My Account

Global Macroeconomic Outlook

Q1 2024

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

long green bar separator

Illuminated globe.

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 (a temporary slowing of the pace of price inflation) 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.

EM Rates Should Follow U.S. Interest Rates Lower

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

Inflation in Focus

Get market updates, behavioral insights and investment ideas.

Agency mortgages

A form of securitized debt that represents ownership in pools of mortgage loans and their payments.

Asset-backed securities (ABS)

A form of securitized debt (defined below), ABS are structured like mortgage-backed securities (MBS, defined below). But instead of mortgage loans or interest in mortgage loans, the underlying assets may include such items as auto loans, home equity loans, student loans, small business loans, and credit card debt. The value of an ABS is affected by changes in the market's perception of the assets backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing any credit enhancement.

BB and BBB credit rating

Securities and issuers rated AAA to BBB are considered/perceived “investment-grade”; those rated below BBB are considered/perceived non-investment-grade or more speculative.

Beta

Beta is a standard measurement of potential investment risk and return. It shows how volatile a security's or an investment portfolio's returns have been compared with their respective benchmark indices. A benchmark index's beta always equals 1. A security or portfolio with a beta greater than 1 had returns that fluctuated more, both up and down, than those of its benchmark, while a beta of less than 1 indicates less fluctuation than the benchmark.

Central bank

Entity responsible for oversight of a nation’s monetary system, including policies and interest rates.

Collateralized loan obligations (CLOs)

A form of securitized debt, typically backed by pools of corporate loans and their payments.

Commercial Mortgage-Backed Securities (CMBS)

MBS that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties, including office buildings, shopping centers, industrial parks, warehouses, hotels, and apartment complexes.

Commercial paper

Short-term debt issued by corporations to raise cash and to cover current expenses in anticipation of future revenues.

Commodities

Commodities are raw materials or primary agricultural products that can be bought or sold on an exchange or market. Examples include grains such as corn, foods such as coffee, and metals such as copper.

Consumer Price Index (CPI)

CPI is the most commonly used statistic to measure inflation in the U.S. economy. Sometimes referred to as headline CPI, it reflects price changes from the consumer's perspective. It's a U.S. government (Bureau of Labor Statistics) index derived from detailed consumer spending information. Changes in CPI measure price changes in a market basket of consumer goods and services such as gas, food, clothing, and cars. Core CPI excludes food and energy prices, which tend to be volatile.

Corporate securities (corporate bonds and notes)

Debt instruments issued by corporations, as distinct from those issued by governments, government agencies, or municipalities. Corporate securities typically have the following features: 1) they are taxable, 2) they tend to have more credit (default) risk than government or municipal securities, so they tend to have higher yields than comparable-maturity securities in those sectors; and 3) they are traded on major exchanges, with prices published in newspapers.

Correlation

Correlation measures the relationship between two investments--the higher the correlation, the more likely they are to move in the same direction for a given set of economic or market events. So if two securities are highly correlated, they will move in the same direction the vast majority of the time. Negatively correlated investments do the opposite--as one security rises, the other falls, and vice versa. No correlation means there is no relationship between the movement of two securities--the performance of one security has no bearing on the performance of the other. Correlation is an important concept for portfolio diversification--combining assets with low or negative correlations can improve risk-adjusted performance over time by providing a diversity of payouts under the same financial conditions.

Credit quality

Credit quality reflects the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer's securities. Common measurements of credit quality include the credit ratings provided by credit rating agencies such as Standard & Poor's and Moody's. Credit quality and credit quality perceptions are a key component of the daily market pricing of fixed-income securities, along with maturity, inflation expectations and interest rate levels.

Credit ratings

Measurements of credit quality (defined below) provided by credit rating agencies (defined below). Those provided by Standard & Poor's typically are the most widely quoted and distributed, and range from AAA (highest quality; perceived as least likely to default) down to D (in default). Securities and issuers rated AAA to BBB are considered/perceived to be "investment-grade"; those below BBB are considered/perceived to be non-investment-grade or more speculative.

Debt security

A debt instrument, including bonds, certificates of deposit or preferred stocks.

Deflation

Deflation is the opposite of inflation (see Inflation); it describes a decline in prices for goods, assets and services, and is considered a highly undesirable economic outcome by economists and policymakers.

Downside protection

Occurs when the investor or fund manager uses techniques attempting to prevent a decrease in the value of the investment.

Duration

Duration is an important indicator of potential price volatility and interest rate risk in fixed income investments. It measures the price sensitivity of a fixed income investment to changes in interest rates. The longer the duration, the more a fixed income investment's price will change when interest rates change. Duration also reflects the effect caused by receiving fixed income cash flows sooner instead of later. Fixed income investments structured to potentially pay more to investors earlier (such as high-yield, mortgage, and callable securities) typically have shorter durations than those that return most of their capital at maturity (such as zero-coupon or low-yielding noncallable Treasury securities), assuming that they have similar maturities.

Earnings per share (EPS)

The portion of a company's profits allocated to each outstanding share of its common stock. It is as an indicator of a company's profitability.

Eurozone

The eurozone is sometimes referred to as the euro area and represents the member states that participate in the economic and monetary union (EMU) with the European Union (EU). The eurozone currently consists of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Federal funds rate (aka fed funds rate)

The federal funds rate is an overnight interest rate banks charge each other for loans. More specifically, it's the interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. It's an interest rate that's mentioned frequently within the context of the Federal Reserve's interest rate policies. The Federal Reserve's Open Market Committee (defined below) sets a target for the federal funds rate (which is a key benchmark for all short-term interest rates, especially in the money markets), which it then supports/strives for with its open market operations (buying or selling government securities).

Federal Reserve (Fed)

The Fed is the U.S. central bank, responsible for monetary policies affecting the U.S. financial system and the economy.

Fundamentals/fundamental analysis

Investment "fundamentals," in the context of investment analysis, are typically those factors used in determining value that are more economic (growth, interest rates, inflation, employment) and/or financial (income, expenses, assets, credit quality) in nature, as opposed to "technicals," which are based more on market price (into which fundamental factors are considered to have been "priced in"), trend, and volume factors (such as supply and demand), and momentum. Technical factors can often override fundamentals in near-term investor and market behavior, but, in theory, investments with strong fundamental supports should maintain their value and perform relatively well over long time periods.

Gross domestic product

Gross domestic product (or GDP) is a measure of the total economic output in goods and services for an economy.

High-yield bonds

High-yield bonds are fixed income securities with lower credit quality and lower credit ratings. High-yield securities are those rated below BBB- by Standard & Poor's.

Inflation

Inflation, sometimes referred to as headline inflation, reflects rising prices for consumer goods and services, or equivalently, a declining value of money. Core inflation excludes food and energy prices, which tend to be volatile. It is the opposite of deflation (see Deflation).

Inflation-protected securities

Debt securities that offer returns adjusted for inflation; a feature designed to eliminate the inflation risk.

Investment-grade corporate bond or credit

A debt security with a relatively low risk of default issued and sold by a corporation to investors.

Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.

Mortgage-backed securities (MBS)

A form of securitized debt (defined below) that represents ownership in pools of mortgage loans and their payments. Most MBS are structured as "pass-throughs"--the monthly payments of principal and interest on the mortgages in the pool are collected by the financial entity that is servicing the mortgages and are "passed through" monthly to investors. The monthly and principal payments are key differences between MBS and other bonds such as Treasuries, which pay interest every six months and return the whole principal at maturity. Most MBS are issued or guaranteed by the U.S. government, a government-sponsored enterprise (GSE), or by a private lending institution.

MSCI World Index

A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Municipal bonds

These are long-term municipal securities (defined below) with maturities of 10 years or longer.

Municipal securities (munis)

Debt securities typically issued by or on behalf of U.S. state and local governments, their agencies or authorities to raise money for a variety of public purposes, including financing for state and local governments as well as financing for specific projects and public facilities. In addition to their specific set of issuers, the defining characteristic of munis is their tax status. The interest income earned on most munis is exempt from federal income taxes. Interest payments are also generally exempt from state taxes if the bond owner resides within the state that issued the security. The same rule applies to local taxes. Another interesting characteristic of munis: Individuals, rather than institutions, make up the largest investor base. In part because of these characteristics, munis tend to have certain performance attributes, including higher after-tax returns than other fixed income securities of comparable maturity and credit quality and low volatility relative to other fixed-income sectors. The two main types of munis are general obligation bonds (GOs) and revenue bonds. GOs are munis secured by the full faith and credit of the issuer and usually supported by the issuer's taxing power. Revenue bonds are secured by the charges tied to the use of the facilities financed by the bonds.

Nominal yield

For most bonds and other fixed-income securities, nominal yield is simply the yield you see listed online or in newspapers. Most nominal fixed-income yields include some extra yield, an "inflation premium," that is typically priced/added into the yields to help offset the effects of inflation (see Inflation). Real yields (see Real yield), such as those for TIPS (see TIPS), don't have the inflation premium. As a result, nominal yields are typically higher than TIPS yields and other real yields.

Non-agency commercial mortgage-backed securities (CMBS)

MBS that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties. Non-agency CMBS are not guaranteed by the U.S. government or a government-sponsored enterprise.

Price to earnings ratio (P/E)

The price of a stock divided by its annual earnings per share. These earnings can be historical (the most recent 12 months) or forward-looking (an estimate of the next 12 months). A P/E ratio allows analysts to compare stocks on the basis of how much an investor is paying (in terms of price) for a dollar of recent or expected earnings. Higher P/E ratios imply that a stock's earnings are valued more highly, usually on the basis of higher expected earnings growth in the future or higher quality of earnings.

Quality

Nationally recognized statistical rating organizations assign quality ratings to reflect forward-looking opinions on the creditworthiness of loan issuers.

Quantitative easing (QE)

A form of monetary policy used by central banks to stimulate economic growth. In QE, a central bank (such as the U.S. Federal Reserve) buys domestic government securities to increase the domestic money supply, lower interest rates, and encourage investors to make investments in riskier assets such as stocks and high-yield securities.

Real estate investment trusts (REITs)

Real estate investment trusts (REITs) are securities that trade like stocks and invest in real estate through properties or mortgages.

Real yield

For most bonds and other fixed-income securities, real yield is simply the yield you see listed online or in newspapers (see Yield) minus the premium (extra yield) added to help counteract the effects of inflation (see Inflation). Most "nominal" fixed-income yields (see Nominal yield) include an "inflation premium" that is typically priced into the yields to help offset the effects of inflation. Real yields, such as those for TIPS, don't have the inflation premium. As a result, TIPS yields and other real yields are typically lower than most nominal yields.

Russell 1000® Growth Index

Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.

Russell 1000® Value Index

Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.

S&P 500® Growth Index

A style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics by using a style-attractiveness weighting scheme.

S&P 500® Index

The S&P 500® Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not an investment product available for purchase.

S&P 500® Value Index

The S&P 500 Value Index is a style-concentrated index that measures stocks in the S&P 500 using three factors: the ratios of book value, earnings, and sales to price. It is not an investment product available for purchase.

Securitized debt

Debt resulting from the process of aggregating debt instruments into a pool of similar debts, then issuing new securities backed by the pool (securitizing the debt). Asset-backed and mortgage-backed securities (ABS and MBS, defined further above) and collateralized mortgage obligations (CMOs, defined above) are common forms of securitized debt. The credit quality (defined above) of securitized debt can vary significantly, depending on the underwriting standards of the original debt issuers, the credit quality of the issuers, economic or financial conditions that might affect payments, the existence of credit backing or guarantees, etc.

Senior-secured securities

A security that has a higher priority compared to another in the event of liquidation.

Sovereign debt

A country's own government-issued debt, priced in its native currency, that can be sold to investors in other countries to raise needed funds. For example, U.S. Treasury debt is U.S. sovereign debt, and would be referred to as sovereign debt when bought by foreign investors. Conversely, debt issued by foreign governments and priced in their currencies would be sovereign debt to U.S. investors.

Spreads (aka "interest-rate spreads", "maturity spreads," "yield spreads" or "credit spreads")

In fixed income parlance, spreads are simply measured differences or gaps that exists between two interest rates or yields that are being compared with each other. Spreads typically exist and are measured between fixed income securities of the same credit quality (defined above), but different maturities, or of the same maturity, but different credit quality. Changes in spreads typically reflect changes in relative value, with "spread widening" usually indicating relative price depreciation of the securities whose yields are increasing most, and "spread tightening" indicating relative price appreciation of the securities whose yields are declining most (or remaining relatively fixed while other yields are rising to meet them). Value-oriented investors typically seek to buy when spreads are relatively wide and sell after spreads tighten.

Spread sectors (aka "spread products," "spread securities")

In fixed income parlance, these are typically non-Treasury securities that usually trade in the fixed income markets at higher yields than same-maturity U.S. Treasury securities. The yield difference between Treasuries and non-Treasuries is called the "spread" (defined further above), hence the name "spread sectors" for non-Treasuries. These sectors--such as corporate-issued securities and mortgage-backed securities (MBS, defined above)--typically trade at higher yields (spreads) than Treasuries because they usually have relatively lower credit quality (defined above) and more credit/default risk (defined above), and/or they have more prepayment risk (defined above).

Spread widening, tightening

Changes in spreads that reflect changes in relative value, with "spread widening" usually indicating relative price depreciation and "spread tightening" indicating relative price appreciation.

Stagflation

Stagflation describes slowing economic growth combined with high inflation.

Subordinated security

An unsecured loan or bond that ranks below more senior loans in terms of claims on assets or earnings.

Treasury inflation-protected securities (TIPS)

TIPS are a special type of U.S. Treasury security designed to address a fundamental, long-standing fixed-income market issue: that the fixed interest payments and principal values at maturity of most fixed-income securities don't adjust for inflation. TIPS interest payments and principal values do. The adjustments include upward or downward changes to both principal and coupon interest based on inflation. TIPS are inflation-indexed; that is, tied to the U.S. government's Consumer Price Index (CPI). At maturity, TIPS are guaranteed by the U.S. government to return at least their initial $1,000 principal value, or that principal value adjusted for inflation, whichever amount is greater. In addition, as their principal values are adjusted for inflation, their interest payments also adjust.

Treasury note

A treasury note is a debt security issued by the U.S. government with a fixed interest rate and maturity ranging from one to 10 years.

Treasury yield

The yield (defined below) of a Treasury security (most often refers to U.S. Treasury securities issued by the U.S. government).

Valuation

A quantitative estimate of a company or asset’s value.

Yield

For bonds and other fixed-income securities, yield is a rate of return on those securities. There are several types of yields and yield calculations. "Yield to maturity" is a common calculation for fixed-income securities, which takes into account total annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.

Yield curve

A line graph showing the yields of fixed income securities from a single sector (such as Treasuries or municipals), but from a range of different maturities (typically three months to 30 years), at a single point in time (often at month-, quarter- or year-end). Maturities are plotted on the x-axis of the graph, and yields are plotted on the y-axis. The resulting line is a key bond market benchmark and a leading economic indicator.

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.