Stocks:
A blistering 2 month rally left global markets closing 2023 with strong annual gains as investors bet that major central banks have finished raising interest rates and will cut them rapidly next year but decrease to 2, to 2.5 over 2024, 2025 and 2026.
The MSCI World index, an indicator of global equities, had surged by 16 percent since late October and was up 22 percent this year by late trading yesterday (31st).
The gains were driven by a dramatic shift in interest rate expectations following a flurry of recent data showing inflation falling faster than expected in western economies.
Note: Slowdown of inflation and preparation of deflation for a soft landing.
A growing consensus that borrowing costs will fall sharply in 2024 also sparked a bond market rally, attracting investors to equities as they seek higher returns. The FED boosted this trend in mid December when its policy projections signalled substantial rate cuts next year.
Globally, the rise in the MSCI represented its best annual run since a 25 percent gain in 2019. Meanwhile, the Bloomberg global aggregate indext of government and corporate debt was up 6 percent this year, having been down about 4 percent in mid October.
The US 10 year treasury yield, a benchmark for global assets that moves inversely to bond prices, had fallen to 3.88 percent from more than 5 percent in October as inflation continues to slide. US consumer prices rose 3.1 percent in the year to November, compared with 9.1 percent in the 12 months to June 2022. Eurozone inflation dropped to 2.4 percent, the slowest annual pace since July 2021, while UK inflation has slowed sharply to 3.9 percent.
Traders are now pricing in six rate cuts (important, 6) by FED and the European Central Banks by the end of 2024, a stark turnaround from the fears of higher for longer borrowing costs that triggered a global bond selling off in autumn.
Many of the gains on Wall Street were driven by a handful of big tech stocks, although the rally has broadened beyond the typical 7 (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidea) in the recent weeks. Nasdaq index was up 44 percent for the year, the highest showing in 2 decades.
Prediction ECB rate cuts:
Falling inflation is set to prompt the European Central Bank to start cutting interest rates in the second quarter of 2024.
Rate cuts expectations have intensified to 2.4 percent in November, down from its peak above 10 percent a year earlier and only slightly above the 2 percent ECB target.
I expect that inflation may shortly dip below 2 percent in the second quarter 2024 but for most of the year will be somewhat above 2 percent.
The ECB has warned it expects inflation to reaccelerate in December before slowly declining to its target in mid 2025. Isabel Schnabel (ECB executive board member) told a newspaper “We still have some way to go and we will see how difficult the famous last mile will be.”
How quickly price pressures subside will be the key question as the central bank decides when to start lowering borrowing costs.
Being too slow to cut rates could well prove more damaging for the ECB credibility in response to an energy shock.
The ECB has raised its deposit rate from minus 0.5 percent last year to its deposit rate from minus 0.5 percent last year to its highest ever level of 4 percent, in response to the biggest surge in consumer prices for a generation.
2
The ECB has raised interest rates very aggressively, by large amounts and quickly, and there is a risk it has overestimated strength of the euro area economy and overtightened.
Debt levels of several EU governments have risen to record levels above 100 percent of gross domestic product in recent years, including Italy, France and Spain. I think most were sanguine about the risk of a crisis.
The spread between the 10 year bond yield of highly indebted southern European countries and those of Germany was unlikely to rise significantly. I wouldn’t be surprised to see European periphery spreads fall further in 2024.
The new EU recently agreed new debt and deficit rules that will require most government to rein in spending.
A blistering 2 month rally left global markets closing 2023 with strong annual gains as investors bet that major central banks have finished raising interest rates and will cut them rapidly next year but decrease to 2, to 2.5 over 2024, 2025 and 2026.
The MSCI World index, an indicator of global equities, had surged by 16 percent since late October and was up 22 percent this year by late trading yesterday (31st).
The gains were driven by a dramatic shift in interest rate expectations following a flurry of recent data showing inflation falling faster than expected in western economies.
Note: Slowdown of inflation and preparation of deflation for a soft landing.
A growing consensus that borrowing costs will fall sharply in 2024 also sparked a bond market rally, attracting investors to equities as they seek higher returns. The FED boosted this trend in mid December when its policy projections signalled substantial rate cuts next year.
Globally, the rise in the MSCI represented its best annual run since a 25 percent gain in 2019. Meanwhile, the Bloomberg global aggregate indext of government and corporate debt was up 6 percent this year, having been down about 4 percent in mid October.
The US 10 year treasury yield, a benchmark for global assets that moves inversely to bond prices, had fallen to 3.88 percent from more than 5 percent in October as inflation continues to slide. US consumer prices rose 3.1 percent in the year to November, compared with 9.1 percent in the 12 months to June 2022. Eurozone inflation dropped to 2.4 percent, the slowest annual pace since July 2021, while UK inflation has slowed sharply to 3.9 percent.
Traders are now pricing in six rate cuts (important, 6) by FED and the European Central Banks by the end of 2024, a stark turnaround from the fears of higher for longer borrowing costs that triggered a global bond selling off in autumn.
Many of the gains on Wall Street were driven by a handful of big tech stocks, although the rally has broadened beyond the typical 7 (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidea) in the recent weeks. Nasdaq index was up 44 percent for the year, the highest showing in 2 decades.
Prediction ECB rate cuts:
Falling inflation is set to prompt the European Central Bank to start cutting interest rates in the second quarter of 2024.
Rate cuts expectations have intensified to 2.4 percent in November, down from its peak above 10 percent a year earlier and only slightly above the 2 percent ECB target.
I expect that inflation may shortly dip below 2 percent in the second quarter 2024 but for most of the year will be somewhat above 2 percent.
The ECB has warned it expects inflation to reaccelerate in December before slowly declining to its target in mid 2025. Isabel Schnabel (ECB executive board member) told a newspaper “We still have some way to go and we will see how difficult the famous last mile will be.”
How quickly price pressures subside will be the key question as the central bank decides when to start lowering borrowing costs.
Being too slow to cut rates could well prove more damaging for the ECB credibility in response to an energy shock.
The ECB has raised its deposit rate from minus 0.5 percent last year to its deposit rate from minus 0.5 percent last year to its highest ever level of 4 percent, in response to the biggest surge in consumer prices for a generation.
2
The ECB has raised interest rates very aggressively, by large amounts and quickly, and there is a risk it has overestimated strength of the euro area economy and overtightened.
Debt levels of several EU governments have risen to record levels above 100 percent of gross domestic product in recent years, including Italy, France and Spain. I think most were sanguine about the risk of a crisis.
The spread between the 10 year bond yield of highly indebted southern European countries and those of Germany was unlikely to rise significantly. I wouldn’t be surprised to see European periphery spreads fall further in 2024.
The new EU recently agreed new debt and deficit rules that will require most government to rein in spending.
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