Macro market analysis playlist

November 2024 highlights

Flight of Icarus: Here we go again. We’ve come back from the edge of imminent recession with rates now overshooting to the upside as markets extrapolate stronger data and a pro-growth Trump agenda into a structurally higher nominal growth environment. While the trading range for the 10-year yield has likely shifted higher given the election results, the aggressive widening has lost the plot, just as we’ve seen in prior selloffs. We’re primed for yet another reversal as rates look set to rally from here.

Run to the Hills: While the market’s repricing of Trump’s victory was certainly a factor in the sharp backup in yields over the past six weeks, from our perch initial conditions and stronger data were the bigger culprit. An excessively pessimistic consensus, paired with stronger growth data, modestly firmer inflation prints, and the Fed’s explicit defense of the labor side of the mandate materially clipped left tail risks. The floor for rates may now be higher, but softer data in the months ahead is likely to fuel a modest rally from current levels.

Purgatory: Growth has remained remarkably resilient, but that resilience is likely to serve as something of a self-governing mechanism to the pace of growth in coming quarters. With the latest selloff in rates, 30-year fixed mortgage rates have backed up over 7% once again. The resulting stasis in housing activity is likely to keep starts below the pace of completions, which translates to less construction activity and a mechanical drag on GDP growth. That growth is likely to be simply delayed, not destroyed, but it will be a near term drag, nonetheless.

The Prisoner: Consumption is likely to be another driver of modestly slower growth in the coming months. We certainly won’t bet against the US consumer, and while there are buffers to support robust consumption in the form of both lower savings rates and increased credit usage, consumption has outpaced income growth over the past few months, suggesting we may see some giveback through slower consumption in the months ahead.

The Number of the Beast: Deficits, our favorite topic. Economic theory might suggest that higher deficits portend higher rates, but theory can’t refute the fact that, in practice, changes in the deficit have historically had no meaningful relationship with changes in interest rates. Higher deficits don’t intrinsically translate to upward pressure on yields and secular US exceptionalism is a significant factor supporting demand for US Treasuries, thereby keeping funding costs in check. Fade the deficit fears.