UBS sees Fed cutting interest rates by 100 basis points in 2024

UBS’ Solita Marcelli, Chief Investment Officer Americas, weighed in on the markets as stocks and high-quality bonds surged in recent months.

The S&P 500 has surged by 14% since its October low, and the 10-year US Treasury yield has retreated approximately one percentage point from its October highs.

These market dynamics reflect a shifting macro environment wherein inflation, economic growth data, and rate expectations play pivotal roles in shaping the investment landscape.

Notably, the past two months have witnessed surprisingly soft US inflation, as well as resilient growth, with US retail sales surpassing expectations and a labor market that remains robust.

“Our base case scenario is for a soft landing, in which growth slows to just below trend, a US recession is avoided, inflation falls toward central bank targets by the second half of the year, and the Fed cuts interest rates by 100 basis points,” Marcelli wrote in a note on Monday.

UBS anticipates that the growth challenges in the US will probably not result in an increase in precautionary savings, and expects inflation to decrease at a more gradual

“Though markets are now pricing steeper rate cuts than our forecast, we think the Fed is trying to balance its desire to help the economy avoid recession with labor market and core inflation data that still suggest a need for somewhat restrictive monetary policy.”

Therefore, the investment giant has revised its three potential scenarios for the Year Ahead. It attributes a 60% possibility to a soft landing scenario, which is still its base case. A Goldilocks and hard landing scenarios both bear a 20% chance of materializing.

“We remain watchful of the risk that a period of higher-than-expected inflation or excess US Treasury supply could lead to an increase in interest rate expectations or push the 10-year US yield back to around 5% again,” Marcelli added.