The last busy week in 2023

Chief Investment Officer's team
11 December 2023


  • Central banks take centre stage this week with the Fed ECB and BoE meetings amongst others
  • They are all expected to stay on hold cementing the “goldilocks” tone of the recent buoyant weeks…
  • … But markets may have been a bit too quick at pricing-in rate cuts for 2024

A parade of Western central bank meetings this week stands between now and the final curtain of the year. Anticipations are clear: the Fed, the ECB and the BoE are all expected to leave their policy rates unchanged, while communicating on their inflexible commitment to bring inflation back to 2%. Market participants will probably not hold their breath, and are impatient to start 2024 with a blank page. 2023 so far is great for financial markets, but terrible for anyone who dared making predictions. As we expected unpredictability, our focus for 2023 was on running agnostic portfolios, aiming at doing ok under all possible scenarios, rather than taking large tactical bets. As surprising as it may sound, agnosticism worked much better than boldness: at +6%, +9% and +11%, the returns of our three profiles are on average 2% better than our global competitors.

We see no reason for a shock in the remainder of the year and turn our focus to 2024, which should provide answers to the questions of 2023. The hottest one is of course about the Fed cutting rates: whether they will, when, by how much, and importantly, why. It is once again about the relative trajectories of growth and inflation. After almost two years of tightening, and as the tide of excess savings from the covid era recedes, we will get a clearer picture. Our current central scenario leans towards an economic slow-down while inflation would continue to fall, but still exceed targets. This wouldn’t support the massive rate cuts currently priced-in by the futures markets.

Our December TAA committee didn’t change our positioning last week. We are working on 2024 – our Global Outlook will as always be released at the beginning of the year (the reason being that we always report on our results for the previous year).

The last busy week in 2023

Cross-asset Update

The latest jobs report seems to confirm that US exceptionalism is still the theme of the day, despite the ongoing slowdown phase in the American economy, as the other major areas continue to be underwhelming in terms of growth profile. This has implications like dollar-centric assets still outperforming, and market upside limited by a growth impulse that remains somewhat vivid in the US only. Longer dated Treasury yields promptly reacted to a better-than expected jobs report by retracing all of the weekly losses, while the US dollar gained snapping six back-to-back weeks of lower lows.

In China nothing much is happening, at least from the point of view of investors that have perennial expectations of a large-scale stimulus that have gone disappointed this time as well. At the Politburo meeting on Friday there was lack of commitment for broad support for the economy, as monetary policy was no longer mentioned as being ‘forceful;’, while fiscal measures would be taking the driver seat, though the government would “act within its capabilities” to improve people’s livelihood, one more hint to a measured approach. And in Europe business sentiment was just less worse than expected last month, though always in contraction territory. China’s considerate approach to stimulus and the delayed effects of the ECB tightening will not be helping much either. So, Europe remains the weak link amongst the big three.

The strong US jobs report comes across as less strong if one strips off the rise in payrolls due to the less cyclical government and healthcare sectors, the major contributors to the positive surprise. So, the impression of a softening labor market remains. At some point in 2024, either labor market weakness triggers a recession, or the economy recovers in response to easing financial conditions as more rate cuts get prices in. It could be that high real rates impact growth, but the Fed cuts and a recession is avoided.

In summary, as the disinflation process continues and investors get mesmerized by the magic the Goldilocks US economy supporting the rest of the world, markets should continue to rise. Gold has been rising and falling with equities, offering few diversification benefits driven by the ebb and flow of liquidity like all other asset classes. The yellow metal could retrace some of the recent gains as US exceptionalism resurfaces and yields again drift higher. In our view a pull-back would be offering one more buy opportunity.

The last busy week in 2023

The last busy week in 2023

The last busy week in 2023

Fixed Income Update

US labor market data was mixed last week. At the beginning of the week, job openings fell 6.6% to 8.7mn in October, the lowest level since March 2021, while layoffs edged up slightly by 2.0%. The week ended with NFP data, the US labor market created 199,000 jobs in November, ahead of market expectations of 180,000 and an improvement on the 150,000 from last month. The unemployment rate fell to 3.7% vs 3.9%. During the week 2-year US treasury rose by 18bps to 4.73%, the 10-year remained flat at 4.23%, and the 30-year decreased by 8bps. FOMC meets with a policy decision due Wednesday. Though there is no expectation of any surprise hikes from the meeting, the press conference and Q&A should be interesting. New US inflation data is at play with the November CPI due early Tuesday, followed by the November PPI early Wednesday.

Global sovereign yields mostly declined last week as futures markets continued to price an elevated probability of rate cuts from major central banks in early 2024. Outside of the US, the 10-year German Bund yield and 10-year UK Gilt yield both ended the week lower at 2.28% and 4.04%, respectively. We are starting a central-bank-rich week, with the Fed first on Wednesday, followed by the BoE and ECB on Thursday amid wide expectations of a continuing pause. BoJ meets on Dec 18 and 19 for a policy decision. The rate hike probabilities of the BoJ have increased to 37% from 2.5% a couple of days back, while swaps price in a full rate hike by April 2024.

Last Friday, The Reserve Bank of India kept policy rates unchanged in line with market expectations since it hiked 25bps in February. The RBI upgraded its growth forecast to 7% YoY from 6.5% earlier for FY24. The steady growth points to a continued hold. The RBI noted "uncertainties in food prices" as a potential risk to a reacceleration in inflation over the coming months after headline CPI dropped to 4.9% for October. The RBI gave a little dovish signal on banking sector liquidity by stating that the liquidity deficit has been larger than expected since its October meeting, so it hasn't had to sell government bonds. This walked back previous hawkish signals.

GCC credit settled lower on Friday across both IG and high-grade papers. However, the region performed better than the overall emerging market space. Separately, Egyptian inflation slowed to 34.6% YoY in November, down from 35.8% the previous month. Its core inflation rate recorded 35.9% in November, down from 38.1% in October. IMF and Egyptian authorities hint at a new deal focused on de-emphasizing the floating of the Pound and prioritizing the focus on curbing inflation.

The last busy week in 2023

The last busy week in 2023

Equity Update

November’s positivity continues into December but not on the same scale. Global equities were close to flat, very small gains last week, with US and Europe up, while in Asia only India ended in positive territory. Impactful week ahead, with a barrage of central bank meetings and inflation data, though we expect no rate increases from the Fed, BOE or ECB, but markets could be a bit volatile, with several Treasury auctions also scheduled. The outlier is the Bank of Japan as hawkish remarks from some officials led to expectations for a hike in December/ January and possibly the end of the ultra easy yield-control policy. We are currently neutral Japan but looking to add to Japan equities next year as market reforms and a stronger Yen should aid returns. We remain underweight Eurozone equities since they have a high beta to China. Last week the STOXX 600 ended 1.32% higher continuing a five-week streak of gains. The rally has continued despite weak confidence in Europe’s economic strength on expectations of rate cuts.

The Dubai bourse (+24% YTD) had Dubai Taxi debut to strong gains. UAE equities remain attractive on high dividend yields and capital appreciation. Banks have not rallied in proportion to the outsize profits they have made in 9M 23, on the back of higher interest rates and a vibrant economy and offer potential going into Q1 dividend season. COP 28 has brought more visitors to the UAE, but also important climate and sustainability alliances across countries, corporates, and institutions.

We are neutral China and overweight India tactically. China stocks under pressure on inflation data, and a disappointing Politburo meeting. Growth is the focus but no outsize stimulus on the way. (MSCI China -15% YTD). On the other hand, India equities had a good run recently and in USD total returns the India MSCI Index is +15% YTD. Though Indian equities are expensive at 24X price/ Earnings, we think the +20% earnings growth should provide further upside. Oil trading lower also good for India, which is an oil importer.

We are overweight the US. The S&P 500 ended Friday at 4,604 (4,600 is a key technical level) to close at almost a 2-year high, 6 weeks of straight gains, despite stronger-than-expected monthly jobs data raising new concerns about the interest rate outlook and a slight pop in Treasury yields. The VIX is at 12.3 back to 2019 levels. The SPX is now up 22% total returns, year-to-date. US equities are supported by still strong consumer spending and an expected soft landing for the economy. The Fed is delivering a ‘goldilocks’ scenario of lower inflation without recession, the best outcome for risk assets. The Nasdaq also closed above a key technical resistance at 14,404.

Positive for equity performance: the 10-year US Treasury yield remains well below its October 16-year highs of near 5%. However, we expect the Fed to keep policy restrictive until mid-2024 at least.

The last busy week in 2023

The last busy week in 2023

The last busy week in 2023

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