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Proyeksi Global

March 2024

Strong start to the year

The economic outlook is set to be more favourable for financial markets this year compared to 2023.

Eli Lee
Managing Director
Chief Investment Strategist
Chief Investment Office
Bank of Singapore Limited

Financial markets have begun 2024 strongly. Enthusiasm for AI, potential rate cuts in the US and Europe, reflation in Japan, stimulus hopes in China and strong growth in India have pushed the S&P 500, Eurostoxx 600, Nikkei 225 and SENSEX equity indices to record highs. But risks remain to the outlook. The UK, Germany and Japan are in a recession. Inflation is preventing early interest rate cuts. The wars in Ukraine and the Middle East may broaden and the US election may see sharp shifts in financial markets.

In the US, we expect the Federal Reserve (Fed) will cut interest rates from June. Since the start of 2024, market expectations have fallen from six Fed rate cuts this year towards our view of three. This has caused 10Y US Treasury (UST) yields to retrace from 3.75% at the end of 2023 to around 4.25% now. But with the Fed intent on lowering rates from the summer, we think fixed income assets will rally again.

We thus recommend staying Overweight USTs and Developed Markets Investment Grade bonds. We forecast 10Y UST yields will fall back to last year’s lows of 3.25% and prefer high quality bonds to hedge against recession risks.

In Europe, we maintain a Neutral stance. Growth should start to recover this year. But the European Central Bank (ECB) and Bank of England (BOE) are unlikely to ease while inflation stays well above their 2% goals.

In China, we also maintain a Neutral stance. Economic growth is likely to remain subdued around 5% this year in the absence of major fiscal stimulus, property market stabilisation and better relations with the US. But valuations have become very undemanding across domestic markets.

Last, we recommend staying Overweight Japan’s equities. The return of inflation makes it likely the Bank of Japan (BOJ) will end negative interest rates in April. But the dovish central bank is set to keep interest rates very low for the rest of 2024.

US – Fed and elections are key

The two key US macro themes this year are the Fed’s interest rate decisions and the outcome of November’s election.

We expect the central bank will make three cuts to its fed funds rate from 5.25-5.50% to 4.50-4.75% this year as the forecast table shows. Core consumer price index (CPI) inflation has fallen from a peak of 6.6% in 2021 as the US reopened from the pandemic to 3.9% in January after the Fed’s aggressive interest rate hikes in 2022 and 2023. The decline opens the way for the Fed to pivot towards interest rate cuts in 2024 as inflation falls further towards its 2% target with 25bps moves likely in June, September and December.

Fed rate cuts would benefit financial markets this year. We see 10Y UST yields falling back to 3.25%. We also expect Fed easing would support risk assets even if the US economy suffers a mild recession which remains our base case for 2024.

The main risk to our view here is if core inflation gets stuck around 3-4%, preventing the Fed from cutting interest rates in 2024. While goods inflation has plunged as supply disruptions have eased after the pandemic, services inflation remains high. But the slowing economy is likely to lower inflation enough this year to let the Fed start reducing interest rates from the summer.

The other key theme will be the US election. If President Joe Biden is behind in the polls in the second half of 2024, then financial markets may react sharply to the risk of former president Donald Trump returning to the White House.

First, the Republican candidate is proposing a 10% tariff for all imports into the US and 60% tariffs from China. This would spark inflation, stop the Fed cutting rates and make the USD surge.

Second, equities may be buoyed by the prospects of Trump reducing corporate taxes again. But the US fiscal deficit is 7-8% of GDP so unfunded tax cuts may cause UST yields to spike.

Third, risks to the Fed’s independence would unsettle markets and, lastly, uncertainty about the rule of law and global politics under Trump may result in gold prices surging. Investors are thus set to keep watching the polls closely this year.

China – More easing required

China’s economic activity remains subdued. January’s consumer price index (CPI) showed inflation was below zero for the fourth month in a row at -0.8%. The last time consumer prices fell at the same pace was in the aftermath of the 2008 global financial crisis.

China’s growth has been lacklustre for two years now. GDP only expanded by 3.0% in 2022 and 5.2% last year owing to the shocks of 2020-2022: strict lockdowns, regulatory hits, property weakness, recessions abroad and rising geopolitical tensions. Consumers are cautious after three years of lockdowns, higher unemployment and falling property prices. Investment is being held back by subdued confidence. Exports are limited by recessions in major economies like Germany and Japan and officials are wary of incurring more debt to finance fresh, large-scale government spending.

This year, we expect GDP growth to stay moderate at 5.0%, far below its 9% annual average rate recorded in the 2000s and 2010s. Policymakers have stepped up efforts to aid growth including cutting 5Y loan prime rates by 25bps in February to 3.95%, the largest decline on record, to support China’s weak property sector.

But officials will need to announce more steps including further fiscal borrowing and additional property easing measures given the current weak levels of confidence in the economy.

Europe – Sticky inflation to delay rate cuts until summer

The latest 4Q23 data shows both Germany and UK suffered recessions in the second half of last year. Germany’s economy, the largest in the Eurozone, contracted 0.3% during 2023 while the UK only grew 0.1% last year owing to high inflation, the energy shock from the war in Ukraine and rapid increases in interest rates by the ECB to a record high of 4.00% and the BoE to 5.25%.

This year, economic activity has started to pick up across Europe as the latest purchasing managers’ indices (PMI) numbers improve. But sticky inflation in both the Eurozone and UK are likely to keep the ECB and BoE from cutting interest rates to support economic recovery until June and August respectively. We thus expect GDP growth for 2024 to remain weak at just 0.4-0.5% for the UK and the Eurozone.

Japan – First interest rate hike since 2007 likely in April

The return of inflation after three decades in Japan is likely to spur the BoJ to end negative interest rates by increasing its deposit rate from -0.10% to 0.00% at its April meeting.

In January, headline inflation fell from 2.6% to 2.2% but stayed above the BoJ’s 2% target while core inflation - excluding fresh food and energy - only dipped from 3.7% to 3.5%. Thus, core inflation remains close to four-decade highs.

Japan’s upcoming annual spring wage talks is set to show firm salary growth for the second year in a row. The BoJ is therefore likely to feel confident that inflation will settle around its 2% target and increase interest rates in April. But officials are unlikely to make any further rate hikes this year given the economy recorded a surprise recession in the second half of last year. Thus, the BoJ may remain dovish throughout 2024 to the benefit of Japan’s financial markets.

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