This is my last weekly comments of the year. At the time of writing, Cagliari Calcio would be relegated to Serie B after losing (again) with honor (once again) against Atalanta this week-end. Except that it has been an incredible eventful and fascinating year on markets. I would like to thank you warmly for your support and interest throughout the year, and wish you a restful break. As we approach the end of the year, it’s time to step back and look now at how I scored on my 10 predictions for 2024 (even it the year isn’t completely over yet). For those who want to double-check and/or see the full script, please refer to my weekly letters of January 8th (here) and 15th 2024 (here).
- Global growth will prove again more resilient than expected, with positive surprises from Europe, Japan and EM economies (excluding China)
Somewhat correct: global growth, but especially US one, proved more resilient than expected, but positive surprises didn’t last long in Europe, which started petering out at the end of Q2 when French President Macron announced the dissolution of the National Assembly. As far as Japan and EM (excluding China), growth was roughly in line with expectations and thus didn’t really surprise on the upside. As a result, given the importance of the US economy on the global economy and markets, we may consider this prediction as somewhat correct.
- The main economic disappointment will come from China as it falls into a Japanese-like deflation scenario.
Somewhat correct: China obviously didn’t fall (yet) into a Japanese-like deflation scenario but it is still not yet out of the woods… Here is what I wrote in January and it turned out quite prescient: Despite the ongoing stimulus gesticulations of the Chinese authorities trying to revive demand through either monetary, budget or fiscal policies, structural headwinds (demographics, excess housing inventories, no more large infrastructure needs, already high level of debt at the country level) and lack of confidence/animal spirits will render them useless and ineffective. Moreover, China policies are somewhat constrained by the resilience of the US economy, which goes to pair with a relatively strong USD, as a significative-enough CNY devaluation is out of question (Xi doesn’t want to lose face and the Chinese currency/assets will likely lose again some relative appeal for international investors). As a result, any potential cyclical recovery will quickly hit a ceiling of lower potential growth with Chinese growth returning to a now “new normal” much weaker track.
- US and EU annual inflation rates won’t fall back below central banks’ targets by year-end
CORRECT: The battle again inflation is not won yet as US inflation is currently standing at 2.7%, while core one remains above 3% (3.3% in November). Even in the euro area, where activity growth has been lower, inflation has remained above 2% so far (2.3% headline and 2.7% core inflation rate in November), with still some doubts from the ECB persisting despite moderating prices pressures.
- The Fed will commit a policy mistake either by cutting too soon or too late (it has no other choices!)
WRONG… for the time being, but it is still possible than the first cuts were too early
- The bulk of the rally in long bonds is behind us (i.e. long rates won’t fall much further)
CORRECT. After the rally in long rates experienced at the end of last year (US 10y rates fell from 5% in mi-October 2023 to as low as 3.8% by end of 2023), they quickly started moving higher (US 10y was back above 4.5% in April), before trending down again (3.6% in September) to finally rebound towards 4.4% actually. Note that it the same up-and-down story for the 10y German bund as it started the year with a yield of 2%, evolved in a range of 2.0%-2.6%, but it is now ending the year of around 2.2. As a result, the positive total returns of long sovereign bonds came only from the coupons, while their prices have brought only volatility (and thus trading opportunities) this year
- Neither Trump, nor Biden will be the next US President…
WRONG… for just a few centimeters!
- Fiscal sustainability to come back at the forefront of investors’ concerns.
Somewhat correct: Fiscal sustainability wasn’t really at the forefront in the US this year as there is more economic growth there, tax cuts could be reversed, while the incoming Trump administration may give the impression to act in order to keep the fiscal house in order thanks to the new Department of Government Efficiency (DOGE). France Sovereign debt is now experiencing some form of mistrust on the back of weak growth, political instability, structural budget deficit (no primary budget surplus since Francois Mitterrand was elected President in… 1981), a structural current account deficit and an already record high taxation level. Who says worse? So, (some) bond vigilantes are still on the lookout.
- Within the fixed income universe, the performances of the main bond’s buckets (govies, IG credit, HY and EM) will be quite similar in the area of mid-single digits returns.
Partly wrong: On average, the YTD total returns of the main bond buckets are around 5% indeed. However, the most credit-risks indices (HY & EM debt h.c.) are closer to 10%, while the US Treasuries index is just above 0% (+1.2% as of Friday). Despite this wide performances’ distribution, it’s worth noting that the trends were very similar as rates were finally the main driver. HY and EM debt just benefitted, to some extent, from further credit spreads tightening on top of an overall higher carry.
- Correlations between bonds and equities will remain positive, especially if economic growth doesn’t peter out.
Less and less correct: The correlation between bonds and equities is now roughly close to zero. However, long top quality sovereign bonds have regained some diversification benefits thanks to the ongoing disinflation process / inflation normalization as it was the case during the temporary recession scare of beginning of August.
- Within the forex markets, the HKD peg will break.
Not yet correct: The HKD peg is still well in place. For more than 40 years now & still counting. Here is what I wrote one year ago: With China turning eventually Japanese (faltering economic growth, inflation already nearing 0%, the bursting of a housing bubble, excessive debt, ageing population and an overall loss of confidence within the private sector), the 40 years history of HKD peg to the USD will be challenged further by the ongoing divergences between US and China trends on growth (resilient vs. faltering), inflation (sticky vs. deflation risks) and real rates (positive vs. negative needed), as well as geopolitical considerations. Does this peg still make sense today? Can the Hong Kong Monetary Authority afford to keep it? Especially as it is exacerbating economic and financial instability in certain circumstances? What’s about China intentions about Hong-Kong? Asking these questions is already providing some insights, in my views… It remains entirely valid. And now keep in mind that it remains among the cheapest option/hedge on earth ($2-3k premium for a 1y call option at 7.80 for $1mio notional – HKD has moved in between 7.76 and 7.84 over the last 10 years-), especially in the case of a full-blown global trade tariffs war, leading to major forex moves…
Final results: hard to say precisely but, at the end, I wasn’t too wrong on my 10 previsions for 2024, especially as most of them helped me to navigate these once-again extra-ordinary markets. I really hope that the correct ones helped you too, whereas you obviously forgot or skipped the wrong ones. Compared to the results and ranking of Cagliari calcio, my overall sport prognosis, or my calls on SNB decisions (I was wrong all the year on this one), my honor & self-esteem come out “relatively” preserved enough to repeat the exercise next month!
That was my last letter of the year, which will then return in January 2025 with my 10 surprises for 2025. In the meantime, I wish you all the best for a Merry Xmas and a Happy New Year… and, as usual, good luck for the weeks ahead on markets. See you next year!
Economic Calendar
The end of 2024 is near… For the last week before year-end celebrations and season greetings, central banks will be in the spotlight with the Fed, the BoJ and the BoE among the major ones to meet over the next few days in order to set the policy rates going into 2025. Economic data and inflation prints will also be on investors’ radar as flash PMI indices for major economies across the world are due today, on top of the releases of retail sales and industrial production November data for both China (today) and the US (tomorrow), while we will get the US PCE deflator (Friday), as well as the November CPI data for the UK, Japan and Canada.
Let’s start with China as the economy appears to have slowed (again) last month, despite tailwinds from recent policy easing. November retail sales came well below expectations this morning (+3.0% YTD YoY change vs. +5.0% expected and 4.8% the prior month), fixed investments disappointed again, still dragged down by property investment (-10.4% YTD YoY), while industrial production growth -supported by external demand- was in line and steady at 5.8%. These rather weak November data underscores the challenge policymakers face in engineering a sustained rebound in domestic activity.
Turning to the main event, namely the Fed decision on Wednesday, there shouldn’t be any surprises (-25bps cut to set Fed funds rate in the 4.25%-4.5% range) following recent in-line jobs report and CPI print. All eyes will rather focus on the hints of what (could) happen next with the new summary of economic projections (SEP), the dots plot and subsequent Jay Powell press conference. Much will also depend on how growth and prices data really evolve thereafter and how Trump policies may impact their future trajectories. As a result, a pause may be due sooner or later next year. In this context, there is a hawkish risk at this meeting (from a potential of signaling just 50bp of cuts in 2025 or negative market reaction to a higher terminal rate forecast), with more participants seeing upside risks to inflation and rates due to the incoming Trump administration, resulting therefore in a hawkish communications tone. Obviously, a reversal in Fed’s easing cycle (i.e. a hike) down the road could prove as disruptive for markets as a recession leading to more aggressive rate cuts: we are still far away from these eventualities but we can’t still rule them out giving the great dose of uncertainties we are facing entering into 2025. Remember that keeping an open-mind will be a key ingredient in navigating these uncertain waters.
As far as the BoJ and BoE meetings are concerned (both on Thursday), decisions on rates are more… uncertain and likely different? BoJ may hike (15% probabilities priced in) or stay put, while the consensus expects a hold from the BoE, keeping UK policy rate at 4.75% without much disagreements among the 9 voting members. A rate increase from the BoJ may bring some temporary volatility in fx and rates markets, but note also that a “dovish”-perceived hold from the Japan central banks could also lead to further undesired weakness in JPY going forward, especially if Japan CPI surprises on the upside on Friday. Concluding with other noticeable data, the global flash PMIs today will be scrutinized, especially in Europe in light of recent political context, as well as persistent weakness in both manufacturing and services indices. Elsewhere, it will be interesting to see evolve the gap between services and manufacturing business sentiment: will manufacturing catching up and/or services start faltering. I anticipate both in the US, leading to a convergence towards the same rate of overall growth (composite PMI index broadly unchanged) but with a better balance. Staying with the US, there will be the latest retail sales and industrial production data on Tuesday (ahead of the Fed’s meeting) on Wednesday. The consensus foresees still robust retail sales growth (+0.5% MoM after +0.4% in October) and a rebound in industrial production (+0.3% vs. -0.3% in October). To end the week, after the Fed meeting, the focus will then shift to the PCE deflator data released along personal consumer expenditures, income and saving rate on Friday. Here too, data are expected to confirm a favorable goldilocks backdrop with solid gains in both spending (+0.4% MoM) and income (+0.4%) and contained inflationary pressures (core PCE deflator up +0.2% MoM and +2.9% YoY in November, according the Bloomberg median estimates).
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