Q2 2024 Global Macroeconomic Outlook
Global Fixed Income team’s view as of 3/8/2023
Global Economy: A Slowdown Is in Sight
U.S. Consumers Are Running Out of Steam
The U.S. economy has remained surprisingly resilient, thanks largely to surplus consumer savings that fueled robust spending. But that support is fading. Many consumers have depleted their excess savings, and we expect high borrowing costs and tighter lending standards to further squash spending. Business revenues will likely fall as consumers spend less, and layoffs may ensue. A rising unemployment rate will only pressure consumers more. Because consumers account for 70% of gross domestic product (GDP), we expect weaker spending to drive an economic slowdown over the next several months.
European Economy Flatlines
After stagnating in 2023, the economy in Europe continues to battle several headwinds. Record-high interest rates and persistent, though slowing, inflation have pressured growth, consumer spending, business activity and loan demand. Attacks on Red Sea cargo ships from terrorist groups sympathetic to Hamas have also pushed freight costs sharply higher. This turmoil is forcing Europe-bound ships to reroute, delaying the arrival of supplies to European manufacturers and threatening an uptick in inflation. A similar interest rate and inflation backdrop pushed the U.K. economy into recession in late 2023. However, U.K. officials expect proposed tax cuts to restore growth in 2024.
China’s Challenges Persist
Declining real estate investment, rising local government debt levels and weak consumer spending growth have pressured China’s economy. The government has attempted to spark growth with fiscal and monetary policies, but these efforts have primarily targeted businesses rather than households. Accordingly, consumer spending and confidence remain sluggish, representing a key structural challenge for China’s politburo. The recent largest-ever reduction in the benchmark mortgage rate will likely have little effect on consumer sentiment.
Inflation: It’s Heading Lower, but Risks Persist
Consumer Prices Are Still Higher Than Target
The personal consumption expenditures (PCE) price index, the Federal Reserve’s (Fed’s) preferred inflation gauge, has steadily slowed, but the path back to the Fed’s 2% inflation target rate may be lengthy. Base effects, geopolitical tensions and fluctuating energy prices may fuel volatility in the monthly inflation readings. Meanwhile, we expect shelter prices to ease amid lower rent resets, high mortgage rates and growth in multifamily housing supply. We believe goods prices remain vulnerable to supply risks, such as the rerouting of cargo ships to avoid the Red Sea. In this environment, we favor a neutral position in inflation-linked securities and await better valuations.
Inflation Subsides in Europe, U.K.
Declining energy and food prices helped slow the pace of annual headline inflation in the eurozone. The U.K.’s annual core inflation rate has also moderated but remains higher than central bank targets. Robust wage growth and the potential for rising energy prices remain primary risks. The ongoing Ukraine-Russia war and a protracted Israel-Hamas war or the expansion of the conflict across the Middle East could drive energy prices higher. Furthermore, continued shipping disruptions in the Red Sea, a main route for goods headed to Europe, could reignite inflation.
Prices Drop in China
While developed economies combat persistent above-target inflation, deflation has gripped China’s economy. The nation’s consumer price index (CPI) recently recorded its worst decline in over 14 years. Food prices, the index’s largest component, declined at a record pace in January. Officials expect the decline to be temporary and inflation to slowly rise amid government infrastructure spending. However, policymakers face severe headwinds as they combat persistent disinflation amid weak consumer demand.
Monetary Policy: Easing Is Likely, but the Timing Is Uncertain
Fed Proceeds Cautiously
All signs suggest the Fed’s latest rate-hike campaign has ended, and its next move to be rate cuts. But the timing remains unclear. We think the Fed will remain on hold until at least June. Policymakers want to be confident that inflation is nearing 2% and the economy is slowing. Cutting rates too soon could ignite inflation while waiting too long could trigger a sharp economic downturn. In our view, the Fed’s late-2023 projection of three rate cuts in 2024 still seems reasonable, but we don’t expect the central bank to ease quickly or aggressively.
Above-Target Inflation Stalls Rate Cuts in Europe
The European Central Bank (ECB) and Bank of England (BoE) also remain on hold, awaiting confirmation that inflation is under control. Even as the economy flatlines, ECB officials have pushed back on market expectations for near-term rate cuts. In the U.K., where inflation remains higher than in the U.S. and eurozone, policymakers are closely watching for signs that wage growth is cooling.
Similar to the challenges facing the Fed, ECB and BoE officials must tread carefully, as cutting rates too quickly could drive prices higher. Unlike the Fed, which has a dual mandate of controlling inflation and promoting full employment, the ECB and BoE have one mandate — maintaining price stability.
China Likely Needs More Stimulus
Amid persistent deflation and waning consumer and business confidence, China’s central bank recently cut its benchmark five-year mortgage rate by a record margin. Policymakers left other key lending rates unchanged as they face mounting challenges. Without more aggressive central bank support, growth will likely remain sluggish, and deflation may persist. However, aggressive monetary support could widen the interest rate differential between China and the U.S. and weaken China’s currency, leading to additional capital outflows.
Interest Rates: Yields Are Volatile but Heading Lower
Rate Outlook May Favor Short-Intermediate Maturities
After reaching multiyear highs in late 2023, we believe U.S. Treasury yields have likely peaked. But longer-maturity yields may remain volatile in the near term in response to inflation, economic data and Fed rhetoric. We have concentrated our duration exposure in the five-year segment of the yield curve. We believe these securities may benefit the most as the economy slows. When rate cuts appear imminent, we expect to shift to shorter-maturity securities, which may rally on Fed easing.
European Yields on a Downward Trend
We expect central banks in Europe and the U.K. to start cutting rates by midyear. This, combined with stagnant economic data, should keep government bond yields on a downward trend. In our view, yields in Germany and the U.K. are attractive.
EM Rates Should Follow U.S. Rates Lower
High U.S. interest rates have been the main factor pressuring emerging markets (EM) interest rates. As the U.S. economy slows and U.S. rates decline, we believe more EM central banks will ease, potentially providing positive results from duration.
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 risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
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.