The Outlook

What to Watch 960x350

Originally published as part of The Outlook Newsletter

Vol. 2, Issue 1C

 

2024 opens with no shortage of major news stories with the potential to roil the financial markets. The U.S. Fed “global watch party” continues – especially in the wake of December’s twists and turns. And its related inflation- and recession-watch “spinoffs” are also still going strong.

The war between Israel and Hamas has joined the ongoing Russia-Ukraine conflagration as a conflict with broad market and geopolitical stability implications. Plus, primary season for the 2024 U.S. presidential race begins in earnest.

Of course, StoneX’s Market Intelligence analysts are monitoring all these storylines to assess how developments in each might move markets. But they are also following some storylines that aren’t starting 2024 at the top of the headlines, but may end up there by year’s end. Here’s what four of our highest-profile analysts are tracking as 2024 begins.

 

 Kathryn_Rooney_Vera_2

Kathryn Rooney Vera

Chief Market Strategist

StoneX Group Inc.

 

Consumer spending and credit card debt vs. corporate earnings

Consumers have financed a lot of their recent spending via credit card debt (with high rates applied to balances). Meanwhile, the companies they work for face rising costs for energy, interest and labor while nominal economic growth is slowing. When earnings revisions come down, when do the layoffs start? That labor stress would put added strain on consumers who are already grappling the depletion of excess savings, a restart of student loan repayments, and the impact of high real interest rates. In fact, we are already seeing rising bankruptcies, delinquencies and defaults as positive real rates and 50% of banks tightening lending standards starts to pinch. When the layoffs get going in earnest, all of this will only get worse.

 

 arlan_suderman_2

Arlan Suderman

Chief Commodities
Economist

StoneX Financial Inc.- FCM Division

 

Agricultural Reform in Argentina

Argentina’s new president, Javier Milei, has vowed to bring significant reforms to the country’s agriculture industry. They include eliminating export taxes on crops and moving the country to a single exchange rate. These reforms could revolutionize Argentina as an agricultural powerhouse, further increasing the investments that farmers are willing to make in producing crops and turning them loose on the world market. Argentina looks to have a big rebound in corn and soybean production over the next six months, following three years of adverse weather. But farmers there will probably hold on to their crops until they get a better sense of whether Milei will be successful in advancing his reforms.

 

 Rhona_Oconnell_2

Rhona O'Connell

Head of Market Analysis,
EMEA & Asia

StoneX Financial Ltd.

 

Banking System Stability

I’m not entirely convinced that a critical mass of small- and medium-sized banks have bolstered their balance sheets sufficiently in the wake of the failures of Silicon Valley Bank, Signature Bank and Credit Suisse last year. There was plenty of chatter among the industry about doing so at the time, but in the absence of another high-profile failure immediately thereafter, the story seems to have disappeared. Meanwhile, banks are still operating in an environment of reduced lending and significantly higher borrowing costs. Those banks that still have unbalanced portfolios, or those that are borrowing short and lending long…they’re still quite vulnerable. So, if a fair amount of such “brittleness” remains, it’s not hard to imagine a “black swan” event coming along and triggering a cascading effect through the system.

 

 Vincent_Deluard_125x125

Vincent Deluard

Director – Global
Macro Strategy

StoneX Group Inc.

 

A fiscal slowdown’s effect on demand

Cost-of-living adjustments and tax bracket increases can have significant effects on real income from year to year – depending on where inflation ends up.  If inflation remains around 3%-4% in 2024, 70 million social security beneficiaries will experience real income losses. Workers will also keep less of their pay than in 2023 due to tax bracket increases. These and other factors should reduce aggregate demand by $425 billion next year, to which we should add about $60 billion in higher interest expenses on credit card balances, $70 billion in interest payments on student loans, and $10 billion in higher net import costs for every $10 increase in the price of oil. In all, we should see a reduction of demand of about 2% of GDP in 2024.

 

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