Welcome to our latest video Macro memo. There's plenty to cover off this go around. We'll talk a little bit about soft versus hard landing recession scenarios and how the relative probabilities of the two are shifting. In a nutshell, the odds of soft landing improved a little, but the likelihood of a hard landing has gone down a little bit, at least in our view.

We'll speak about economic developments, to be sure, including some job numbers and some purchasing manager indices. We'll spend a moment on supply chains, which we'd hoped we'd left behind a year or two ago, but they are back -- maybe not in focus, but in the periphery of our vision. They need to be talked about as they do present a new upside risk.

We'll spend a moment just on the U.S. Federal Reserve versus other developed world central banks. Just why the messaging has been a little bit different recently. And lastly, we'll touch on some imminent macro and political events that are coming down the pipe over the next few weeks.

Okay. Let's go get going on the soft versus hard landing debate.

Recession watch: soft versus hard landing? I guess maybe the takeaway here is that the soft-landing likelihood has increased. For those who don't know, soft landing really means avoiding recession. It doesn't necessarily mean particularly impressive growth, but avoiding a recession. And so those odds have improved. And in terms of why they've gotten better in recent months, some of it is just that the U.S. economy in particular just keeps chugging along, defying all expectations.

Maybe more concretely, we can say inflation has fallen out of the extreme danger zone. Interest rates have fallen quite nicely over the last few months and bond yields, of course, but not central bank rates. So those things are helpful for an economy and they do improve the odds of the economy continuing to grow in 2024.

You can also throw in, by the way, the ‘Fed put’ is now back. In other words, the Fed is now confident enough that inflation is coming down in a good way. You can start to focus a little bit on the economy. And if the economy were to run into trouble, the Fed could lend more of a helping hand by cutting rates than it might have been capable of not that long ago.

And so all that said, again, a soft-landing likelihood has gone up. The twist here is that we think it's gone up from a 30% chance to a 40% chance. Now that's material. Once upon a time it was as low as maybe a 20% chance. So there is a very real chance of a soft landing here.

But those of you who are even mediocre at math will realize that 40% is a less than 50% chance. There’s a missing 60% in this equation. That is to say we still think a recession is more likely than not. So we've said 40% chance soft landing now, still a 60% chance of something like a recession. That’s down from 70%, but nevertheless, slightly more likely than not.

In fairness, if we got a recession, and we've been saying this for a long time, we think it would be fairly mild. We think it could be fairly short. But ultimately, it still makes sense to us to think that a recession is the more likely of the two scenarios. And part of the reason is just that, yes, bond yields are down very nicely over the last few months, but they're still a lot higher than they were a year ago and a few years ago.

That's still a significant drag. Also, we're not behind schedule for a recession from a timing perspective. In fact, historical tightening cycles have usually mapped into a recession around the spring of this year, in terms of the time frame. Advanced economies outside of the U.S. are already suffering. We're not seeing reliable growth out of Canada or the UK or the Eurozone. And so higher rates are biting and there does tend to be some spillover across countries.

We think we're seeing little bits of evidence of the U.S. economy slowing. We think that some of the special supports for the U.S. economy in 2023 may start to fade a bit in 2024, in particular fiscal support, but maybe also the ability of consumers to spend. And we still have a lot of recession heuristics like inverted yield curves and late points in the business cycle analysis that suggest there's a risk there too.

So I guess the useful thing to say here is, yes, we do believe a recession is more likely than not, but a soft-landing scenario – always conceivable – has become even more conceivable. We do need to seriously consider both scenarios. 40% and 60% are both things that can happen very, very easily indeed.

And so this is a world in which we do need to think through all those scenarios and be investing in a way that acknowledges the possibility of either outcome right now.

More on economic developments: We shift from there just to the economy more generally – some recent data points, really. One that caught our eye was U.S. payrolls. That's the U.S. job numbers for December.

On the surface, they look pretty good. You had 260,000 new jobs created. That was a little more than expected. It's a robust number by conventional metrics. I would say it wasn't as good as it looked, though. Part of it was that there were downward revisions to prior months. That chopped a significant amount off the level of employment versus expectations.

A big part of it was because even though there were more workers, there were fewer hours worked cumulatively in the economy, which is sort of a strange thing. But the takeaway is that businesses required actually less labor, not more, despite adding technically to the workforce.

And then the other one is just to recognize there’s not just one way to guess as to the number of workers in the economy. The payroll survey says there were more than 200,000 jobs created. There was another survey also from the U.S. government, the household survey. It actually says the U.S. economy lost 683,000 jobs and it tends to be the choppier of the two. I wouldn't take that as the truth by any means, but it does usually add some informational value and it's been noisy recently.

I should also note the prior month was a big positive, but actually even with that, the three-month average is actually -249,000 jobs a month, according to this alternate survey.

Again, not saying that's the right one, but just saying you take this broader picture, the hours work story, the household survey story, none of it was as good as the headline number that happened to capture the most attention. We still think the labor market is softening in a subtle way, and indeed temporary employment did fall yet again, which historically has been a leading indicator for economic problems down the road.

The other economic item maybe worth mentioning is a global Purchasing Managers’ index. This is a bit of a forward-looking indicator for the manufacturing sector. It's now been in contraction mode for 14 consecutive months. That's actually a modern-day record for the length of time that the manufacturing sector has been shrinking.

It is a bit of an open question how to interpret this. Optimists can very easily say that the fact that the manufacturing sector has been contracting for more than a year and couldn't kill the economy despite again a year of trying is a good thing.

Pessimists will say that it is not great when a big, important sector of the economy is clearly suffering for an extended period of time. Both arguments have some credence. I'm inclined to think that it’s bad. That's usually how the world works most of the time. The fact that manufacturing is weak isn't great. It is admittedly curious that this weakness hasn't yet mapped into a broader contraction in the overall economy.

But still, when you've got one sector suffering, that's not a great sign.

Supply chain problems: Okay, let's shift from there to the supply chain. Again, I'm as surprised as you are that I'm talking supply chain again. It was a big problem a few years ago. It was a central driver of high inflation, you might recall. But most of the metrics have suggested a nearly complete normalization over the intervening year or two.

We are beginning, though, to see supply chains become problematic again. In the Red Sea, Houthi rebels in Yemen have been firing rockets at various ships. And so a lot of major shipping companies are opting not to transit via the Red Sea. And if you don't know, the Red Sea culminates in the Suez Canal, which is where 12% of global trade goes.

That's how you essentially ship things from Asia to Europe and back. In fact, 30% of global container traffic goes through normally the Suez Canal. So essentially Asian, European trade is being impeded.

Simultaneously, though completely coincidentally, the Panama Canal, which is really the other oceanic canal that also handles a very large fraction of global trade, is also struggling right now. Not because of rockets, but because of drought that has lowered the level of fresh water at a lake in the middle of the route.

And so only half the normal number of ships are able to go through. Some are being forced to carry less cargo than normal as well. And that looks like it's an issue that will persist for at least several months or so. So as we turn our attention to things like the cost of shipping, we are now seeing container shipping costs up visibly. Not like they were in 2021 or 2022, but up visibly, we're seeing drive-up costs go up as well.

Our bingo card does not include supply chains being a central problem for inflation this year or next. But I will say that there is a bit of an upward inflation pressure that's currently manifesting via supply chains, and so we do need to be aware of that.

Central banks on interest rate cuts: Let me spend a moment as well on the U.S. Federal Reserve. I suppose I can say that in the middle of December the Fed came out in a fairly dovish way. It was talking pretty explicitly about rate cuts. In fact, it added to the number of rate cuts it was thinking about for 2024. However, other central banks haven't done that, so that’s the other half of the introduction here.

And so the question is, is the Fed in a position of needing to or planning to cut rates sooner or more than other developed world central banks because of that? I'm not convinced. I would say that in fact, in theory, the U.S. is less in need of rate cuts than many of the other countries. The U.S. economy is stronger, U.S. inflation is still somewhat elevated and the U.S. economy is less rate sensitive.

Those are all reasons to cut rates, less if anything. And so we're a little bit dubious that the Fed is going to truly be more dovish than everyone else.

I think really the story here is one in which they've just been a bit more transparent – and it is hard not to be transparent when you publish your policy rate forecast every quarter, which they do, but which most central banks don't.

So when you're acknowledging you're planning on cutting rates, you do need to talk a little bit about that. And I think that does explain a significant part of the divide. We have seen some Fed speakers walk back a little bit Fed Chair Powell's dovish remarks since then. We've also seen some other central banks feel a bit more emboldened to talk about rate cuts since the Fed did that.

I suspect, again, the difference across central banks is perhaps exaggerated. The end of the day, we're going to see, I suspect, a lot of central banks easing rates cautiously, initially, perhaps this spring, perhaps as late as the summer. But I don't think the U.S. is going to be that different from the others.

Upcoming political events: I’ll finish with just a fairly brief look at some imminent macro and political events that are coming down the pipe in the very near term.

I'll start with the U.S. political environment, as 2024 is an election year. It's a presidential election year and the Republican primaries begin on January 15th in Iowa. They're followed in subsequent weeks by equivalent events in New Hampshire and Nevada.

Former President Trump is a dominating figure in the race and very much expected to capture those easily at this point. But it will be very interesting to see who comes second, whether that person can consolidate support and mount a more serious challenge somewhat later. So those are worth watching.

There is the risk of a U.S. government shutdown on January 22nd and then in theory again on February 6th for different parts of the government. I must say at this point I'm not too concerned. They managed to avert the prior two risks in October and November. They will probably fixed this as well, but there is a chance of some temporary economic pain there.

And then just turning to international elections, I can say Taiwan has an election on January 13th. Indonesia has one little later on February 14th. Both very important countries, the first geopolitically, the second, I would say economically, it looks as though the incumbent parties probably win in both cases.

And so the world probably doesn't change too drastically. But again, worth watching.

Okay, I'll stop there. I’ll say thank you so much for your time. I should have said Happy New Year at the start, and so I'll say it at the finish and I wish you very well with your investing. And please tune in again next time.