The drag from fiscal and monetary policies on GDP will dissipate, and the market is satisfied with the economic outlook😊

After a final trough in Q4, GDP growth is expected to rebound to ~2% in 2024, driven by pickup in investment spending and residential investments to offset a still weak manufacturing sector and lack of fiscal impulse. Furthermore, the fiscal and monetary drag on GDP is expected to have fully gone through the system by the end of the year, so as long as the Fed doesn’t try to unexpectedly and forcefully try to muscle terminal rates higher in 2024, markets are comfortable with the forward economic outlook, with the extra benefit of a Fed with a lot of ammo to ease, should the situation demand it. On the flip-side, by all likely measures, US core CPI appears to be troughing above a 3% annualized level, still well above the Fed’s long-term target of 2%, with the recent bounce in oil prices adding upside risks in the near-term outlook. Furthermore, the market’s expectation of ‘long-term’ neutral rates appears to have permanently shifted up since the mid 2010s, and particularly out of covid, with the 10y5y rate proxy grinding up to decade highs of 4% versus a 2.5% average for much of the previous decade.

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