What are your expectations for rate cuts by the U.S. Federal Reserve for the balance of 2024 and into 2025?

Importantly, we've just left an era of rate hiking. That was the story behind 2022, and 2023. 2024 has shaped up to be the start of rate cutting, and the fed in the U.S.has been slower off the mark than other central banks in that regard. As we were recording this, it hasn't yet made its first move, though that does appear imminent.

But it's just worth reflecting on the fact that a lot of other central banks have already begun. And so we started with, in the developed world, Switzerland and then Sweden and then Canada, the European Central Bank, the Bank of England of all initiated their rate cutting journeys. And in several cases, they've done several rate cuts already. The fed is on the cusp, we think, of starting a similar downward journey and in terms of why now is the time for rate cuts, it really does come down to the fact that inflation has now settled to the point.

You can begin to remove some of that restraint that was intended to help inflation come down. And economies have also weakened to some extent. And so that also endorses some rate cuts at this point in time. And of course, lower interest rates are welcome to the extent we've all been fretting over recession risks in the light. Most of that does revolve around the headwind that comes from high rates.

So lower rates is a welcome thing. As we look forward, we think it's most likely that the fed and other central banks, for that matter, will proceed at a 25 basis point rate cut pace, and the fed case likely can do this at several consecutive meetings in a row. And so there's a fair amount of movement that can happen in a fairly short time.

And we believe those rate cuts can continue into 2025. I would say that at this juncture, we're dubious that larger rate cuts are on the offer. You would need an economic shock of some sort to motivate, say, a 50 basis point rate cut. So 25 likely the order of the day, despite some market speculation to the contrary. And as much as we do think there's a fair amount of rate cutting to come, and policy rates can find themselves a couple of percentage points lower over the next 18 months or so and get them down closer to what might be described as a neutral level.

It is possible the bond market right now is pricing a little bit too much in in terms of just how much cutting might actually happen. And so we're of the view that bond yields have maybe already fallen enough pricing all of that in.

Are you concerned about the latest weakness in labour markets?

The market focus certainly has shifted. And so inflation is no longer the big enormous problem. It has still room to improve certainly. But the major drivers that contributed to high inflation have largely gone away. And the trajectory is a pretty friendly one. We can talk about inflation that continues to come down. And so this has given markets the luxury of fretting over other things.

And the obvious thing to worry at least a little bit about right now is, perhaps slowing economic growth, but specifically it is labor markets and that U.S. labor market is capturing a lot of attention. And it's undeniable the unemployment rate has moved notably higher from its low. It's gone from around 3.5% to closer to 4.5% at this point.

And so there's been some deterioration there. We can say that just in the rate of hiring has also slowed to some extent. Still positive, but it's been slowing as well. And the reality with labor markets, particularly that U.S. labor market, is it can be a slippery slope. When you start to see a deceleration, it can be pretty hard to stop.

And so we've seen at least one traditional, recession signal emitted recently just because the unemployment rate has now risen to a point, that historically it's been hard to stabilize from this moment. So that's where the concern lies right now. I think we can push a little bit back against that, just in the sense that, for instance, as much as that unemployment rate is higher, unusually, it has more to do with more people looking for work, which is sort of a benign force, than people losing their jobs, which would be a worse interpretation.

We can say some other corners of the labor market are actually holding together just fine right now. And so weekly jobless claims have actually been falling, which is a good thing. And so it's not as though anything, sudden or abrupt is going on here. But again, the takeaway is that there is a softening labor market. It does flag that there is some risk of recession out there that that persists.

I would emphasize that there are other parts of the economy we should be caring about as well that are still looking pretty fine. And so as an example, the U.S. consumer is holding together pretty well. They're 70% of the economy. So long as that persists things might just be fine. Similarly, service sector businesses are feeling pretty good right now.

They are expecting further growth. And you see, U.S. corporations not really, complaining all that much about the risk of recession or these sorts of things. And so we step back from this and simply recognize, okay, the economy is slowing. Best case scenario here is that it stabilizes soon and we have a happy soft landing. We think that actually is the more likely outcome at this point in time.

But there is also the risk of a recession. It's not zero. Neither is it our base case scenario. And we need to watch that labor market really closely to see whether we can pull off that immaculate soft landing. And as it stands right now, there isn't perfect clarity there. We would just say, that if there were to be a recession scenario, we think it would be pretty mild and pretty short lived in something that you'd probably look at opportunistically as an investor.

But in the meantime, a soft landing still looks quite plausible to us.

Will the latest rate cuts from the Bank of Canada improve outlook for consumer spending and housing?

Bank of Canada has actually been among the more aggressive central banks in cutting rates. It started sooner than many, its cut rates by more than several. It has very clear plans to continue lowering rates. And a lot of that has very much to do with the fact that Canadian households, Canadian consumers and Canadian housing more generally have all been a bit more challenged than in some other countries.

And we know there's a lot of household debt swirling around, and this country is particularly interest rate sensitive. And so it makes sense that the rate cutting is coming a bit sooner and faster in Canada. The question is whether we can see an immediate revival in the consumer and in housing as those rate cuts take hold. And at this juncture, I would say we probably need to be cautious for a while longer.

And so when we look at the consumer, we're seeing overall consumer spending grow. But it's a bit of a mirage because what's happening is population is going up so quickly. That's what's driving the spending growth. The average person is actually spending less. And I think prioritizing some of that money to service perhaps their debt and so on.

And so the consumer, I think, is some distance away from returning to outright strength, but lower rates absolutely help and should permit that, perhaps in 2025. And the housing market, of course, benefits enormously as rates start to come down. But it's worth keeping in mind there is still some pain left to come in the sense that you have these cohorts of borrowers who will be still rolling into higher rates, plausibly in 2025 and 2026, even as the Bank of Canada cuts rates just because of how extraordinarily low their initial mortgage rate was when they locked in five years before.

And so when it comes to housing, we are budgeting for home prices that go roughly sideways in Canada over the next few years. And so that would be described as weakness, but not a collapse. And housing resales similarly probably remaining somewhat sluggish, which is where they are right now. You can certainly spin a tale that we should see more construction going forward.

It's becoming a bit easier from a zoning perspective. And there's a housing shortage, and the population has gone up quite a bit. The complication there is that it's very expensive to get financing for builders. And, there are a lot of properties on the market in a way that suggests maybe that building boom is a few years away as well.

So probably slow going for now. And that really is a story which is monetary policy hits with a lag. So the full pain wasn't felt the first day of the first rate hike. And, the removal of that headwind doesn't happen after the first rate cut. It's going to take some time for these to improve.

Fiscal deficits are rising around the world – what will be the economic impact of so much debt?

Markets remain mostly focused on short term questions around central bank rate cuts and growth versus recession and those sorts of acute near term issues. But, it's undeniable there is a medium term challenge that is looming out there somewhere. It eventually may well capture the market's attention and hopefully will capture policymakers attention, which is there are a lot of countries out there in a challenging fiscal position running very large government deficits, unbelievably large by the standards of a period of economic growth, with big public debt loads that very often are above 100% of GDP, which would have been almost unheard of a decade or two ago and is practically the norm now.

And so there are these fiscal excesses, and over time that is going to catch up to some countries. And so we've done a lot of work on this. We've built a fiscal health index. And as we look our way through the major countries of the world, I think you can say that quite a number have a challenge in front of them.

Maybe that challenge is greatest in Italy. The challenges considerable in the U.S. and UK and Japan and Brazil. Not to say everyone else is fine. There are a lot of countries running deficits and with some work to be done, and to give you a bit of a sense, you know, to stabilize the U.S. public debt load, you would need to reduce the deficit by about 4% or 5% of GDP.

And it really would amount to an economy that theoretically runs about a percentage point slower than normal over 4 or 5 years. To get that back into line, just to stabilize a very high debt load. And so hard to say exactly when that happens. Honestly, U.S. probably can get away with more than most countries as the world's reserve currency.

But the way we think about this is just that, as we look forward to perhaps the second half of the 2020s, there is a fair chance that growth is going to be a bit more sluggish than normal, as some of these fiscal excesses are eventually dealt with.

What is your outlook for European economic growth?

The good news on Europe is that inflation has declined as it has across much of the world, and that's now allowing the European Central Bank and the Bank of England and some others to reduce rates. And so that's taking some of the pressure off Europe, much as that pressure is being removed elsewhere. Beyond that, it's certainly fair to say a few other things about the European economy.

So one would just be the speed limit is lower than in a lot of countries. We know that the demographics are a bit more challenging and so on. So it's not naturally a fast growing region of the world. Within that, though, there's quite a lot of variation. And you might even describe this is a two-speed economy.

And fascinatingly, it's the Mediterranean, European countries that are the ones that are moving more quickly. And that's quite a remarkable reversal, say, from a decade plus ago when the sovereign debt crisis was very much impeding those countries in particular. So it's the Greece's and some of these other countries that are moving somewhat faster. And so that's been the good news story.

They seem capable, we think, of continuing that, in contrast, we can say Germany has been struggling and really not growing all that reliably and finding that many of its sophisticated manufacturing goods don't see quite as much demand around the world, and finding that its auto sector is now suddenly competing with this new, Chinese behemoth making all of these new vehicles.

And suddenly there's a lot more competition there as well. So Germany is in a more difficult position. The UK is a country that had been struggling mightily and had perhaps the worst 2023 of all of the world's major economies. And it is now seemingly bouncing back. And we do see some better job numbers, and we see some purchasing manager indices that are reviving.

And this is the classic rebound after a period of difficulty. But we think they may be able to sustain that going forward. On the aggregate, Europe is in a position to grow, but to grow at quite varying rates depending on where you are within Europe.

What factors are contributing to the slowdown in Chinese economic growth?

The Chinese economy certainly has been struggling and it has slowed even quite recently. And when we look at the various drivers and constraints, it really is a trifle economy in the sense that the housing market in particular is still the laggard here. There were great excesses, the excesses are being worked out of the system, but it remains a painful process.

And while we think policymakers will continue to do what's necessary to prevent anything too negative emerging from that sector, it's not likely to be a source of strength anytime soon. And it was for a very long time. So that puts China on a very much slower footing. You then have the consumer and of course, China's middle class has been growing.

And in theory, the expectation was that China's middle class would be the new driver of consumption and economic growth. It hasn't fully worked out that way. And so we are getting increases in retail sales and the like, but it's a much more modest rate of growth. And I think what's happened is that Chinese households have a lot of wealth tied up in the housing market, and it's just so weak that they don't feel confident to spend.

And so you're left with the traditional driver of Chinese growth actually doing some driving right now. And so that would be things like exports and industrial production and manufacturing. And so that has remained fairly strong. And we think it can likely be the main contributor going forward. But it still leaves China growing at no more than about 5% this year, probably four point something percent next year, and with a significant risk.

And so that significant risk is that depending on the outcome of the U.S. election, there could be additional tariffs applied to China. And, and so China could well be somewhat slowed by that as well. But I wouldn't want to overstate that effect just because as much as China and the U.S. do trade quite closely with one another, it is amazing how unreliant China actually is on U.S. exports.

It's less than 3% of their economy. And so we need to watch that. But it may not have quite the effect that people think. More broadly, I would say it's a China that's decelerating and over the long run might not grow more than 3% or 4% a year, which is quite a long distance from the 6% and 8% and 10% that we used to be accustomed to.

But for all of that, this is in part a China that's getting richer, and China is still set to be the biggest single driver of global growth over the next five years. So it's a country that continues to matter, and people may be selling it a little bit short in terms of its economic potential.