Over the last few weeks, we have been trying to frame up the comparison set for growth and inflation as we move through the first half of 2024. One of the goals of this is to get an idea of the economic environment that central bank policymakers will be operating in when target interest rate decisions are being made. Are we more or less likely to be in an economic environment that would justify rate cuts by March, May, or June?
In addition to mapping out the growth and inflation setup, we can look at the market’s expectations for policy decisions via overnight index swap (OIS) futures. When monitoring this data, we believe it is important to not only track the U.S./Federal Reserve, but also the Euro Area/ECB and United Kingdom/BoE, given the historical precedence of central bankers to take cues from one another.
Ultimately, outside of central bank policy decisions, we track global macro and market data because the trajectory of U.S. economic activity is likely not isolated from economic activity abroad.
Source: Macrobond.
Starting in the U.S., growth comps will get tougher in 2024, while inflation comps will ease. The y/y comp for Q1 2024 GDP will be moving against a 0.7% in Q4 2022 to 1.7% Q1 2023. The y/y comps for CPI will move from 6.4% in January 2023 down to 3.1% by June 2023. This means the Fed will likely be operating in a decelerating growth environment while inflation remains above its target rate of inflation. Over the last month, the Fed Funds futures market has shifted its view on the pace and amount of rate cuts from the Federal Reserve. The probability of rate cuts beginning in March has declined to 11%, while June and July fell to 27% and 65%, respectively.
Source: Macrobond.
Source: Bloomberg.
Euro Area growth comps will ease through 2024 alongside easing of inflation comps. One of the major differences between U.S. GDP and Euro Area GDP is how much weaker the Euro Area has been. As the y/y comps ease from already weak growth rates, it would likely be a sign of significant economic weakness if GDP does not pickup in 2024. Complicating the matter, CPI will ease from 8.6% in January 2023 down to 2.4% in November 2023. Given the comp setup, it is possible that we will see an acceleration in growth and inflation as the ECB considers its policy changes over the next few meetings. Similar to the U.S., Euro Area OIS futures imply a meaningful change in expectations for the pace and amount of rate cuts by year end.
Source: Macrobond.
Source: Bloomberg.
United Kingdom growth comps will ease against already weak growth rates while inflation will ease from elevated growth rates. On a y/y basis, UK GDP slowed to -0.2% against a 0.6% comp. Given the weak GDP comp setup, if GDP does not accelerate it would indicate a meaningful decline in economic activity. In terms of inflation, the y/y comp will ease from 10.4% in February 2023 down to 3.9% in November 2023. Unlike the GDP dynamic, the CPI setup has been accelerating y/y against historically elevated growth rates. The Bank of England will likely be in an environment where GDP could accelerate due to weak base effects and inflation remains above target.
Source: Macrobond.
Source: Bloomberg.
While central banks have been at a standstill on rates, the broader economic trend worth highlighting is the cumulative impact of weaker GDP growth and elevated inflation that will likely continue to reverberate across the global economic setup in 2024. We will continue to monitor this setup as more data becomes available and central banks layout their guidance for interest rate targets at upcoming meetings.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Investment Strategist
Boyd Watterson Asset Management, LLC