What kind of landing?
The most frequently asked question as 2024 approaches is what sort of landing is in store for the global economy.
Following the steep monetary policy tightening and the unwinding of a number of once-in-a-generation shocks, the Markets 360 analysts continue to think that there will be a landing. However, as the downward trend in inflation seems sufficiently established, major central banks are likely to feel confident enough to begin cutting rates in the not-too-distant future, reducing the risk that this landing will be a hard one.
Luigi Speranza, Head of Markets 360 and Chief Economist
Policy to take its foot off the brake
The Markets 360 economists think disinflation is likely to be sufficiently advanced to allow most DM central banks to start cutting policy rates soon, lowering the risk of a hard landing and allowing for a moderate growth recovery in the second half of 2024.
While the team expects the US economy to slow substantially from the heady pace recorded in Q3 2023, policy easing will likely help it avoid a more conventional and deep downturn. As for the eurozone, the economists continue to expect it to avoid a full-blown recession, with activity likely to stagnate over the next few months before a possible recovery from spring 2024.
Meanwhile, they believe growth in China has likely passed its trough; but barring an (unlikely) step-quickening of the policy response, the rebound looks set to be moderate and short-lived, capped by structural headwinds.
Japan is the notable outlier. The team thinks sustained wage growth following this coming spring’s wage negotiations and further fiscal stimulus are likely to help stabilise its inflation rate, opening the way for the Bank of Japan to end its negative interest rate policy.
The Markets 360 analysts have generally revised up their EM GDP forecasts, particularly in Latam, reflecting stronger growth momentum. This should not prevent a further fall in inflation but could make the disinflation path bumpier and more uncertain than assumed to date, limiting the extent of further policy easing.
Inflation: too early to claim victory
Whether the slack ensuing from this slowdown is sufficient to lower inflation sustainably to central banks’ targets over the medium term is still an open question for the Markets 360 team. The economists’ bias remains that inflation will continue to be more volatile than in the past and settle at the high end of the acceptable range for central banks. Moreover, they consider risks to be skewed towards inflation regaining momentum, due in part to structural forces such as the fragmentation in trade and global value chains.
Rates and FX
Supply issues – more specifically, an unprecedented increase in net bond supply net of central banks’ quantitative tightening – look set to be a key variable underlying market developments in 2024. Markets 360 rates strategists think it will cap the rally in DM long-end bonds, while EM bonds should benefit from positive returns from both duration and FX, combined with positive carry.
Our FX strategists remain structurally bearish on the USD, especially against the EUR and other low-yielders. Nevertheless, as the team forecasts monetary policies to be on similar paths (with the notable exception of Japan), FX volatility should be low.
Equities and Credit
Despite the prospect of rate cuts, the Markets 360 team sees risks to equities as skewed to the downside in the US and balanced in Europe and China. In contrast, they see a potential upside to Japanese equities.
The credit market is also likely to be relatively range-bound, with wider spreads in leveraged finance and in US Investment Grade, ratings decompression and modestly positive excess returns in both Europe and the US due to the upcoming maturity wall. The credit strategists think EM could outperform.
Commodities
The Markets 360 analysts expect commodities to trade in a choppy range. While the volatility seen in 2022 is unlikely to be repeated, the team still expects energy to remain volatile and base-metal volatility to rebound from current low levels. Directionally, they expect gas and power prices to fall in 2024, oil to be range-bound, and carbon to rise. Base metals may see a USD-driven rise in the second half of 2024. Gold could reach new highs.
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