Jefferies sat down with Mohit Kumar, Chief Economist and Strategist for Europe, at the firm’s 14th annual Global Healthcare Conference in London. They discussed central bank policy, the potential for recession, the latest inflation and employment figures, the best asset classes for 2024, and more.
Their conversation comes on the heels of October inflation data, where US headline inflation fell from 3.7% to 3.2%. The drop reduces the likelihood of an interest rate hike at the Federal Reserve’s year-end meeting. The United Kingdom also saw a sharp drop in annual inflation, from 6.7% to 4.6%.
We recently received October inflation data from the United States and United Kingdom. Where are we in the global battle against inflation?
I think we are still some distance from the central bank target of two percent, but we’re trending in the right direction. Inflation is moving lower. I think we will be below two percent by the end of next year in the US. For Europe and the UK, it might take slightly longer, but by the end of 2025 or early 2026, we could be below two percent as well.
What is important from markets and central banks’ point of view is that, in the medium term, inflation expectations are below two percent.
Should we expect a recession in 2024 in Europe?
Recession is a strong word. It means two quarters of negative GDP growth. In Europe, my best case is we see flat or zero growth over the next two quarters. Maybe we avoid recession; it’ll be very close. Even if we get a recession, I suspect it’ll be a mild one. A slow down rather than a proper recession.
Growth is slowing down. Inflation is slowing down. What does this mean for interest rates – have we seen the end of hikes?
I definitely think so. Thinking about the three main central banks – the Federal Reserve, European Central Bank (ECB), and the Bank of England – I believe all three are done with rate hikes.
Now, of course, these decisions are data dependent. If the data surprises, we could see more hikes, but the bar for another hike will be high. My view is that we see a slowdown going forward, which means there’s no need from the Fed, ECB, or Bank of England.
The next question is: when will they cut?
For the Fed, we have a presidential election cycle coming. The Fed wants to be neutral during an election cycle, so they will be very reluctant to cut rates unless we see a material slowdown. For ECB, you see the unwinding of quantitative easing (QE) policy and interest rates. My best guess is they will announce the end of Pandemic Emergency Purchase Programme (PEPP) investments next June and cut rates in the third quarter. For the Bank of England, again, it’s a summer or post-summer story.
All said, the direction of central banks is clear: rate hikes are done. Rate cuts are the next step.
Employment has shown resilience globally. What do you expect for jobs in the coming year?
The job picture has been very resilient overall, but if you look at the details, it’s sector specific. There’s been resilience in small and medium enterprises (SMEs), or companies with fewer than 100 employees. In the US, from pre-COVID to today, there’s been a 120% increase in SME new hires. In the UK, it’s close to 140%.
The obvious question, then, is why is the SME sector so strong? I’d offer three reasons.
First, the pandemic – during COVID, the government paid us money to stay home, and people formed new companies. New company formation and SME new hires went through the roof.
The second reason is excess cash. The SME sector is flush with cash. That means the Fed or ECB can hike rates, and the impact on companies’ balance sheets will be limited. The central banks’ transmission mechanism is not flowing through.
The third reason is end consumers, who also have excess cash. Our level of excess savings remains very high. Our expectation was that by Q3 2023, the lower-income cohort would run out of excess savings. Three weeks ago, we saw revisions to the national account data which showed excess savings as double our initial predictions.
The expectation that a slowdown would start in Q3, and that’s when the labor market would crack – I think this has all shifted forward by 3 to 6 months. I think the labor market will slow down, but it’s a late Q4 or early Q1 story. Jobs will remain strong for a bit longer.
When we see cracks in the labor market, I don’t expect a deep recession, meaning 8% unemployment. I expect unemployment to peak around five percent. This would be a mild recession or slowdown in the US and Europe, not a deep one.
Is there any market where you expect especially strong growth? A star of 2024?
A few markets. I’d first highlight the US tech market, which I think can continue to perform strongly – with the exception of maybe Q1, where we may see short-term growth concerns. Credit is another strong market. Clearly the investment grade market should do very well next year, compared to equities. Of course, you have to focus on total yield rather than just a spread basis, but I’m confident credit can continue to perform.
Emerging markets (EM) is another area that should perform. If the dollar weakens and the Fed starts talking about rate cuts, EM can do quite well. With EM, you always have to pick your countries, but as an overall asset class, it should perform quite well next year.
Broadly speaking, we’re going to see a fixed income market over the next year. Whether you’re looking at credit or sovereign, these are the asset classes you want to own next year.