PNC Capital Markets: Remaining Prepared in an Uncertain Environment

In looking ahead to 2024, the path of interest rates and the economy, uncertainty about geopolitical events, and a U.S. election year are the primary focus of most market participants. Many are wondering, will the Federal Reserve pause or cut rates in the coming year, or will interest rates stay higher for longer? Will there be a soft or hard landing? How will conflicts and events abroad play out, and what are the impacts of the 2024 election year?

These are questions that many businesses have been wrestling with for months. But in the presences of mixed indicators about all these headline items, it’s important for businesses not to focus on pinning expectations to any one potential outcome, according to Charlotte McLaughlin, president and chief executive officer of PNC Capital Markets LLC. “We are reaching a point where, no matter what your view on rates or the economy or the market is, we believe business leaders should be focusing less on where we are going and more on protecting against their businesses unique exposures, whether it be rates or currencies or some other type of risk, so that they have downside protection regardless of how markets respond to the broader macro backdrop.”

Indecision in the face of uncertainty stands to reason. “For example, we have never seen a period of quantitative tightening and rate increases that has followed such a long period of quantitative easing and low rates, and this may be the first time treasurers and other financial decision makers of many businesses have operated in this kind of a rate environment,” said McLaughlin. “But regardless of the uncertainty, businesses should be prepared to take action to raise capital, divest, pursue mergers or acquisitions, or whatever their objective may be, because if they remain on the sideline waiting for things to become more certain, they’re likely to miss out on opportunity.”

To help navigate this uncertainty, and take advantage of market opportunities, PNC offers dedicated and highly experienced teams that can help clients identify and manage their unique risk profiles.

Interest Rate Derivatives 2024 Outlook^[1]

The Fed dot plot resulting from the December 2023 Federal Open Market Committee (FOMC) meeting showed the committee expects to cut rates by 75 basis points based on the median forecast in 2024. However, financial markets reacted much more strongly than what policymakers showed in their projections and have continued to price in approximately 150 basis points in cuts in 2024.

Volatility has been a consistent theme in financial markets over the past two years, and if the disconnect between the Fed’s forecast and market expectations is any indication, 2024 will be no exception. Many businesses have been caught off guard with the rapid ascent of interest rates over the past two years, which created challenges to profitability.

For many businesses, looking to minimize exposure to interest rate volatility and risk remains a key objective. When facing continued rate uncertainty, actively addressing interest rate risk can help to reduce rate impact on profitability.

Additionally, this backdrop of uncertainty can create opportunity to manage risk. For example, an overreaction by the market to where rates are likely to move could create an opportunity to manage interest rate risk more advantageously.

Fixed Income Securities 2024 Outlook^[2]

With an anticipated end to the quantitative tightening cycle on the horizon in 2024, market participants are expected to shift from being reactionary to anticipatory. As rates rose in 2023, many investors sat on the sideline, waiting for more clarity in the direction interest rates would go. There remains a divergence between what policy makers are guiding for rates and what the market expects, and this will likely continue to drive volatility. This divergence also represents an opportunity for investors looking to put cash to work or reposition their portfolio. For example, at the front end of the rates curve today, opportunity remains for investors to achieve yield without adding longer duration assets. This opportunity could be particularly beneficial for businesses looking to invest cash. If guided by clear investment objectives, investors should continue to find opportunities in this market even as the direction of rates starts to solidify.

Foreign Exchange 2024 Outlook^[3]

Given monetary policy and geopolitical considerations for the U.S. dollar (USD), corporate treasury and finance teams need to remain nimble in their approach to currency risk management. Certain assumptions and strategies that have become comfortable in a sustained period of USD strength may be tested by a material shift with the dollar and/or increased currency volatility as the market works to identify which direction the global economic winds are blowing. This is expected to put increased pressure on the accuracy of forecasts and underscore the importance of identifying potential sources of risk and effective execution of risk management strategies. Having an established FX Policy to support corporate decisions and actions when it comes to currency risk management can help address challenges.

Financial Institutions Group (FIG) 2024 Outlook^[4]

The ongoing quantitative tightening cycle continues to have significant impacts on U.S. regional and community banks. Read more about FIG’s outlook for these institutions in 2024.

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Important Legal Disclosures and Information

Interest rate derivatives are a PNC Bank product/service.
Fixed income securities are a product/service of PNC Capital Markets.
Foreign exchange is a PNC Bank product/service.
FIG is a PNC Bank and PNC Capital Markets service.

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

The PNC Financial Services Group, Inc. provides investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and provides specific fiduciary and agency services to individual clients through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC provides various discretionary and nondiscretionary investment, trustee, custody, consulting, and related services to institutional clients through PNC Bank, and investment management services through PNC Capital Advisors, LLC, an SEC-registered investment adviser and wholly-owned subsidiary of PNC Bank. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”) and affiliate of PNC Bank, National Association (“PNC Bank”). PNCCM is not a bank or thrift, but rather, it is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by PNC through its subsidiaries PNC Bank and PNCCM. Securities underwriting, sales and trading services are provided by PNCCM. Foreign exchange and derivative products are obligations of PNC Bank, National Association.

PNC Capital Markets Disclosure

Important Investor Information – Securities, insurance, foreign exchange, and derivative products are:
Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
• Not Insured By Any Federal Government Agency • May Lose Value

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PNC Capital Markets: Remaining Prepared in an Uncertain Environment

Interest Rate Derivatives 2024 Outlook[1]

Fixed Income Securities 2024 Outlook[2]

Foreign Exchange 2024 Outlook[3]

Financial Institutions Group (FIG) 2024 Outlook[4]