A recent report argued that global financial asset markets entered 2024 riding a wave of optimism about a “soft-landing” for the U.S. economy, together with high expectation for aggressive rate cuts by the Fed and most other developed market central banks.
Instead, the recent dramatic easing in aggregate monetary conditions is reinforcing the reacceleration of the U.S. economy. This will more likely result in a “no-landing” outcome, with a continuation of above-trend economic growth and sticky underlying inflation pressures. This will curtail the amount of rate cuts the Fed will be able to provide.
U.S. and G7 bonds may remain reasonably well bid in the near run but risks for yields are again skewed to the upside from current levels. Investors should stay positioned for broadening equity participation and the ongoing catch-up of the cyclical and select defensive laggards, which offer better valuation support to offset higher-for-longer bond yields.