Soft Landing vs Recession
November 27, 2023
A US soft landing in 2024 is the prevailing narrative with risks skewed toward a potential recession. The difference between a soft landing vs the start of a recession will be hard to define during the first six months of the year. US GDP growth is expected to slow considerably and labor markets are expected to cool. The difference between a soft landing and a recession scenario is in the inflation outlook. The soft landing camp has core inflation (core PCE) drifting below 2.5% next year, which allows the Fed to cut rates by ~50bp in Q3’24 and ~50bp in Q4’24. Soft landings are difficult to engineer with the US economy recording only three occurrences in modern history following rate cycles totaling more than 250bp. Those expecting a recession next year feel that inflation will remain stickier, resulting in higher for longer rates until something breaks.
Gold is trading at a 6-month high intraday as the soft-landing narrative makes its way into cross markets. Gold is priced in dollars and over a short period of time, the value of a currency is heavily influenced by the country’s interest rate differential. All else equal, a material slowdown in US growth and inflation that triggers rate cuts would narrow the dollar’s interest rate differential, resulting in a lower relative value. Note that gold has also been helped by a 12% YoY increase in demand out of China given a lack of onshore investment alternatives and still-low consumer confidence.
The SPX is up +8.7% MTD as weaker October payrolls and a cooler CPI print pushed 10-year yields below technical support levels. Bond yields are lower again today following weaker US data but this week’s heavy US Treasury issuance could result in upward pressure on bond yields. If bond yields can stay contained this week, we’d expect to see a continuation of the SPX performance chasing rally likely into mid-December.