Macro Outlook


By Investment Desk | 23 Oct, 2023

Q3 has put the optimism that drove the rally in the first half of the year to the test, especially regarding the expectation that the US Federal Reserve (Fed) would soon move to cut interest rates.

Indeed, the resilience of the US economy seems to have led to a reassessment of when the Fed might start easing monetary policy, driving up real interest rates, which in turn weighs on equities.
We believe that economies are beginning to feel the effects of tighter policy, which means that growth could slow to anaemic levels.
Markets have also been unsettled by the difficulties in the Chinese economy: recent data indicates that domestic consumption remains subdued due to a weak property sector, while the authorities have failed to provide enough stimulus to support growth.

Sobering scenarios for US Economy remain under represented.

US Equity markets are largely discounting a benign soft-landing (a reference to the shape of economic slow down that avoids recession) scenario whereby the disinflation process completes before consumption/demand falters, giving Central Banks the opportunity to dial back restrictive policy and avoid recession.
We think the outlook is more complicated and alternative, less market friendly scenarios, are underrepresented:
  • Private sector balance sheets may be in better health versus historical performance and more resilient to rate hikes, but they are not interest rate proof.
  • Pandemic assistance programs and lower discretionary spending during COVID drove “excess” savings to $2.1 trillion. Roughly three-quarters of this excess has been drawn down, and most of the remainder is likely to be used-up by the end of this year, if recent spending patterns continue. Once the excess is used-up, future economic gains will have to be delivered organically.
  • The US rate cycle may have started 18 months ago but it only turned genuinely restrictive more recently. Given the long and variable lags in the transmission of policy, consumption could slow faster than expected.


To read the full AndPapers Q4 2023 click here.

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