Market bets for 2024 thrown into chaos by US recession conundrum
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[December 07, 2023] By
Naomi Rovnick
LONDON (Reuters) - Investment banks and asset managers have wildly
varying stock market and currency calls for 2024, reflecting deep
division over whether the U.S. economy will enter a long-heralded
recession and drag the world with it.
The lack of consensus among forecasters is a stark contrast to a year
ago, when most predicted a U.S. recession and rapid rate cuts that
failed to materialize. The world's largest economy expanded by 5.2% in
the third quarter of this year.
The divisions this year have produced a scattergram of projections for
the U.S. interest rate path and how global assets that are influenced by
the Federal Reserve's actions will perform.
Market participants are therefore bracing for a bumpy start to the new
year after a strong rally last month for both stocks and bonds based on
a short-term consensus that inflation and interest rates are on a firm
downward path.
"Whether the U.S. has a hard landing or a soft landing will dominate the
market," said Sonja Laud, chief investment officer at Legal & General
Investment Management.
"The narrative isn't clear yet," she added, noting that if current
interest rate forecasts "were to shift significantly that creates
significant volatility".
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Options trading data shows that investors are becoming increasingly
interested in protecting their portfolios from heightened stock market
volatility ahead.
ALL TOGETHER...NOT
Economists polled by Reuters predict 1.2% U.S. GDP growth for 2024 on
average.
But while forecasters are united that the Fed's most aggressive rate
hiking cycle in decades will cause a slowdown, they are split on whether
2024 will also include a couple of quarters of economic contraction that
may prompt rate cuts and weaken the dollar.
Amundi, Europe's largest asset manager, now expects a U.S. recession in
the first half of 2024, meaning the group is negative on the dollar and
likes emerging market assets.
In foreign exchange, Japan's yen will be the market's "bright spot" as
the Bank of Japan is expected to finally move away from its ultra-easy
monetary policy, said Amundi CIO Vincent Mortier.
The yen is trading around 147 per dollar, not too far from 30-year lows.
Morgan Stanley, however, sees no recession and reckons the Fed may keep
rates high well into next year. It views the dollar index rising to 111
points from 104 currently, the euro dropping to $1 and the yen
recovering only moderately to 142 per dollar.
STOCKS, UP OR DOWN?
For U.S. stocks, which drive world equity markets, forecasters are
divided between what Citi head of trading strategy Stuart Kaiser calls
the "converts and disciples" of last year's strong recession consensus.
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A street sign for Wall Street hangs in front of the New York Stock
Exchange May 8, 2013. REUTERS/Lucas Jackson
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"Some bears are (still) very dedicated and believe that if it didn't
happen this year it has to happen next year," Kaiser said.
Deutsche Bank predicts a mild U.S. recession in the first half of
2024 and a whopping 175 basis points of rate cuts, with lower
borrowing costs driving the S&P 500 share index to 5,100 points. The
S&P 500 has gained 19% this year to 4,567.
JP Morgan views a recession as possible and the S&P finishing the
year at 4,200, while Goldman Sachs sees only limited recession risk.
Equity analysts' estimates of S&P 500 earnings are currently the
most dispersed since the COVID-19 pandemic, according to Blackrock
Investment Institute (BII).
LGIM, which manages roughly $1.5 trillion of assets, is underweight
equities and expects a U.S. downturn, Laud said.
Some investors meanwhile had moved beyond the U.S. economy debate to
seek other opportunities.
Luca Paolini, chief strategist at Pictet Asset Management, said the
firm's big call was for gains in European equities, which they
believed were undervalued.
BONDS ARE BACK
Most economic forecasters agree that a global inflation surge is
over. But whether this means dramatic rate cuts, which generally
raise bond prices as yields fall, is not something investors agree
on either.
Bond giant PIMCO puts the probability of a U.S. recession in 2024 at
50% and recommends government debt over equities.
HSBC fixed income strategists target a 3% yield for the benchmark
10-year U.S. Treasury by late 2024, down from about 4.3% currently.
But Adrian Gray, global chief investment officer at Insight
Investment Management, said government bond markets had moved too
exuberantly already.
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"We're seeing the Fed, the European Central Bank and the Bank of
England all cutting (rates) from around Q3 next year," he said.
"Right now, government bond markets are pricing in more than that,"
he said, projecting yields would rise "a little," from here.
(Reporting by Naomi Rovnick; editing by Dhara Ranasinghe and Emelia
Sithole-Matarise)
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