Market Focus Shifts to Fears of an Economic Contraction

August 5, 2024 — Until recently, the prevailing market narrative since October was that the Fed was in a “pivot” to eventual rate cuts given a Goldilocks economic environment defined by falling inflation and a moderate economic expansion. Last week’s data readings and the market’s reaction indicate that US economic growth may be moving out of a “soft landing” zone into a deeper contraction. The focus on growth preservation rather than inflation fighting should serve as a tailwind for fixed income, leading to lower yields and a return to a negative correlation with equities.