by Chris Black
Predictions for 2024
We like to think of each half or quarter of the year as distinct, so will try to specify H1 versus H2 here, or Q1 vs Q2, Q3, and Q4. Some of these predictions are bound to happen, and it’s more about what becomes of it.
First, our major “macro” predictions:
1) The RRP draining to zero will be the most significant macro event of H1 next year. When this is empty in March or so, bank reserve balances will have peaked at just under $4 trillion.
This may mark the bottom in yields, since the elevated coupon issuance set for 2024 is 90% greater than it was for 2023 , and most of those won’t have RRP cash to fund it.
2) A weaker USD will support risk assets and gold in H1 next year, both of which means yields will likely stay muted for H1.
In H2, risk assets will be supported by rate cuts (which may come as early as March 20 FOMC, but more likely the May 1 FOMC).
Yields will remain low for H1, but return to 5% in about July or so. The yield curve will invert further.
3) Coupon UST supply may overwhelm balance sheets. A number of regulatory decisions revealed at the New York Fed’s recent Treasury market conference (https://www.newyorkfed.org/newsevents/events/markets/2023/1116-2023) suggest Treasury market liquidity will continue its structural decline.
This comes as the Treasury is set to issue over $1.9 trillion in coupons next year , versus about $1 trillion in 2023. Dealer balance sheets are already chock full .
The RRP being tapped out will mean that households will finance this issuance as QT drains bank reserve balances at a rate of up to $95 billion per month.
Households are not going to buy USTs unless the yield is enticing enough — yields must go higher.
4) The structural decline of Europe will resume, as noted by declines in euros and pounds.
Europe’s “dark winter”, widely predicted for last winter, is a product of euro weakness relative to commodity prices.
Today, natural gas is cheaper and the euro/pound is stronger relative to this time last year. That will not be the case next winter.
Energy prices will be higher next year. Relative H2 declines in euro, pound, and yen will reflect in a stronger dollar for reasons explained here .
Europe will suffer as capital is reshuffled into the US. Japan is finished on any kind of long term scale, and they too are destined for the same fate.
5) Inflation will not return in 2024, but it’s coming.
We think 2024 will be like 1976 in many ways (after a consistent two year decline, the CPI bottomed in December 1976 and came back with a vengeance over the next three years (https://fred.stlouisfed.org/graph/?g=1d2pA)).
It will take The Mother of All Pain Trades to crush this resurgence in inflation, just as Volcker did in the early 80’s.