8 November 2024
Jose Rasco
Chief Investment Officer, Americas, HSBC Global Private Banking and Wealth
Michael Zervos
Investment Strategy Analyst, HSBC Global Private Banking and Wealth
As expected, the FOMC cut the Fed funds rate by 0.25% to the 4.5-4.75% range. We expect the Fed will lower policy rates in December by 0.25% to a range of 4.25-4.5%. In 2025, we forecast the FOMC will cut policy rates four more times for a total of 1% to a range of 3.25-3.5%.
The Fed's confidence that inflation will move sustainably to target argues for a continued gradual policy easing towards neutral. Powell reiterated Fed will support economy: “If the economy remains strong and inflation isn’t sustainably moving toward 2%, we can dial back policy restraint more slowly. If the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly.”
Source: Bloomberg, HSBC Global Private Banking and Wealth as at 7 November 2024.
Economic growth is slowing but still strong. Real GDP has slowed from 4.4% q-o-q to 2.8% (seasonally adjusted annual rate) in 3Q24. Consumer spending has slowed from 4.9% in 1Q23 to 3.7% in 3Q24. The GDP deflator rose 1.8% q-o-q while the quarterly PCE deflator was 1.5% q-o-q in 3Q24. Both are below the Fed’s target range of 2%. Given a slowing economy and coming technology-driven deflation, potential inflation risks seem to be on the downside. Labour markets remain healthy. Payroll growth is slowing but the unemployment rate remains near a 55-year low of 3.4%.
Donald Trump is set to become the 47th President of the United States with 295 electoral college votes as of 7 November according to the New York Times. The Republicans have retaken control of the US Senate, after flipping seats in West Virginia, Ohio and Montana. The results guarantee the Republicans at least 52 out of 100 seats. The remaining 27 House of Representatives races haven’t been called. The Republicans currently have 210 seats vs. the Democrats’ 198. The Republicans need 8 more House seats to secure a majority, while the Democrats need 20 (data as at the time of writing).
Despite uncertainty surrounding domestic politics and a host of other issues, the Fed easing cycle continues.
Although the race for the House of Representatives isn’t yet settled at the time of writing, we believe a Trump presidency is likely to offer additional support to US stocks, principally because of the proposed tax cuts and likely deregulation. As a result, we add further to our existing US equity overweight.
According to FactSet as of 1 November, earnings are forecast to rise 9.3% in 2024 and 15.1% in 2025. These forecasts were made prior to the election. The potential for lower household and corporate taxes should be further accretive to earnings.
Pontential positive impacts on sectors:
For the bond market, fiscal stimulus, the potential for unusually large Treasury issuance and potential tariff-related upward pressure on inflation may lead to further volatility. As a result, we downgrade USD investment grade bonds to neutral. We continue to see investment grade bonds as a way to generate income by locking in current yields, but think investment grade bond price appreciation becomes less likely while volatility picks up.
We think there will be continued strong demand for gold as a hedge against tail risk, hence, we upgrade gold to an overweight position.
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