Representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets, and economic releases such as inflation, GDP, consumer confidence, housing, retail sales, and job unemployment news. Here is their outlook for the second quarter of 2024.
Coming into 2024, weaker economic data from the previous quarter supported a narrative of a steadily slowing U.S. economy. Given the progress made on inflation, coupled with some evidence of a slowing economy, our view supported the narrative that the Fed could commence a rate-cutting campaign, but we certainly thought the market’s initial interpretation of five to six rate cuts in 2024 was dubious at best. In our 2024 outlook, we penciled in a forecast centered around three rate cuts for the balance of the year, but the winds have shifted for the Fed during the first quarter of 2024 and, with monthly inflation data moving in the other direction, we think it is going to take some time before the Fed is thoroughly convinced they should be cutting policy rates.
Throughout the first quarter, the U.S. economy has shown resilience across both hard and soft economic data categories, with five out of six major economic categories showing positive upside surprise relative to expectations. As a result, the 10-year yield has remained well above 4% as the market continued to gravitate away from the idea of a March rate cut, opting instead to shift focus toward a cut at the June Fed meeting. However, given the uptick of inflation and strong data from the labor market, a rate cut in June is also looking more unlikely. Meanwhile, the S&P 500 hit an all-time high during the quarter, and the index’s performance was quite impressive despite the shifting narrative around rate cuts from the Fed. Giving a nod to a 1960s Western movie, the “Magnificent Seven” is a name used to describe seven of the most valuable large-cap technology companies that continue to push the boundaries around trends in artificial intelligence, cloud computing, as well as advanced hardware and software. The Magnificent Seven are driving the S&P 500 Index's return, but our concerns are building as the level of concentration the group has in the S&P 500 is above 30% and comprises nearly 25% of the index’s earnings. Looking ahead, the route has become more unclear given the stickiness of inflation and uncertainty surrounding Fed policy, but odds are in favor of a bearish continuation with regards to bonds, and the direction of the equity market hangs in the balance of earnings living up to expectations that the market has built in.
Real GDP increased +3.4% in 4Q23, and while down from a strong +4.9% in 3Q23, the pace of growth has still been better than market participants had anticipated. State and local government spending along with a resilient consumer continue to be driving factors for the recent economic strength. On the other hand, it’s concerning that household debt levels have increased to a record $17.5T at the same time banks are reporting tighter lending standards. This could be a sign of headwinds to come for consumer spending and potentially slow economic growth. However, with the labor market showing no signs of cracking anytime soon, our base case is for Real GDP to continue growing around potential. On this premise, we are expecting Real GDP growth to be near the upper end of the range of +1.0% to +2.0% potential for FY 2024.
It has been quite a parlor game for market participants to figure out the magnitude and timing of Fed rate cuts this year. Following the Fed’s rate cut signal in December, we had long been skeptical of the market’s interpretation of Fed cuts early on as it always felt premature to kick off a series of rate cuts when inflation was still well above the Fed’s target. With inflation data picking up since the beginning of the year, the market narrative has shifted significantly toward the idea of only a couple rate cuts instead of five or even six. The problem for the Fed is they already let the cat out of the bag, and Chairman Powell doesn’t seem too keen on going back to the drawing board. We expect the Fed will eventually get around to a couple rate cuts this year given where Core PCE inflation is, but it certainly won’t be any time soon. As such, we are updating our forecast for Fed funds to end the year between 4.50% and 5.00%.
Inflation has largely continued its downward trend, with Core PCE printing +2.8% in February, but other monthly inflation prints have been coming in higher than expected. Housing and utilities costs were again among the largest contributors to the inflation. Real-time housing data from Zillow and others continue to show shelter costs declining faster than the index portrays, which should resolve over time. Inflation pressures are consistent within service sectors like auto insurance and health care, while goods inflation remains under control. We expect inflation to move lower in 2024, however, getting to the Fed’s stated 2% inflation target may be less linear than last year. Given this backdrop, our forecast for Core PCE (excluding food and energy) remains unchanged, ending 2024 between 2.0% and 3.0%.
The year is shaping up to be another volatile year for U.S. Treasuries, and in particular, the 10-year note has seen a big upward shift in yield as the economy has proven to be much stronger than anticipated. Against the current backdrop, we see some risk for the 10-year rate to drift even higher, but we are doubtful that we can reach the high point of 5.00% that we saw in 2023 unless rate hikes come back into the picture. Our base case going into the year was that 10-year yields would remain elevated and likely end the year higher than where they started with a steeper yield curve. Despite the 10-year yield moving above our expected target, we still think the economy will marginally slow and, with a couple rate cuts implemented by the Fed before year end, we should see the yield end the year near the top of our forecasted range of 3.75% to 4.25%.
U.S. equities continued to advance into the new year, notching +10% for 1Q24, the second consecutive quarter with double-digit returns. Stronger than expected 4Q23 company earnings and upbeat prospects for artificial intelligence are providing the stimulus. While a concentration of technology-related names led the way, energy was the top sector. Other sectors such as financials and industrials also contributed as the index moved higher. The only S&P 500® sector with negative returns for 1Q24 was real estate. We expect to see lower inflation throughout the year supporting U.S. stock prices; however, we also expect higher volatility with geopolitical risks continuing to ratchet higher. Our view also includes a mild economic slowdown, which could impact the timing of profits and possibly provide a headwind to returns. While we acknowledge there is upside risk to our forecast, we remain unchanged in our outlook for the S&P 500® Index to return 0.0% to +10.0% in 2024.
Table Columns
Previous – Observation as of the end of the prior month
Survey – Economist survey prediction for current month’s observation
Actual – Actual observation as of the end of the current month
Next – Date of next period’s observation
ISM Manufacturing Index
Based on a survey from the Institute for Supply Management, this index indicates a positive growth in the manufacturing sector when the figure is above 50 and a contraction of the sector when it is below 50. An increase in the figure indicates either slowing contraction or accelerating growth. The index represents underlying figures in employment, inventories, new orders, production levels, and deliveries. (Source: Bloomberg)
Unemployment rate
Based on a monthly survey of households, the unemployment rate is one of many figures in the Current Population Survey that move markets by indicating what portion of the population is at work, looking for work, what they are getting paid, and how many hours they work. The unemployment rate is the percentage of workers unable to find work who are actively seeking a job. The survey is conducted by the Bureau of Labor Statistics.
Retail sales
Retail sales measure the total amount of purchases by consumers in stores that sell merchandise, food, and other services to end consumers. This measure is a significant indicator of trends in consumer spending, which moves markets because consumer spending accounts for over two-thirds of U.S. economic output. Data is compiled by the U.S. Bureau of the Census.
Consumer Price Index (CPI)
The Consumer Price Index measures the prices of a fixed basket of goods that reflect an average consumer’s cost of living. CPI is a popular indicator of inflation, driving prices on U.S. inflation-linked bonds, and is used to adjust tax brackets and Social Security payments. CPI is compiled by the Bureau of Labor Statistics monthly.
Home Price Index
The S&P CoreLogic Home Price Index is the seasonally adjusted average price of residential homes in 20 major cities in the U.S. Data is published with a two-month lag (numbers available in March reflect price changes from January). Housing prices affect consumer wealth and consumers’ ability to borrow and spend, which in turn affects U.S. economic growth.
Gross Domestic Product (GDP)
Gross Domestic Product is the sum of the value of all goods and services produced in the economy. It is one of the most comprehensive benchmarks for economic performance. Real GDP measures economic productivity adjusted for inflation, which measures growth that is not due to goods getting more expensive. GDP is published by the Bureau of Economic Analysis.
University of Michigan Consumer Sentiment Index
The index is derived from surveys of 500 households by the University of Michigan on consumer finances and attitudes regarding the economy. The index is set to 100 as of 1966, reached a high of 107.3 in June of 1999 and a low of 56.4 in June of 2008. High consumer confidence levels lead to robust consumer spending, whereas low consumer confidence levels lead consumers to pull back on spending.
S&P 500® Index
The S&P 500® Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.
Chicago Board Options Exchange (CBOE)
Volatility Index® (VIX® Index)
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index®, or VIX®, is a real-time market index that represents the market’s expectations of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500® index options, it provides a measure of market risk and investors’ sentiments.
The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of April 2024. This document is provided for informational purposes by AIM LLC, a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. These views may change as interest rates, market conditions, tax rulings, and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. This report does not constitute a solicitation or an offer to buy or to sell any security, product, or service. It is not intended and should not be used to provide financial advice as it does not address or account for an individual's circumstances. Consult with your advisor and tax professional before taking any action based upon the information contained in this document. Past performance does not guarantee future results and no forecast should be considered a guarantee. Any investment and economic outlook information contained in this document has been compiled by AIM LLC from various sources, including affiliated entities. AIM LLC takes reasonable steps to provide up-to-date, accurate, and reliable information, and believes the information to be so when provided, but no representation or warranty, express or implied, is made by AIM LLC as to its accuracy, completeness, or correctness.
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