Will there be more layoffs in 2024? Will inflation keep dropping toward 2%—and stay down? Will U.S. consumers remain resilient despite larger credit card balances and dwindling savings? What will happen in the equity and bond markets?
Those are some of the questions that hang in our minds as 2023—the year of a surprisingly strong U.S. economy—comes to a close and 2024 begins.
To answer these questions and more, we keep an eye on domestic and global economic indicators and policy daily. We evaluate what will impact you and your money the most and break it down into easy-to-understand, relevant commentary that you can find online in the Statement or delivered directly to your email inbox.
And so, as we go into the year ahead, here are some of the indicators we’ll be watching closely:
- Inflation: Although inflation doesn’t have to hit the Federal Reserve’s 2% target in 2024, it must keep trending downwards toward that figure, said BOK Financial® Chief Investment Officer Brian Henderson. If it doesn’t, then at the least the Fed might have to hold the currently high Federal Funds rate longer, which jeopardizes the possibility of the U.S. economy achieving a “soft landing.” Still, as it is now, Henderson views a soft landing to be more likely than a recession. “We’ll probably know the answer to this as we get further into 2024. As we get more data, we’ll have a better understanding of where inflation is going to land. But for now, I just don’t see any signs of a recession.”
That said, there are some potential ingredients for recession in the economy, but they are not materializing, Henderson noted. For example, although mortgage rates are high, households that are already in a mortgage with a fixed lower rate aren’t feeling the brunt of higher rates.
- The labor market: The Fed has been closely monitoring jobs data to determine whether its rate hikes are adequately slowing the economy to bring down inflation. “Inflation and the labor market are intertwined,” said Steve Wyett, BOK Financial’s chief investment strategist. “If we see inflation continue to decline, but the labor market stays pretty strong, I don’t think the Fed will lower interest rates because they won’t believe that they can get inflation to 2% and have it stay there.”
“Ideally, we will continue to see the number of open jobs come down faster than actual unemployment goes up. That’s probably the path to getting inflation back toward 2% without having to go through a recession,” Wyett continued. “How the labor market unfolds is going to tell the tale.”
- Corporate earnings: Currently, projections are for S&P 500 earnings to grow 10% in 2024, said Matt Stephani, president of Cavanal Hill Investment Management, Inc., which is a subsidiary of BOK Financial Corporation. “We’ll be watching to see if that is reasonable,” he continued. “We think that might be a little aggressive, given the fact that the Fed is trying to slow the economy.”
One factor keeping economic growth—and thus corporate earnings—strong is consumer spending, which has remained strong despite the Fed’s interest rate hikes. But that could change, Stephani noted. “Although consumer spending has been robust so far, as consumers run out of excess savings to spend and credit is harder to come by—and more expensive—it may slow down,” he explained. “Still, government spending continues to be above trend and may make up the difference.”
- The bond market, including bond spreads: Overall, we expect the bond market to perform positively in 2024, based on the assumptions that the Fed will either keep rates stable or cut them slightly in the second half of the year, said Leslie Lukens Martin, tax-exempt fixed income portfolio manager for Cavanal Hill Investment Management. Municipal bonds may perform particularly well, she noted. “With many investors who pulled out of municipal bonds in 2022 ready to re-enter the market given the attractive yields, we expect demand will continue to exceed supply, which should help municipals outperform.”
Meanwhile, throughout the year, one of the factors we’ll be watching closely is the credit spread between 10-year Treasury bonds and 10-year corporate bonds, said Mark Buntz, director of alternative investments for BOK Financial. “It’s a good indicator to follow to see the strength of the economy and financial markets.”
Assuming the same maturity date, a corporate bond will usually give a greater yield than a Treasury bond because of the credit risk associated with the corporation, he explained. “If the economy falters and there are concerns about companies repaying their debt, that spread will expand, but if the economy is doing well, then the spread will contract.”
- Non-U.S. monetary policy: We’re going to be paying a close eye on the Bank of Japan in particular, Henderson said. Japan is one of the few developed economies that has not moved away from zero-interest-rate policies, but they may do so in 2024 because of higher inflation. “If they do, it could drive some of the bond yields in the U.S. and other developed markets higher,” he explained. That’s because, as Japanese bond yields move higher, it could encourage Japanese investors to stop buying or even sell foreign bonds—increasing global bond yields, and in turn, borrowing costs.
However, what happens here in the U.S. may be the most important in determining global growth, Wyett added. “When it gets down to it, the domestic U.S. economy is the global economy ‘dog.’ Everything else is a ‘tail.’”