2024 Global Macroeconomic Outlook
Third Quarter
Global Fixed Income team’s view as of 6/6/2024
Global Economy: Slow Growth Lies Ahead
Weaker Spending May Weigh on U.S. Growth
We expect the ongoing effects of the Federal Reserve’s (Fed’s) aggressive rate-hike campaign and elevated inflation to help stifle consumer spending, the main driver of U.S. gross domestic product (GDP). Additionally, consumers’ pandemic-era savings are gone, eliminating a key funding source of recent robust spending and economic growth. As consumer spending slows, business revenues will likely fall, which could pressure the job market and push the unemployment rate higher. Ultimately, with consumers accounting for nearly 70% of GDP, we expect weaker spending trends to slow down the economy over the next several months.
European Economies Improve
The eurozone economy continues to inch back from a modest recession in late 2023. Private sector business activity recently reached its highest level in a year, suggesting the region’s economic recovery is taking hold. The HCOB Eurozone Composite Purchasing Managers’ Index, a measure of manufacturing and services activity, expanded for the third straight month in May, exceeding analyst forecasts. Meanwhile, an unexpected jump in negotiated pay in early 2024 highlighted the lingering inflation threat. A similar scenario has unfolded in the U.K., where GDP returned to positive territory in early 2024. However, high interest rates may lead to sluggish growth for the rest of the year.
First-Quarter Growth Lifts China’s Forecast
Surprisingly robust growth in early 2024, combined with a record cut in a key mortgage benchmark, has boosted China’s economic growth forecast. The manufacturing and services sectors have expanded, and the unemployment rate edged lower. However, the ongoing property sector slump, rising local government debt levels and weak consumer spending growth continue to create headwinds. Recently, the government pledged to ease property purchase rules and urged local governments to buy unsold homes.
Inflation: Target Rates Remain Elusive
Shelter, Services Keep U.S. Inflation Elevated
Inflation has remained elevated relative to the Fed’s target primarily due to the shelter and core services components. We expect a gradual disinflationary (when prices keep rising but at a slower rate than before) trend driven primarily by slowly easing housing costs. Additionally, a softening labor market should lead to lower wage increases and weak demand for core goods, especially durables (cars, appliances, electronics). Meanwhile, pressures persist. La Niña’s influence on weather in the summer and fall could lead to higher food and energy prices later in the year. Also, we believe some upside risk to goods inflation may emerge next year, as both U.S. presidential candidates are likely to implement tariffs.
Inflation Slows in Europe
Inflation has eased notably in the eurozone and the U.K., more so than in the U.S., but reaching the official 2% target may take more time. Nevertheless, the slowdown was sufficient for the European Central Bank (ECB) to cut interest rates in June for the first time since 2019. Policymakers cautioned that pricing pressures remain strong, though, and a follow-up rate cut was uncertain with inflation still above target. In the U.K., recent higher-than-expected services inflation and a jump in gasoline prices tempered the enthusiasm surrounding the headline inflation rate reaching a three-year low.
Inflation Remains Weak in China
While above-target inflation challenges in developed economies, weak inflation has gripped China’s economy. The nation recovered in early 2024 from a four-month bout of deflation with a slight uptick in the consumer price index. However, food prices, the index’s largest component, recently dropped for the 10th straight month. This factor, along with low consumer confidence and weak demand, has kept deflation concerns alive. The International Monetary Fund expects core inflation to rise but remain low amid weaker-than-anticipated output.
Monetary Policy: Canada and Europe Launch Easing Campaigns
“Higher for Longer” Lingers
The market’s early-2024 Fed rate-cut optimism continues to fade amid stubborn inflation. Persistent above-target gains in the core inflation rate have kept the Fed on hold, and the “higher for longer” rate mantra remains intact. Policymakers want to be confident that inflation is nearing 2% and the economy is slowing before they embark on an easing campaign. We believe the Fed is likely to remain on hold for now, likely until near year-end. We still expect slowing consumer spending to weaken the economy, which should ultimately ease inflationary pressures and give the Fed room to cut rates.
European Central Bank Shifts to Easing Mode
Following the Bank of Canada’s 0.25% rate cut in early June, the ECB followed suit with its own quarter-point cut. However, ECB officials have pushed back on expectations for a subsequent series of easing moves, even as growth remains lackluster. Although inflation has slowed significantly, it remains above the central bank target. U.K. inflation has also slowed sharply, but the Bank of England (BoE) has held interest rates at a 16-year high. While BoE policymakers expect inflation to reach the central bank’s target level, they remain wary of geopolitical risks for energy prices.
China Seeks to Spark Growth
After announcing a record rate cut in February, the People’s Bank of China has left key mortgage benchmarks at record lows amid efforts to spark growth. Policymakers have also held steady a medium-term lending rate in an ongoing effort to stabilize the nation’s currency. However, without more aggressive central bank support, growth may downshift, and deflation may remain a threat. However, aggressive monetary support could widen the interest rate differential between China and the U.S. and weaken China’s currency, which could lead to additional capital outflows.
Interest Rates: Slowing Growth Should Drive Yields Lower
We Believe Intermediate Maturities Are Still Attractive for Now
Amid elevated inflation and uncertain Fed policy, we believe the intermediate segment of the yield curve may offer an opportunity from a duration positioning perspective. As economic growth continues to slow, yields in the five- to 10-year maturity range will likely decline. Then, when rate cuts appear more imminent, we would expect short-maturity securities to benefit from declining yields. We believe this may occur later in the year.
European Yields May Trend Downward
With the ECB shifting to easing mode, we expect yields in Europe to slowly decline. As the BoE gains more confidence that inflation is likely under control, we expect the U.K. to follow suit. This, combined with weak economic data, should keep government bond yields on a downward trend. In our view, yields in Germany and the U.K. remain among the most attractive.
EM Rates Should Follow U.S. Rates Lower
High U.S. interest rates have been the main factor pressuring emerging markets (EM) interest rates. As the U.S. economy slows and rates decline, we believe more EM central banks will ease, potentially providing positive results from duration.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.