Derivative Logic: Q4 2024 US Interest Rate Outlook

Two Sides of the “High” Rates Coin
..two-tiered economy creating tug-of-war for our interest rate future

Those that owe money…

• High debt burden draining savings
• Reluctant to move/leave low rate mortgages for fear of reset
• Highly levered firms seeing debt write downs and equitization.
• Percentage of total debt is small, limiting large corporate layoffs
• Wage growth > inflation keeping them alive, but begging for rate cuts

Those that own assets…

• Best financial shape of their lifetimes
• “Wealth Effect”: Stock market, home values, bond yields are all up
• Account for largest portion of consumer spending
• Keeping inflation pressures alive
• Fed rate cuts
• “Wealth Effect”

State of Jobs Market: Few Signs of Weakness…
…but Fed’s regional surveys tell another story

Hiring Challenges:

“Many Districts reported ongoing challenges in hiring and retaining workers, particularly in the healthcare and hospitality sectors”

Wage Growth:

“Wages rose at a slower pace, and employees’ expectations of future pay hikes were more in line with historical increases”

Sector-Specific Trends:

“Several Districts reported declines in employment in the manufacturing sector due to slowdowns in new orders“

Future Outlook:

“Contacts expected job growth to settle into a modest pace over the next 12 months, although many continued to note difficulty filling higher skilled positions”

Short-term Rates: It’s All About the Curve…
…futures markets predicting more cuts than the Fed will deliver

• SOFR forward curve projecting sequential cuts through Sept 2025
• Fed projects slower pace, but both end up near 3%
• Markets assume a recession is guaranteed
• Terrible predictor of rate moves historically
• Fed is seen as protecting the jobs market
• Fixed rate financing to remain cheaper than floating, but with significant pre-payment/yield maintenance landmines

…

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About Derivative Logic

Derivative Logic is a specialty hedge advisory firm serving the interest rate and currency risk management needs of:

• Private Equity
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The Derivative Logic team are highly experienced derivatives professionals, sharing over 100 years of industry experience and billions in notional derivative contracts executed.

Jim Griffin
Managing Director | Derivative Logic
jgriffin@derivativelogic.com

Rex Evans
Managing Director | Derivative Logic
revans@derivativelogic.com