Macro market analysis playlist

September 2024 highlights

Am I Losin’: The market’s focus is now squarely on the labor side of the mandate, given the softening we’ve witnessed and the recent trigger of the Sahm Rule. And although unemployment tends to be inertial, you need to have a reason as to why that trend of softening continues. Much of the rise in unemployment has been a function of increasing supply colliding with low hiring rates. But the typical feedback loop that feeds that inertia is a function of softer consumption and layoffs; however, if revenues are holding up and margins are expanding, there’s little reason to expect a wave of aggressive layoffs.

Simple Man: This is a Taylor Rule Fed, and with the inflation gap rapidly closing as core PCE quickly approaches target as the unemployment gap has already closed on recent softening, the implication for policy is clear. The balance of risks has swung back to the labor side of the mandate, with upside risks to unemployment now far larger than upside risks to inflation. The data itself provides plenty of ammunition for the Fed to commence its easing cycle and move quickly back to a more neutral stance.

Comin' Home: While the recent debate has been all about the size of that first cut, a secondary debate continues to rage with respect to how many cuts are priced into rate markets. Markets may be a little overzealous in pricing in 225 basis points (bps) of easing by June 2025, but as inflation has cooled to target, real policy rates have ratcheted to their most restrictive levels. Though it’s impossible to say what neutral is with certainty, real policy rates appear to be at least 150bps restrictive based on a wide range of neutral estimates. The magnitude and pace of cuts are a function of both the magnitude of hikes and the timing of the start of the easing cycle, both of which suggest a large and rapid recalibration given the shifting balance of risks.

Free Bird: Soft landings may be rare, but midcycle adjustments, where the Fed recalibrates policy in the midst of an ongoing expansion, are not. Since 1971 we’ve seen at least eight examples of these midcycle adjustments. While markets have grown accustomed to rates falling down the elevator shaft, a more benign recalibration of policy has tended to be supportive for both the real economy and risk assets.

I Got the Same Old Blues: While midcycle adjustments have historically been bullish up and down the cap spectrum, the extent of that support is not homogenous. It all boils down to the growth outlook. Midcycle adjustments have tended to stabilize conditions as opposed to drive a strong reacceleration in growth expectations in the subsequent 12 months. That has tended to see large-caps continue to outperform small-caps. The start of the easing cycle is likely to continue to favor large over small until we begin to see a brighter growth backdrop taking shape for 2025.