At a glance:

  • European Outlook: Nearly three months into the year, the broad outlook has not changed. In Europe, Inflation continues to fall, albeit more slowly, and rate cuts are likely from mid-year onwards. The US economy is forecasted to grow by +3.0% year/year in real terms in Q1 2024, translating to a remarkable nominal growth rate of 6% per annum for the third consecutive quarter.
  • Central Banks Policy Dilemma: The trajectory of European markets in 2024 will likely take its lead from the changing interest rate environment . The ECB, expected to hold rates at a record 4%, is navigating a tricky path between keeping rates high long enough to contain inflation while not cutting too late as price pressures ease quickly. With the US economy showing robust growth and signs of inflation, Federal Reserve Chair Jerome Powell faces a similar dilemma with some questioning the justification for rate cuts amid such economic strength.
  • Global Economic Trends: Global Purchasing Managers Indices (PMIs) indicate continued acceleration in the global economy, particularly in services and manufacturing sectors. However, concerns persist, especially regarding China’s economic situation, characterized by overbuilding and financial vulnerabilities reminiscent of Japan’s lost decades.
  • Market Performance and Outlook: Equities have started 2024 positively, with the FTSE World Equity Index rallying +5% year-to-date in euro terms. Bonds face challenges amidst strong economic data and inflationary pressures. Commodities, including crude oil and agricultural commodities, have performed well, signalling a late-cycle phenomenon. Expectations of increased volatility in the second half of the year coincide with the US presidential election, but the overall outlook for equities remains bullish despite potential volatility.

The US economy is forecast to grow by +3.0% year/year in real terms (before accounting for inflation) in Q1 2024. When you consider that US CPI also continues to bubble along north of 3% per annum, the United States is on track to grow by 6% per annum in nominal terms for the third quarter in a row. This is extraordinary for a $28 trillion economy.

US non-farm payrolls expanded by over 350,000 in January, nearly double the consensus estimate, while the prior two months were also revised higher. The US unemployment rate, at 3.7%, continues to hold at record lows, while the labour force participation rate continues at 63%. The US is firing on all cylinders, which is why Jerome Powell has recently been more reluctant to signal to markets that he is ready to cut interest rates from their current level of 5.25%-5.5%.

Some folks question whether interest rate cuts are justified at all when the US economy is growing at over 6% per annum and inflation is showing signs of coming back to life. This poses a potential problem for the Federal Reserve (and equity investors alike). If the US economy continues on its current growth trajectory, the risk of overheating becomes a real concern. If, on the other hand, the US begins to eventually slow down, Powell could lower rates, but this would likely occur in the face of a potential recession. Powell is walking a tightrope. Ultimately, the decision is out of his hands. We explore some of the possible scenarios that could unfold in 2024 later in this month’s investor update and consider the potential impact on economies and markets around the world.

Outside the US, data remains quite mixed. We have some positive data points with the global PMI readings indicating that the global economy continued to accelerate in February. Purchasing Managers Indices (PMIs) are considered a leading indicator because they tend to provide a glimpse of economic trends before they are reflected in other economic data. Changes in the PMI can signal shifts in economic activity before those changes are seen in other indicators like GDP growth or employment numbers.

Economic growth trends are improving across services and manufacturing sectors, but inflation has also ticked higher. China remains a weak spot. Chinese GDP growth reached 5% in 2023 but the key driver for growth has come from government spending on endless real estate and infrastructure projects that have delivered poor returns on invested capital. Overbuilding has taken its toll on the country’s finances. Today, China has many similarities to Japan’s lost decade(s) with overvalued real estate, a high and rising debt burden and demographic decline being the dominant trends.

2024 is off to another positive start for equity investors. The FTSE World Equity Index has rallied +5% year-to-date in euro terms. Bonds continue to struggle in the face of stronger-than-expected economic data and the threat of rising inflation. The US dollar has gained +1% versus the Euro while commodity prices have also performed well, generally a late-cycle phenomenon. West Texas Intermediate crude oil has rallied +13% so far this year to $81/barrel. Agricultural commodities have rallied +9% while industrial metals are modestly lower. We expect volatility to pick up in the second half of the year as the US presidential election comes into focus. The bull market in equities should continue in our view, despite increased volatility.