Macro Outlook: Rates and Profits Critical to the Path Forward

Editor’s Note: Every year, Loomis Sayles features sector outlooks across the fixed income market. We asked experts immersed in each sector three questions that drill into key themes for the year ahead. We will share their views in a series of outlooks over the next few weeks.

To set the stage, we’re starting with Craig Burelle, Global Macro Strategist, Credit, and his views on the macro backdrop in 2024.

1. Financial markets seem to have priced in a soft landing for the US economy in 2024. Do you agree with that view?

Yes, we do. While somewhat rare historically, depending on one’s definition, we believe a soft landing may be occurring right now in the US. We define a soft landing as a scenario in which US real economic growth remains positive, unemployment does not rise markedly and core inflation heads toward 2.5% by mid-year 2024.

On the Loomis Sayles Macro Strategies team, we firmly believe that corporate profits drive the credit cycle. A downturn appears less likely now that the US earnings recession has ended. As long as year-over-year corporate profit growth comes through in the mid-single-digit range, we believe a soft landing is achievable. With profits on the rise, companies are more likely to retain workers and avoid widespread layoffs.

That said, much like the markets, we are constantly reassessing our economic scenarios as data comes in. While a majority of the Macro Strategies team favors a soft landing scenario, we are also monitoring our less probable scenarios, including a downturn scenario and a higher-rates-for-longer scenario. Learn more here.

2. Many central banks appear to be finished with their hiking cycles as inflation trends lower. What’s your view on central bank policy in 2024?

To the relief of many consumers globally, inflation has started to slow down. We expect inflation to continue cooling in 2024 as economic growth trends lower, giving central banks room to cut rates if needed.

In our view, the European Central Bank (ECB) and Bank of England (BoE) seem content to hold policy rates near current levels, even with real growth near zero. The US Federal Reserve (Fed) has signaled that rate cuts are possible. We believe the current Fed board wants to avoid an overly restrictive policy stance, particularly given the late stage of the credit cycle and below-trend growth in the US. We think the Fed may begin cutting interest rates this year, potentially starting with a 25-basis-point cut in June and again in September and December. Our view is less aggressive than what has been priced into the fed funds futures market.  

Our expectations for interest rates are a critical driver of our broader economic views. Monetary policy has been restrictive around the world and we are starting to see growth rates move lower. We believe central banks’ response to lower growth will lay the groundwork for the next phase of credit cycle. We think the United States can avoid a downturn—at least for the next few quarters—but continental Europe may not.

3. Where are you seeing potential opportunities in this environment?

We believe that risk assets have largely priced in a more optimistic economic outlook and valuations across most financial markets have risen. Our expectations for lower interest rates across the globe supports longer-duration positioning relative to benchmarks. We have a neutral view on credit—we think US credit markets can offer carry, but we don’t see much room for spread compression.

In foreign exchange markets, we expect the dollar to weaken as the US continues to chug along in late cycle. A weaker dollar would likely bolster emerging market currency returns, particularly those with higher rates than the US. We believe emerging market local-currency bonds can offer attractive carry over high-grade US fixed income, with the potential for strong currency performance.