Investors Bullish on Global Economy’s “Soft Landing” Amid Interest Rate Cuts

Investors are increasingly confident that the global economy will achieve a “soft landing,” where inflation subsides but overall economic activity doesn’t significantly deteriorate amid higher interest rates. According to Bank of America’s August Global Fund Manager Survey, released on Wednesday, 76% of respondents believe a soft landing is the most likely outcome for the global economy in the next 12 months. This marks the highest percentage of respondents projecting such an outcome dating back to May 2023.

The confidence in a soft landing is primarily driven by expectations for lower interest rates. In the survey, 93% of investors expressed confidence in lower short-term rates in the next 12 months, the highest level of confidence in lower rates in the past 24 years. Additionally, 60% of investors expect four or more interest rate cuts this year, aligning with current market pricing projections of four interest rate cuts in 2024.

The survey, conducted between Aug. 2 and Aug. 8, took place after a weak July jobs report that increased recession fears and caused market volatility. Despite this, investors remain optimistic about the economic narrative, with many economists also supporting the view that a soft landing is still achievable with Fed rate cuts.

Morgan Stanley chief global economist Seth Carpenter predicts that the Federal Reserve will cut interest rates by 75 basis points this year to support the soft landing. He emphasizes the strength of the job market and consumer spending as factors that can sustain economic momentum, provided the Fed follows through with rate cuts.

While market expectations for Fed easing slightly exceed Carpenter’s projection, he considers this rational given the heightened risks to the economy. Investors have adjusted their asset allocation accordingly, moving out of stocks and into cash and bonds at the fastest pace since September 2022. Respondents to the survey now hold their lowest allocation to stocks since January 2024.

Overall, investors’ growing confidence in a soft landing for the global economy reflects a belief in the effectiveness of lower interest rates to support economic growth. As market dynamics continue to evolve, it will be crucial to monitor how central banks and policymakers respond to ensure a smooth transition to a more sustainable economic environment.

In conclusion, the survey results highlight the prevailing sentiment among investors and economists that a soft landing is within reach, provided the necessary policy measures are implemented. The ongoing dialogue between market participants and policymakers will be essential in navigating the complexities of the global economy in the coming months.