolitical unrest have further challenged the Politburo’s growth efforts. So far, piecemeal fiscal and monetary support have failed to overcome the pressures from China’s structural issues.

Inflation: Trending Lower but Still Above Target

Consumer Prices to Slowly Moderate

Inflation has slowed from 2022’s multidecade highs, but the core Consumer Price Index remains above the Federal Reserve’s (Fed’s) target. We expect inflation to ease overall in 2024, but the path back to the Fed’s 2% target may be lengthy. Base effects, geopolitical unrest and fluctuating energy prices will likely fuel volatility in the monthly inflation readings. Meanwhile, we expect shelter prices to ease amid lower rent resets, high mortgage rates and an increase in multifamily housing supply. We believe goods prices remain vulnerable to supply shock risks. We favor a neutral position in inflation-linked securities in this environment, awaiting better valuations.

Inflation Cools in Europe, U.K.

Recent declines in energy and food prices triggered a slowdown in headline inflation in the eurozone and the U.K. Core inflation also moderated but remained notably higher than central bank targets. Looking ahead, the potential for rising energy prices remains a concern. The ongoing Ukraine war and a lengthy Israel-Hamas war or the expansion of the conflict through the Middle East could drive energy prices higher. Additionally, wage growth has pressured a broad range of prices, suggesting inflation may be entrenched, particularly in the U.K. economy.

China Battles Deflation

As the U.S. and Europe have combatted persistent above-target inflation, China has faced flat to falling consumer prices. For example, the nation’s consumer price index recently logged its second year-over-year decline in four months. Food prices, the index’s largest component, plunged 4% in October. Officials insist the decline will be temporary, and inflation should pick up slowly as the effects of a high base in 2022 fade. However, policymakers face a formidable challenge to combat persistent disinflation amid weak consumer demand.

Monetary Policy: Central Banks Leave Options Open

Next Fed Move Will Likely Be a Rate Cut

While the Fed remains reluctant to officially end its tightening campaign, December's dovish pause suggests it's over. Additionally, most policymakers expect to cut rates at least three times in 2024, a notable change from previous Fed projections. While the Fed remains hopeful its cautious approach will engineer a soft landing, we're skeptical. Historically, soft landings have been rare. As the economy – particularly the consumer component – continues to absorb the full effects of the Fed's aggressive rate-hike campaign, we expect a recession to unfold.

European Central Bank May Be First to Ease

Following its fastest tightening pace in history, the European Central Bank (ECB) remains on hold and adopted a “wait and see” approach amid heightened recession worries. Policymakers said they would hold interest rates at their multiyear highs until inflation cools to the 2% target. But with recession looming, the ECB’s commitment remains in doubt. Inflation rates are notably higher in the U.K., where elevated prices and a slowing economy complicate the Bank of England’s strategy. Furthermore, rising wages have pressured the inflation rate, fueling expectations for an extended central bank pause or even potentially more tightening, even as growth stalls.

China Faces Economic Challenges

A series of support measures from the People’s Bank of China in the second half of 2023 yielded marginal economic results. Policymakers face a difficult task building on these gains. With aggressive monetary support, they risk further widening the interest rate differential between China and the U.S. They could further weaken the nation’s currency, leading to additional capital outflows. Elsewhere, many emerging markets (EM) central banks that had aggressively raised rates to combat inflation have ended their tightening campaigns, and some have started cutting rates.

Interest Rates: Yields Retreat

Rate Outlook Highlights Duration

Fed rate hikes, high inflation, a better-than-expected economy and a sharp increase in U.S. Treasury issuance pushed U.S. bond yields to multiyear highs in 2023. But late in the year, that trend reversed, and we expect yields will remain on a downward trend into 2024. The Fed is likely finished with its rate-hike campaign, which should help stabilize shorter-maturity Treasury yields. As growth ultimately slows, yields across the yield curve should decline, highlighting the potential advantages of extending portfolio duration. We also believe reinvestment risk is rising for investors with large cash balances, underscoring the potential benefits of shifting into intermediate-maturity bonds before yields head lower.

European Yields to Decline

We expect government bond yields in Europe and the U.K. to decline amid escalating recession risk and expectations for central bank rate cuts. Yields in semicore European countries, such as Finland and Ireland, have been attractive versus core countries, while peripheral countries may underperform with quantitative tightening.

EM Rates Should Follow U.S. Interest Rates Lower

High U.S. interest rates have been the main factor pressuring EM interest rates. As recession sets in and U.S. rates decline, we believe more EM central banks will cut rates, potentially providing positive results from duration.

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References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.