9 janvier 2024
Macro - The main events of 2023 and the ones that should mark 2024
Deputy CIO, CPRAM
Head of Research
and Strategy, CPRAM
As is often done in our business, we provide below a recap of main macrofinancial events of 2023 and emphasize the ones that should mark 2024.
The main macrofinancial events of 2023
- Inflation began to recede in developed countries. In early 2023, inflation was still hovering around 10% in the euro zone and 7% in the US, both figures far above the Fed’s and the ECB’s inflation targets. Although inflation did indeed recede over the course of the year, the Fed and ECB continued to raise their key rates, to a high since 2001 for the Fed (at 5.25/5.50% for the fed funds target range) and to an all-time high since the creation of the euro zone for the ECB (at 4% for the deposit rate).
- The US economy’s resiliency. In early 2023, it was generally assumed that the US economy would sink into recession. There are several reasons for which that didn’t happen: 1) the impact of the 2020/2021 monetary easing continued to be felt; 2) fiscal policy remained expansionary, and the Biden administration’s massive investment plans produced their initial effects; and 3) excess savings (about 10% of GDP) accumulated by households during the Covid crisis remained highly abundant.
- A disappointing reopening of the Chinese economy. When the Chinese authorities backed off their “zero-Covid” policy at the end of 2022, the consensus forecast was more or less for a sharp acceleration in growth. That didn’t happen, and households’ consumption grew only moderately in 2023, as they tended to save more because of lacklustre prospects on the real-estate market.
- India became an engine of global growth. In the first three quarters of 2023, India was, by far, the G20 country with the fastest growing GDP, ahead of Brazil, China and Turkey. This confirms what had already been apparent in 2021 and 2022 – ie the fact that India is becoming an engine of global growth.
- As in 2022, volatility remained very high on the bond markets in 2023 and even higher than in the 1990s. This was mostly due to major central banks’ tightening cycle and uncertainty on whether they would stick to it or call it off. In both the US and Europe, the yield curve stayed steeply inverted. Bond yields gyrated, with the US 10-year yield ending 2023 about where it began (at about 3.80%) but after briefly exceeding 5% in mid- October.
- The equity markets were driven by the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). Their combined market cap soared by about 70% in 2023, while that of the other S&P 500 companies rose by barely more than 10%. The “Magnificent Seven” operate in various sectors (electric vehicles, semiconductors, tech products, the cloud, etc.) but all had in common that they rode tailwinds, such as the search for quality. They now account for about 27% of the S&P 500 market cap.
- AI and GLP-1. The equity markets were also driven by significant progress in generative artificial intelligence. Announcements by Novo Nordisk and Eli Lilly1 on GLP-1 anti-obesity treatments pushed those two companies to remarkable outperformances, but many other healthcare companies to steep underperformances. Meanwhile, cleantech companies took a big hit from very high interest rates, which rendered a number of projects non-viable.
- US bank failures. In an episode reminiscent of the 1980s savings & loan crisis, several US banks failed. This forced the Fed to set up a special mechanism (BTFP) to provide liquidity to banks whose balance sheets were burdened with too many unrealised losses.
Events likely to highlight 2024
- How far will inflation recede in developed countries? Disinflation is already well under way on both sides of the Atlantic but visibility is not the same. The lagging taking into account of slower increases in rents will continue to push US core inflation down steadily (some Fed research has even suggested that it could slip into negative territory in 2024), whereas factors behind the decline in euro zone core inflation were not as clear-cut. These yardsticks will remain key in 2024.
- The start of the monetary easing cycle in developed countries. The Fed has already flagged in its dot plots three 25 bps rate cuts in 2024. The markets are pricing in about twice that many. The ECB has suggested that it has probably hit a pivot on its key rates, but, even so, the markets are probably getting carried away on their monetary easing forecasts.
- The end of the Fed’s QT? In the FOMC minutes of December 2023, the Fed has already begun to explicitly flag a QT tapering (i.e., a reduction of non-reinvestments of maturing securities). This will become necessary once QT-driven liquidity shortages become too serious. A possible reversion to a sort of technical QE (as in late 2019) would be seen in a positive light by risky asset markets. Fed “tapering” would be in the opposite direction of the ECB, which plans to accelerate its QT in H2 2024.
- The normalisation of the yield curve. Key rate cuts by the ECB and the Fed are likely to cause the short-end of the yield curve to fall more than the long-end, which would end up normalising the yield curve (ie no inversion anymore). Remember that the 2y-10y segment in the US has been inverted since summer 2022.
- The end of negative rates in Japan? Having stayed the course on its key rates in 2022/2023, whereas all other central banks in developed economies raised theirs, the BoJ is likely to call a halt to its negative-rate policy in 2024. That would probably boost the yen.
- Persistent sluggishness in the Chinese economy. Weak prospects for an improved real-estate market are likely to keep Chinese consumers from opening their wallets, and growth is likely to remain below its 2010s average.
- A weaker dollar? The dollar strengthened as the Fed tightened faster and more steeply in 2022/2023 than other central banks. The opposite course in 2024 is likely to hurt the dollar.
- About half of the world’s population will be called to the voting booths in 2024. The elections that matter most to the markets will be in Taiwan, India, Mexico, Europe and, of course, the US. The outcome of US elections (both the presidency and Congress) will be decisive in more ways than one. They will be especially important to thematic investors, as the Biden administration has been a driver of investments related to fighting climate change.
- Once again, geopolitics. While unlikely, the armed conflicts in Ukraine and the Middle East could lead to an escalation in tensions between major powers, with unforeseeable consequences. Recent Houthi rebel attacks against commercial cargos ships in the Red Sea have disrupted global trade and could, in turn, disrupt disinflation dynamics.
- On the equity markets, the “Magnificent Seven” are likely to be far less dominant in 2024. For one thing, there is likely to be far more dispersion among the seven. Mid-caps are likely to recover more positive momentum, but, there again, dispersion within the asset class is likely to be great.
- Also on the equity markets, the losers of 2023 could outperform in 2024. A number of healthcare stocks wrongfully punished because of GLP-1 announcements are likely to rally. Likewise, cleantech stocks are likely to benefit from the decline in interest rates, which hurt them more than other stocks in 2023.
1- Examples of companies within our investment universe given for indicative puposes only.