2024 Economic Outlook: 10 Considerations for the Us Economy

Economic

Summary:

The economy is losing some of its steam, but could land softly in 2024.

1. Economic growth is likely to decelerate in 2024 as the effects of monetary policy take a broader toll and post-pandemic tailwinds fade.

We expect real GDP growth to walk the line between a slight expansion and contraction for much of next year, also known as a soft landing. After tracking to a better-than-expected 2.8% real GDP growth in 2023, we forecast a below-trend 0.7% pace of expansion in 2024. Among the major components of GDP, consumer spending is likely to rise at a more muted pace next year, while fiscal spending could swing from a positive contributor in 2023 to a modest drag. Notable drops in business investment and housing activity in 2023 set the foundation for improved performance in 2024, even if the outlook remains muted amid higher interest rates; 2023 strength in services sector is likely to soften.

2. We assume the hiking cycle is over, leaving the Fed Funds on hold at 5.25%-5.5% until the middle of 2024.

If inflation continues its moderating trajectory over the coming quarters, we think it is likely the FOMC will start to slowly normalize policy rates near the midpoint of next year. We forecast 25 bps cuts at each meeting beginning in June, bringing the Fed Funds target range to 4.00%-4.25% at the end of 2024. Concurrently, quantitative tightening, the Fed's balance sheet runoff program, is expected to be maintained at the same pace through 2024. At $95 billion per month, quantitative tightening is projected to remove approximately $1 trillion from the economy next year.

3. The U.S. consumer could begin to bend, but not break.

There are numerous reasons to expect consumer spending growth to slow next year from its firm pace in 2023: diminished excess savings, plateauing wage gains, low savings rates and less pent-up demand. Additionally, the restart of student loan payments and uptick in subprime auto and millennial credit card delinquencies are emerging signs of stress for some consumers. On the flipside, household balance sheets and debt servicing levels remain healthy. Tight labor markets continue to support employment and therefore income levels. Considering the cross currents, we think consumer spending growth can stay positive overall in 2024, but at a lower rate than 2023.

4. The larger-than-expected fiscal boost to the U.S. economy in 2023 could flip to a slight headwind in 2024.

The fiscal deficit roughly doubled to $1.84 trillion—7.4% of GDP—in fiscal 2023 from $950 billion in 2022. While the full extent of this year's deficit expansion would not be considered stimulus in a classic sense, it is clear the federal government took in a lot less cash than it sent out. Looking to 2024, we expect the federal deficit to narrow to a still very large 5.9% of GDP, reflecting a bit of belt-tightening on the spending side partly offset by higher interest outlays on government debt.

5. Labor markets are showing signs of normalization to end 2023; unemployment could drift higher in 2024 while remaining low in historical context.

Momentum in the job market is starting to wane with slowing payroll growth and modestly rising unemployment, as well as declining quit rates and temporary help. Increased labor force participation and elevated immigration patterns over the past year have added labor supply, while a shortening work week indicates moderating demand for labor. Considering the challenges to add and retain workers coming out of the pandemic, businesses could be more reluctant than normal to shed workers in a slowing economic environment. Even so, less hiring activity could be enough to cause the unemployment rate to tick up to the mid-4% area by the end of next year due to worker churn. Already slowing wage gains should slow further in the context of a softer labor market.

6. Inflation trends are cooling, but likely to remain above the Fed's 2% target through 2024.

After reaching a four-decade high in 2022, inflation on both a headline and core basis has moderated significantly in 2023. Some categories have seen more improvement than others. For example, core goods inflation dropped from a peak of 12.4% in February 2022 to 0% in October 2023. Progress on core services inflation, which includes the sticky shelter category, has been slower. After peaking at 7.3% in February 2023, core services inflation was still running an elevated 5.5% in October 2023. We expect moderating shelter inflation in 2024 as the lag in market rents pricing should catch up in the inflation readings. We forecast core PCE prices—the Fed's preferred inflation metric—to rise 2.4% in 2024, down from 3.4% in 2023.

7. Housing sector activity has dropped 30%-40% over the past 18 months amid the surge in mortgage rates.

With housing affordability metrics at a 40-year low, combined with 75% of mortgages locked in at 4% or below, the U.S. housing market is effectively frozen. Real residential investment tumbled at a 12% seasonally adjusted annual rate over the past six quarters. Meanwhile, home values rose 6% in 2023—to near all-time highs—amid tight supply and historically low vacancies. Given the already large drop in recent years, we think the housing market is one area of the economy that could perform better in 2024 than in 2023, even if trends remain soft in the near term.

8. Supply chain bottlenecks are mostly in the rearview, while global supply chain restructuring will take time.

Over the past year, as inventory constraints and shipping costs have fallen, supply chain considerations have shifted from short-term tactics to longer-term strategies of minimizing costs while ensuring resiliency. Legislation passed in 2022 including the CHIPS and Science Act and Inflation Reduction Act provides incentive for certain strategic industries—including semiconductors and renewables—to onshore production. This has resulted in rising business investment in high-tech manufacturing structures over the past year. Bigger picture, we expect global supply chain adjustments to continue at a conservative pace, as even the simplest changes are both costly and complex.

9. Pressures on the commercial real estate sector are likely to intensify.

The higher-for-longer interest rate environment and challenges among small and regional banks are resulting in tightening of lending standards and slowing slow growth. This is occurring across all loan types, but most acutely for the commercial real estate sector, where small and regional banks have meaningful exposure. With nearly $550 billion of maturing commercial real estate debt over the next year, losses are expected to mount for lenders and investors. While we do not expect this to be a systemic issue, reduced lending activity and potential investor losses could be an economic headwind.

10. Geopolitical risks will remain top of mind.

Elevated trade tensions with China, the ongoing Russia-Ukraine war and conflict in the Middle East all point to continued uncertainties and risks heading into 2024. While direct U.S. economic impact has been limited thus far, the larger risk is for a supply shock of a critical commodity or good—energy, food, semiconductors—that triggers significant market disruption. Next year's U.S. presidential election could be more impactful than recent cycles on geopolitics given the backdrop of already elevated tensions.

2024 Economic Outlook: 10 Considerations for the Us Economy_1

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Chandan Gupta

Stocks

Forex

Traders' Opinions

Asian Market Performance

In Asia, market indices showcased a blend of gains and stability. Tokyo's Nikkei 225 witnessed a modest rise of 0.3%, reaching 33,254.03, while the Shanghai Composite index edged up by 0.1% to settle at 2,918.93. Concurrently, Taiwan's Taiex and Bangkok’s SET saw marginal upticks of 0.1%. The subdued trading activity could be attributed to most markets remaining closed due to the Christmas holiday.

Chinese Regulatory Impact

An intriguing development emerged from China, where regulatory announcements approving over 100 online games sought to stabilize the industry. This move was a response to a plunge in major game makers' stocks, such as Tencent and Netease, triggered by draft guidelines released earlier. These regulatory shifts in one of the world's largest gaming markets could have significant implications for the global gaming industry's future trajectory.

Wall Street Performance and Economic Reports

Meanwhile, on Wall Street, the S&P 500 wrapped up its eighth consecutive winning week, ending with a 0.2% gain, resting just below its record high set nearly two years ago at 4,754.63. The Dow experienced a marginal decline of less than 0.1% to 37,385.97, while the Nasdaq inched up by 0.2% to 14,992.97. This continuous upward trajectory of the S&P 500 marked its longest winning streak since 2017, reflecting market optimism.

Investor attention was captivated by a suite of economic reports released on Friday, which led to fluctuations in Treasury yields and market sentiments. The Federal Reserve's preferred inflation gauge slowed to 2.6% in November from the previous month's 2.9%, surpassing economists' expectations. This aligned with earlier November inflation reports, showcasing a more significant drop than anticipated.

Consumer Spending and Economic Indicators

November witnessed an unexpected uptick in U.S. consumer spending, a positive sign for an economy heavily reliant on consumer expenditures. However, this also hinted at persistent inflationary pressures. Additional reports highlighted that while orders for durable manufactured goods exceeded expectations, sales of new homes unexpectedly weakened. Despite this, consumer sentiment in the U.S. improved, reflecting mixed signals about the economy's underlying health.

Federal Reserve's Balancing Act

The Federal Reserve finds itself navigating a tightrope, aiming to control inflation by raising interest rates without pushing the economy into a recession. A robust economy, while promising for growth, could complicate this delicate balancing act. The 10-year Treasury yield stood at 3.90% on Monday, relatively stable compared to Friday's figures but significantly lower than the levels seen in October, which exerted substantial downward pressure on the stock market.

Impact of Declining Yields

The decline in yields has been a primary catalyst for the stock market's remarkable surge of approximately 15% since late October. Lower yields not only encourage borrowing, bolstering economic activity, but also alleviate strain on the financial system and elevate investment prices. This trend stems from hopes that inflation has cooled enough for the Federal Reserve to implement rate cuts through 2024.

Market Speculation and Currency Movements

Market speculation hints at expectations that the Federal Reserve might reduce its main interest rate by at least 1.50 percentage points by the end of the upcoming year, as per data from CME Group. Presently, the federal funds rate ranges between 5.25% and 5.50%, the highest level in over two decades. In currency markets, the U.S. dollar slightly weakened against the Japanese yen while the euro witnessed a minor increase.

Final Verdict

The intricate interplay of economic indicators, market movements, and regulatory shifts creates a dynamic financial environment globally. The Asian markets' mixed performance, Wall Street's upward momentum, and the Federal Reserve's tightrope walk in managing inflation and economic growth highlight the complexities and nuances shaping the contemporary financial landscape. The ongoing developments signify the need for astute analysis and a nuanced understanding of the multifaceted factors impacting the world economy.

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Owen Li

Economic

Asia's megacities often undergo surprising metamorphoses in short amounts of time. Kuala Lumpur is one such example. When I visited the city in late October, I was amazed at how much it had modernized since I visited nine years ago.

Urban rail lines now crisscross the city, with new shopping malls sprouting everywhere. Particularly eye-catching was Merdeka 118, a 118-story skyscraper completed earlier this year. The 678-meter tower -- the world's second-tallest after the Burj Khalifa in Dubai -- is a symbol of the country's growing affluence. Its spire was designed to evoke the image of Tunku Abdul Rahman, Malaysia's first prime minister, raising his hand as he proclaimed national independence in 1957.

Malaysia over the past few years has experienced a rapid turnover of prime ministers, though the political situation seems to have stabilized. On Dec. 5, about a year after the launch of his government, Prime Minister Anwar Ibrahim stressed his intention to push for faster economic growth. "It's time to focus on developing the economy," he said in an interview with a local broadcaster.

Anwar's government in July unveiled its 10-year Madani Economy plan and the National Energy Transition Roadmap. These were followed in September by the midterm review of the 12th Malaysia Plan and the New Industrial Master Plan 2030. In October, Anwar's government launched its Hydrogen Economy and Technology Roadmap.

"It is not clear how these relate to one another," a Japanese businessperson said. Still, it seems clear that the government's main goal is to achieve annual growth of over 5.5%, a target specified in the Madani plan.

Malaysia's gross domestic product grew 8.7% last year, the highest in 22 years, and growth for this year is estimated at 4%, despite the global slowdown. Given its relatively young population, domestic demand is expected to further expand. The country's semiconductor and other sectors are also attracting foreign direct investment as alternative supply chain bases amid mounting U.S.-China tensions.

The country's per capita gross national income was $11,780 in 2022. If the economy grows 5.5% per year and there is no sharp depreciation of the ringgit against the dollar, it could shed its middle-income status, as defined by the World Bank, in two or three years, joining the ranks of high-income nations.

Graduation has been a long time coming.

Malaysia became an upper-middle-income country in 1996, according to a working paper that Jesus Felipe, a professor at De La Salle University in the Philippines, wrote in 2012, when he was with the Asian Development Bank. Felipe reasons that upper-middle-income nations become ensnared in the middle-income trap if they are unable to move up for more than 15 years. Once trapped, countries suffer stagnant growth, sandwiched between technologically advanced developed nations and developing countries abundant in cheap labor. The description fits Malaysia's situation.

To see why Malaysia could not extricate itself from the trap for so long, one needs to look at its history.

Twelve years after the country gained its independence in 1957, a racial riot engulfed the capital. Malays accounted for nearly 70% of the population, but ethnic Chinese, who made up less than 30%, controlled the economy. The strain of this incongruity led to the clash, resulting in about 200 deaths.

To prevent a recurrence of the tragedy, the government began to address the economic disparity and in 1971 adopted a policy called Bumiputera (sons of the soil) -- a type of affirmative action for ethnic Malays. The policy treats Malays favorably in all aspects of life, including school admissions, employment and even stockholding.

The country's ethnic Chinese are traditionally considered to be strong in commerce and industrial activities. "If we recruit people by ability alone, many could be Chinese," an executive at a Japanese company said.

By trying to fix the racial imbalance artificially, Bumiputera is often cited as a source of inefficiency, but it has its merits.

"If the government had not provided elementary and secondary education to Malay villagers and helped them migrate to cities and find jobs in the commercial and industrial sectors, the country would have suffered a serious labor shortage in the early stage of economic development," said Satoru Kumagai, director of the economic geography studies group at the Institute of Developing Economies of the Japan External Trade Organization. It can be said that Bumiputera's goal is to strike an optimal balance between distribution and growth.

Mahathir Mohamad, who in 1981 became Malaysia's fourth prime minister, shifted the national focus to growth by adopting the Look East policy, which sought to emulate Japan's economic success. The country also began to actively attract more foreign capital. In 1991, Mahathir launched Vision 2020, the goal of which was to become a high-income country in 30 years.

"His greatest achievement was to set a goal of becoming a high-income country," said Abdul Razak Ahmad, founding director of Bait Al Amanah, a private think tank. He "thus changed the people's mindset, encouraging them to have a can-do attitude."

Malaysia enjoyed annual growth of nearly 10% for 10 years before the Asian financial crisis hit it hard in 1997. Afterward, its growth slowed to around 5% to 6%. Anwar, then the deputy prime minister and finance minister, clashed with Mahathir over how to cope with the crisis and was dismissed.

When Anwar this year announced the Madani plan, he said the country had been "caught in a vicious cycle of high costs, low wages, low profits and a lack of competitiveness" since the 1997 crisis. Anwar clearly sees the plan as a roadmap to push the country into the high-income category during his tenure -- something his old enemy could not achieve.

The reason for Malaysia's inability to pull itself out of the middle-income trap becomes clear when looking at the economic development of Taiwan and South Korea.

In terms of population, Taiwan and South Korea are not much different from Malaysia. Taiwan is home to 23 million, South Korea to 51 million and Malaysia to 33 million.

In 1981, when Mahathir became prime minister, the three were not far apart in per capita GDP. Taiwan's was at $2,691, South Korea's at $1,883 and Malaysia's at $1,920.

Taiwan became an upper-middle-income economy in 1986, followed by South Korea two years later, according to Felipe. Taiwan stepped up to high-income status in 1993, with South Korea following in 1995. It took just seven years for the two to move from upper-middle-income to high-income status.

How Malaysia Is Finding Its Way out of the Middle-Income Trap_1

Unlike Malaysia, they did not fall into the trap. Last year, Malaysia's per capita GDP was $12,465, far below Taiwan's $32,687 and South Korea's $32,418. Several factors were at play here.

First, Taiwan and South Korea do not have complex ethnic problems that cause them to pursue difficult socioeconomic policies. Second, the two had no choice but to industrialize as they are not blessed with natural resources like Malaysia, which is rich in petroleum, natural gas and palm oil.

Third, democratization in Taiwan and South Korea began shortly before the end of the Cold War in 1989, allowing them to catch the waves of globalization and information technology. Taiwan democratized in 1986 and South Korea in 1987.

Malaysia has held democratic elections since it gained independence, but the country was under a "developmental dictatorship" that prioritized economic development while restricting political freedom. Malaysians had to wait until 2018 for their government to hand power to another party for the first time.

Fourth, internationally competitive businesses like Taiwan Semiconductor Manufacturing Co., Hyundai Motor and Samsung Electronics have driven growth in Taiwan and South Korea. Malaysia, meanwhile, has failed to nurture such companies with an economy that instead has been led by government-affiliated entities. Its automobile, electrical and electronics industries have depended on foreign businesses.

Grab Holdings, whose ride-hailing superapp is now ubiquitous across Southeast Asia, was founded in Malaysia but quickly relocated its head office to Singapore to facilitate fund-raising and other benefits.

On the whole, Malaysia's lack of economic dynamism was to blame for its lower growth curve.

Still, it should be noted that Malaysia has avoided the so-called resource trap, in which the presence of abundant resources holds back a country's industrialization. Malaysia's leading exports are electrical and electronic products, which account for 40% of its total exports. It tops the U.S. and Japan in terms of exports of semiconductor-related products by value.

This trap can be seen in Saudi Arabia, which in 2016 drafted its Vision 2030 strategy to reduce its dependence on natural resources. Malaysia achieved 40 years ago the industrialization Saudi Arabia is now pursuing.

Said Kumagai: "Malaysia is different from East Asia's elite economies like Japan, Taiwan and South Korea, and from countries with unique strengths such as Singapore, Hong Kong and oil-producing Gulf states. If it achieves high-income status, it will be the first 'normal' country to do so."

Still, challenges abound. In chip manufacturing, Vietnam and India are catching up fast, making it imperative for Malaysia to boost investments in higher value-added upstream industries. Given the accelerating trend toward carbon neutrality, demand for its fossil fuels will likely decline.

Yet, while balancing growth and stability, the multiethnic country with an average age of 30 has succeeded in making slow but steady progress toward overcoming the middle-income trap. Its industrial success will certainly serve as a beacon for other emerging and developing countries in the Global South.

Source: NIKKEI Asia

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Chandan Gupta

Traders' Opinions

Fundamental Analysis

In the bustling world of digital currencies, Ethereum stood out with a modest upswing during Thursday's trading session, hinting at its allure for prospective investors in the days ahead. However, this ascent wasn't without its challenges. Ethereum has been contending with the weight of prevailing lower interest rates, a factor casting a shadow on its trajectory. This trend of reduced interest rates doesn't seem inclined to fade away, implying a continued burden on Ethereum's performance in the foreseeable future.

Why is this happening? The financial landscape has been navigating the terrain of reduced interest rates for a while now. Traditional avenues for investing and saving have witnessed a gradual decline in returns due to these diminished rates. As a result, money is actively seeking new avenues, new paths that can offer not just stability but also promise growth. And within this quest, the realm of cryptocurrencies beckons with its intriguing prospects.

Cryptocurrencies occupy a unique niche in the financial realm. They exist in a domain that's perched considerably higher on the risk spectrum compared to traditional investment avenues. This high-risk, high-reward dynamic is alluring to a subset of investors who seek alternatives to the conventional, more predictable asset classes. Among these digital currencies, Ethereum shines as a platform that extends beyond just a medium of exchange or a store of value; its underlying technology enables a multitude of decentralized applications, offering a broader spectrum of utility and potential use cases.

While the broader financial market is facing challenges due to the persistent low-interest-rate environment, the cryptocurrency sector, Ethereum in particular, has emerged as a space where innovation, volatility, and opportunity intertwine. It's positioned as a playground for those willing to traverse the less-charted territories of investment.

Exploring this realm of digital assets, however, requires a measured approach. The volatility inherent in cryptocurrencies can be a double-edged sword. While it presents a chance for substantial gains, it also amplifies the risks. Hence, a prudent investor would conduct thorough research and consider the dynamics at play before delving into this alternative investment avenue.

Despite the volatility, there's an undeniable draw. Money is seeking momentum, searching for outlets where it can generate substantial returns. In this quest for growth, cryptocurrencies present themselves as dynamic alternatives. Ethereum, with its technological advancements and robust community, stands as a frontrunner in this burgeoning landscape.

Moreover, the ethos behind Ethereum extends beyond mere financial gains. Its decentralized nature and smart contract capabilities offer a vision of a more democratized and autonomous future. Developers and innovators across the globe are building applications on the Ethereum network, envisioning a decentralized world where intermediaries are minimized, trust is established through code, and access to financial services becomes borderless.

Nevertheless, the road ahead for Ethereum and the broader cryptocurrency market is not devoid of challenges. Regulatory uncertainties, technological hurdles, scalability issues, and market sentiment swings continue to influence its trajectory. These uncertainties add layers of complexity, further emphasizing the need for cautious exploration within this realm.

Ethereum's recent upward movement signifies its potential to entice more investors, yet it operates within the confines of a financial ecosystem grappling with persistently low interest rates. The cryptocurrency sector, though laden with risks, stands as an intriguing and relatively high-risk alternative investment avenue. Considering its potential for growth and technological innovation, it merits exploration, but with a cautious and informed approach. The world of Ethereum beckons—a domain where innovation meets volatility, and the potential for gains intermingles with the risks inherent in a nascent and evolving market.

Looking ahead, it's important to consider some crucial factors that could influence Ethereum's trajectory. The holiday season typically saps market liquidity, particularly in terms of institutional involvement, leaving retail trading at the forefront. Although retail traders can impact Ethereum, a reduction in overall market liquidity might lead to unpredictable price swings.

For traders taking a long-term view, navigating this period might involve weathering volatility by entering the market strategically. Recognizing the potential for fluctuations due to reduced liquidity, a prudent approach could mean staying patient and resilient.

Nevertheless, despite these potential fluctuations, the prevailing sentiment seems inclined toward a continuous interest in buying Ethereum, supported by the significant $2,100 level.

Technical Analysis

Looking optimistically, Ethereum faces a notable hurdle at the $2,500 mark, posing a short-term resistance. Should Ethereum surpass this threshold, a potential rally toward $2,700 could unfold. Yet, the upcoming weeks might present challenges, urging a cautious approach regarding position sizing. Notably, the 50-Day Exponential Moving Average hovering above $2,000 adds a supportive layer.

Despite these near-term obstacles, Ethereum remains an attractive prospect for buyers. However, the holiday season could introduce uncertainties. Hence, exercising prudence in sizing positions is advised. Acknowledging the market's resilience and the reinforcing support from the 50-day EMA is crucial. Moreover, the ongoing decline in US interest rates is anticipated to entice more participants, offering opportunities for gains amidst favorable conditions and momentum. Etherium: A Market with Bullish Sentiments_1

Etherium: A Market with Bullish Sentiments_1

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Alex

Economic

The U.S. and China on downgrade warnings, Turkey hoping for its first upgrade in a decade and Israel facing its first cut - plus more than 50 elections to navigate - means 2024 could bring pivotal moves in some sovereign credit ratings.

Next year might be starting with highest share of "stable" sovereign ratings for years, but with record debts now meeting higher borrowing costs, spluttering growth and multiple wars, there are big names are in play.

Moody's has negative outlooks on both the United States and China, the world's two biggest economies. A downgrade would cost the U.S. its only remaining triple-A rating.

Marie Diron at Moody's said it wants to see if Washington can address a threatened "very steep deterioration in debt affordability" and whether China can stop its property and local government debt woes worsening.

Fitch, which downgraded the U.S. in August, and S&P Global are also keeping a close eye as November's presidential election approaches.

"Many of the factors we pointed to with the (U.S) downgrade remain in effect," Fitch's Ed Parker said, explaining that higher interest rates, defence spending and an aging population would all keep U.S. debt levels rising.

Fitch sees Chinese growth dipping to 4.5%-5% but has also modelled a "hypothetical stress scenario" where the property sector and other problems cause it crater to just 1.5% and only recover to 2% in 2025.

"A downgrade would be likely in such a scenario," Parker said, although "we wouldn't expect more than a one-notch move" given China's broader strengths.

Turkey meanwhile could see its first upgrade in over a decade, if President Tayyip Erdogan's new finance minister and central bank head keep policy repair efforts going, and Oman could be elevated to investment-grade.

Moody's Diron said Turkey's local elections in March will test authorities' resolve in sticking with 40%-plus interest rates but that if they maintain course and foreign investors start returning, "that would point to positive momentum".

US and China Remain Top Credit Ratings to Watch in 2024_1

OMAN, PANAMA AND ISRAEL

Securing investment-grade status would see Oman's bonds added to the global fixed income indexes giant pension funds use like a shopping list and drive what analysts estimate could be $3 billion of inflows that would cut its borrowing costs.

Oman has been upgraded two years running, S&P's Frank Gill said, adding: "At the end of the day they are still very sensitive to the price of oil but tax revenue as a percentage of GDP is now over 31%, which is notable for a resource-driven economy."

In contrast, Panama looks most in danger of dropping to "junk" as it goes through the painful process of shutting one of the world's biggest copper mines, which provides around 5% of its GDP.

Morgan Stanley has tipped a downgrade to happen around May when elections are due, and at BBB- with a negative outlook Fitch looks closest to doing the deed.

"It is one where we have been flagging some negative developments," Fitch's Parker said. "It will certainly be an interesting credit for 2024."

Italy's huge debts will keep it under scrutiny, while Spain, Germany and election-bound Britain still spend at least 4 percentage points of GDP more than pre-COVID.

S&P also expects to make a decision on whether to lower France from AA. "We are likely to resolve it (France's rating decision) by the end 2024," Gill said. With debt-to-GDP expected stay at almost 110% in the coming years "we are watching to see if they deliver additional fiscal reforms".

Israel's war with Hamas could meanwhile prompt its first ever ratings cut.

It is on negative outlook with S&P while both Fitch and Moody's have applied their most imminent downgrade warnings - "rating watch negative" and "rating under review" - meaning both could potentially deliver cuts in the next month or two.

With Yemen's Iran-aligned Houthi rebels now attacking Israel-bound ships in Red Sea, there is a "huge amount of uncertainty how long the war will go on for, or what comes after", Fitch's Parker said.

Israel's deficit is now likely to be 5 and 5.5 percentage points of GDP this year and next, S&P's Gill added, although its $200 billion of foreign exchange reserves more than covers all its international debt.

"It definitely could move," Gill said. "But we are talking about a transition from AA- to A+."

US and China Remain Top Credit Ratings to Watch in 2024_2

Source: Reuters

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Warren Takunda

Economic

The Bank of Japan's persistent efforts to steer the nation's economy towards price stability have taken center stage as Governor Kazuo Ueda hinted at a potential shift in interest rates. In a recent speech, Ueda acknowledged a gradual rise in the probability of Japan escaping its low-inflation environment, emphasizing the delicate balance the central bank is striving to maintain amidst uncertainties in economic activities both at home and abroad.

Ueda emphasized the Board's patient approach to monetary easing, carefully weighing the positive effects against potential side effects. A key point highlighted in the speech was the divergence in policy responses between the BoJ and other central banks, attributed to the differing situations concerning prices and wages. However, Ueda left the door open for a change in approach, stating that if the symbiotic relationship between wages and prices intensifies, and the prospect of achieving the 2% price stability target in a sustainable manner becomes sufficiently probable, the BoJ may consider adjusting its monetary policy.

Market Reaction: Nikkei 225 Climbs 0.26%

The impact of Governor Ueda's remarks was promptly reflected in the Japanese stock market, with the Nikkei 225 gaining 85.05 points or 0.26% to close at 33,254.03 on Monday. This extended the positive momentum from the previous session, where Wall Street's year-end rally spilled over into global markets. The US Federal Reserve's November inflation gauge, which fell below expectations, further fueled optimism as it approached the central bank's target level of 2%.

Despite the positive market sentiment, Japan faced a dip in both headline and core inflation readings, hitting a 16-month low the previous month. On Christmas day, investors navigated a quiet trading session, scrutinizing Governor Ueda's speech for insights into the central bank's future policy considerations. The governor emphasized that the BoJ is maintaining a highly accommodative monetary policy stance to safeguard the fragile economic recovery.

Sectoral Performance and Top Performers

In this subdued Christmas day trade, healthcare emerged as the leading sector, propelling the market's upward trajectory. Noteworthy gains were also seen in property, technology, and consumer-related sectors. Among the top performers were Nexon Co. (5.4%), NTT Data Group (4.5%), Lasertec Co. (2.8%), NH Foods (2.5%), and Takashimaya Co. (2.4%).

Investors are keenly monitoring developments as the BoJ navigates the delicate balance between sustaining economic recovery and achieving price stability. The potential shift in monetary policy, as hinted by Governor Ueda, adds a layer of complexity to Japan's economic landscape, leaving market participants on the edge of their seats in anticipation of future policy decisions.

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Kevin Du

Economic

Stocks

Inflation data out Friday showed the Federal Reserve continues to close in on its goal of returning inflation to 2% and puts the central bank on the path towards cutting interest rates.

Recession signals remain few and far between. Interest rates have moderated from decade-plus highs reached this fall. The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) are on the doorstep of record highs. And the Nasdaq Composite (^IXIC) is up over 40% this year.

In the week ahead, whether the stock market's rally will result in a record for the S&P 500 — the Dow hit a record last week — should be the highest drama to face investors this week amid a light economic schedule and a barren earnings slate.

Stocks Sit near Record Highs as 2023 Trading Wraps Up: What to Watch This Week_1

Inflation nears the Fed's target

On Friday, inflation data showed the Fed taking a crucial step towards returning inflation to its 2% target.

The Personal Consumption Expenditures Price Index showed prices on a "core" basis, which strips out food and energy and is the Fed's preferred inflation measure, rose 3.2% over last year in November. This was the slowest annual increase since April 2021.

But slicing this data more finely reveals the central bank has more or less reached its goal.

On a six-month annualized basis, "core" PCE came in at 1.9% in November.

"This week saw a renewed attempt from some Fed officials to push back against market expectations for interest rate cuts but, with core PCE inflation running at an annualized pace of below 2% over the past six months, this final flurry of hawkishness isn’t fooling anyone," wrote Andrew Hunter, deputy chief US economist at Capital Economics, in a note on Friday.

"There is mounting evidence that the post-pandemic inflation scare is over and we expect interest rates to be cut significantly next year," Hunter added.

Stocks Sit near Record Highs as 2023 Trading Wraps Up: What to Watch This Week_2

That the Fed will be moving to quickly cut rates next year has, in part, been supporting the market's rally in 2023.

And while many investors will remember this year for the AI-related hype that reignited the tech trade after a dismal 2022, the second half of this year has been all about rates.

An autumn swoon in the US stock market coincided with a surge in Treasury yields to 16-year highs as doubts about slowing inflation pressures — and, in turn, doubts that Fed policy would ease from 22-year highs — weighed on markets.

Recent data, along with the Fed's forecasts, put to rest many of these fears.

Chasing 2024

As the stock market has pushed toward record highs to cap 2023, forecasts for 2024 have already become stale.

Last week, the equity strategy team at Goldman Sachs revised their 2024 S&P 500 price target up to 5,100 from 4,700.

When many on Wall Street began rolling out their year-ahead forecasts in mid-November, the market wasn't yet convinced of the path forward for inflation, the economy, and the Fed.

Now, we round out the year with a broad consensus that inflation will ease, the economy will continue to grow, and the Fed will cut rates. In other words, a "soft landing" has become the base case powering markets higher.

Stocks Sit near Record Highs as 2023 Trading Wraps Up: What to Watch This Week_3

And as we round out two of the more adventurous years in recent market history, the team at Bespoke Investment Group on Friday flagged a few market stats that remind us history will likely relegate these post-pandemic spasms to the dustbin.

On Nov. 30, 2023, the S&P 500 closed at 4,567.80. On Nov. 30, 2021, the S&P 500 closed at 4,567.00.

In between, of course, investors endured the S&P 500's worst year in a generation and are on the cusp of seeing the index clinch one of its best five years since the financial crisis. But the further we move past this two-year period where stocks "went nowhere," the less we'll remember of the drama that filled both moments.

In this same vein, Bespoke noted that during 2022's sell-off, the seven largest stocks by market cap in the S&P 500 to start the year lost a collective $4.9 trillion. This year, those same seven stocks have increased their collective market cap by the same $4.9 trillion.

As 2024 approaches, Wall Street forecasts reveal investors will enter the new year with what we'll call cautious optimism. The S&P 500 gains, on average, about 9% per year; most forecasters are looking for something closer to a 5% gain next year.

The stock market rarely sees an "average" year. Since 1957, the S&P 500 has gone up 15% or more 33 times. Over the same period, the index has lost ground 15 times.

Against this backdrop, it seems clear Wall Street is again setting itself up to be wrong about where stocks land at the end of next year.

But as Bespoke's data makes clear, aiming for precision in a given year is a fool's errand, anyway — in time, the drama of any one year's gain or loss will be flattened. And the arc of market history bends one way, in the end.