January 2024 / QUARTERLY MARKET REVIEW
Global Markets Quarterly Update
For Fourth Quarter 2023
- Easing inflation pressures and falling long-term interest rates led to strong gains in most developed markets.
- A rise in most currencies against the U.S. dollar, fostered in part by expectations that the Fed would lead the way in cutting rates in 2024, boosted overseas returns for U.S. investors.
- Most emerging markets also performed well, although declines in China led to a negative return for the broad emerging markets index.
A broad rally in the final two months of the year helped stocks record solid gains in the fourth quarter. Enthusiasm over artificial intelligence helped growth and technology stocks, although small-cap value shares proved to be the best-performing style category. The narrowly focused Dow Jones Industrial Average and the technology‑heavy Nasdaq 100 Index stood out for marking record highs, while the S&P 500 Index moved within about 0.5% of its intraday peak. Most sectors in the S&P 500 recorded gains, but returns varied widely. Technology stocks delivered a total return (including dividends) of over 17%, while energy stocks—the sole decliners for the period—fell nearly 7%.
Bond yields decrease sharply after hitting 16-year high
After reaching its highest levels since 2007, the yield on the benchmark 10‑year U.S. Treasury note plunged 71 basis points (0.71 percentage point) over the quarter, providing a general boost to most bond prices. Corporate and securitized bonds performed especially well as investors embraced credit-sensitive issues. Given the unusually heavy supply due to the swelling federal deficit and the Treasury’s need to rebuild its general account following the mid-2023 resolution of the debt limit standoff, investors kept a close eye on weak demand apparent at Treasury auctions early in the quarter. Later auctions appeared to get better receptions, however.
The quarter started off on a weak note, as investors appeared to worry that interest rates would remain “higher for longer” due to unforeseen strength in the economy. The major indexes began to pull back on October 17, following news that retail sales increased 0.7% in September, roughly double consensus expectations. The increase was particularly strong among online retailers and at restaurants and bars, indicating continued strength in discretionary spending. While surveys indicated that consumers remained pessimistic about economic conditions, wage gains outpaced inflation in September, and job gains surpassed expectations by a wide margin.
Cooling inflation leads to expectations for more rate cuts in 2024
Encouraging inflation data in November appeared to help markets engineer a turnaround. Headline consumer inflation was flat in October, and core (less food and energy) prices rose 0.2%, bringing the year-over-year increase to 4.0%, the slowest pace in two years. On the final day of the month, the Commerce Department reported that the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose at an annual rate of 1.9%—a tick below the Fed’s 2% inflation target—in October. Over the previous six months, core PCE was running at an annualized rate of 2.5%.
Fed officials’ reaction to the data seemed to help markets retain their momentum into the end of the year. Following their final policy meeting of 2023 on December 12–13, officials left rates unchanged, as expected, but the quarterly “dot plot” summarizing individual policymakers’ rate expectations indicated that the median projection was for 75 basis points of rate cuts coming in 2024, up from the 50 basis points of easing in their previous projection.
The quarter brought some signals of softening in the tight labor market, dampening one major concern of policymakers. The unemployment rate was 3.7% in November and weekly jobless claims remained contained, but continuing claims hit their highest level in two years. The number of people leaving their jobs voluntarily also fell to its lowest rate since January 2021, indicating less competition for workers.
The STOXX Europe 600 Index and major benchmarks in Germany, France, and Italy rallied over the quarter as growing hopes for interest rate cuts in early 2024 bolstered risk sentiment. A sharp increase in the British pound versus the U.S. dollar weighed on the UK’s FTSE 100 Index, which gained less ground than other major benchmarks. A stronger UK currency curbs gains in the index because it includes many multinationals that generate overseas earnings.
European government bond yields touched their lowest levels in a year as investors brought forward their bets on rate cuts. The yield on the 10-year German government bond fell and ended the year near 2.0% after briefly breaking below that level for the first time since January. The equivalent Italian bond yield declined and finished the quarter at 3.7%. In the UK, the 10-year gilt yield dropped to about 3.5%.
Interest rates stay high, ECB lowers outlook for inflation and growth
The European Central Bank (ECB) kept its benchmark rate unchanged at a record high of 4.0%, while the Bank of England (BoE) kept rates at a 15-year high of 5.25%. The ECB also reduced its inflation forecast, saying that the annual increase in consumer prices would slow to just below the 2% target by 2026. It also lowered its projection for economic growth to 0.6% in 2023 and 0.8% in 2024. Slowing inflation and flatlining economic growth fueled bets on lower borrowing costs in the first half of 2024, as did strong hints from the U.S. Federal Reserve that it could soon start to lower borrowing costs.
Key policymakers push back on rate cuts
However, a handful of leading ECB policymakers, including President Christine Lagarde, reiterated that it was too early to cut rates. At the BoE, Governor Andrew Bailey adopted a similar stance, saying it was too early to talk of reducing borrowing costs, as did Deputy Governor Ben Broadbent, who said more evidence of weakness in the labor market would be required for a reduction to be contemplated.
Inflation slows faster and growth falters
Annual consumer price growth in the eurozone slowed sharply to 2.4% in November from 4.3% in September. Similarly, in the UK, the headline inflation rate fell to 4.2% in November from 6.3% in September.
Both economies struggled to grow. Eurozone gross domestic product (GDP) contracted 0.1% in the third quarter, after rising 0.1% in the April–May period. In the UK, the Office for National Statistics (ONS) indicated that the economy performed worse than previously thought in recent quarters. It lowered its estimate of growth in GDP for the April-to-June period to 0% from 0.2%, while the final estimate for the third quarter indicated that the economy shrank 0.1%. The ONS also said that the economy weakened further in October, with GDP contracting 0.3% sequentially.
While most developed equity markets rallied in the fourth quarter of the year on expectations that central banks will cut interest rates sooner than expected in 2024, Japanese equities lagged, with the MSCI Japan Index gaining 2.2% in local currency terms.
Yen strength posed a headwind for the country’s exporters. The Japanese currency strengthened to around JPY 141 against the U.S. dollar, from the low JPY 149 range at the end of the previous quarter. This was largely in anticipation of reduced interest rate differentials with the U.S., where the Federal Reserve gave the clearest sign yet that it will pivot away from monetary policy tightening as it held interest rates steady in December and projected three rate cuts in 2024.
The Bank of Japan (BoJ) adjusted its yield curve control framework in October for the second time in three months, stating that it would regard its 1.0% ceiling for 10-year Japanese government bond (JGB) yields as a reference, rather than strictly capping interest rates at that upper bound.
This was followed by BoJ officials’ comments in early December that stoked speculation that the central bank may abandon its policy of negative interest rates earlier than anticipated. However, the BoJ retained its ultra-accommodative monetary policy stance, including forward guidance, at its December meeting. It refrained from making comments about possible policy tweaks in 2024, appearing to push back against market expectations of a near-term interest rate hike. Against this backdrop, the yield on the 10-year JGB fell to 0.61% from 0.76% at the end of the third quarter.
Economic data paint mixed picture
Japan’s core consumer price index rose 2.5% year on year in November, down from the previous month’s 2.9% and the softest such inflation print since July 2022. Japan’s GDP, meanwhile, contracted by a bigger‑than‑estimated 2.9% quarter on quarter, annualized, in the three months ended September, compared with an initial reading showing the economy had shrunk 2.1%.
December purchasing managers’ data showed that Japan’s private sector experienced a mild expansion in business activity over the month, as a stronger rise in services activity offset a quicker contraction in manufacturing. Separately, the BoJ’s quarterly “tankan” survey suggested growing optimism among Japan’s large manufacturers. This could bode well for companies’ ability to hike wages, adding to the positive price‑wage spiral that the BoJ is waiting to see become entrenched as a condition for normalizing monetary policy further.
Government remains unpopular despite fresh fiscal stimulus
In early November, Japan’s government announced a new fiscal stimulus package worth more than USD 110 billion, aimed at boosting growth and helping households cope with the rising cost of living. The measures include cuts to income and residential taxes as well as cash handouts to low earners. The announcement came at a time when support for Prime Minister Fumio Kishida’s administration appeared to be falling, with many voters critical amid the impact of rising inflation on their purchasing power. Kishida has seen his popularity plummet further and credibility dented amid a political funds scandal that has embroiled the ruling Liberal Democratic Party in the final months of 2023.
Chinese equities retreated as concerns about the country’s property sector slump and persistent deflationary pressures weighed on investor sentiment. The MSCI China Index gave up 4.21% while the China A Onshore Index declined 3.08%, both in U.S. dollar terms.
Inflation data revealed that consumer and factory gate prices contracted during the quarter. China’s consumer price index fell 0.5% in November from the prior-year period, accelerating from October’s 0.2% contraction and marking the steepest drop since November 2020. The producer price index dropped a bigger-than-expected 3% in November from a year ago, marking the 14th monthly decline.
Other readings painted a mixed picture of China’s economy. Industrial production grew more than forecast in November from a year earlier, while retail sales surged but missed expectations. Fixed asset investment rose weaker than forecast in the first 11 months of the year as declines in infrastructure growth and real estate investment deepened. The urban unemployment rate remained unchanged from October at 5%.
At the end of December, Chinese regulators approved more than 100 new online games, signaling a softer stance toward the industry after a draft of new rules designed to curb spending on video games triggered a stock sell-off earlier in the month. The regulations wiped off nearly USD 80 billion in market value from some of China’s largest gaming companies amid concerns that the government would reassert tighter control over the tech sector following a two-year crackdown that started in 2021.
In monetary policy news, the People’s Bank of China on December 15 injected a net RMB 800 billion into the banking system via its medium-term lending facility, a record amount of cash that reflected a more forceful response to the weak recovery. The medium-term lending facility rate was left unchanged, as expected. The record cash injection reflected Beijing’s balancing act of trying to stimulate China’s economy without weakening the yuan, which lost nearly 2% against the greenback in 2023.
Central bank sees inflation expectations improving in Turkiye (Turkey)
Turkish stocks, as measured by MSCI, returned -12.13% in the fourth quarter versus 7.93% for the MSCI Emerging Markets Index.
Turkiye’s central bank raised its key policy rate, the one-week repo auction rate, three times in the fourth quarter, from 30.0% to 42.50%. The October and November rate increases were 500 basis points each, 5.00%, while the December rate increase was only 250 basis points (2.50%).
While year-over-year inflation exceeded 60% and real (inflation-adjusted) interest rates were still well below 0%, policymakers decided to reduce “the pace of monetary tightening” in December—as they projected they would in their November post‑meeting statement—because they determined that “monetary tightness is significantly close to the level required to establish the disinflation course.”
In the central bank’s December 21 post‑meeting statement, policymakers noted that the “existing level of domestic demand, stickiness in services inflation, and geopolitical risks” were sustaining price pressures. However, they also observed that “recent indicators suggest that domestic demand continues to moderate as monetary tightening is reflected in financial conditions.” In addition, central bank officials ascertained that “inflation expectations and pricing behavior” have “started to show signs of improvement,” as various factors—including an “accelerated increase in domestic and foreign demand for Turkish lira-denominated assets”—are contributing “significantly to exchange rate stability and the effectiveness of monetary policy.”
As for future rate increases, policymakers anticipated that they will “complete the tightening cycle as soon as possible,” which could mean that there may be only one more interest rate increase. However, they expect to maintain tight monetary policy “as long as needed to ensure sustained price stability” and will aim to bring inflation down to the central bank’s 5% target in the medium term.
Mexican equities easily outpace broad emerging markets
Mexican stocks, as measured by MSCI, returned 18.81% in the fourth quarter, over double the return of the MSCI Emerging Markets Index. During the quarter, the Mexican central bank kept the target for the overnight interbank interest rate at 11.25%, where it has been since the end of March.
According to the central bank’s most recent post-meeting statement, published on December 14, “world economic activity…continues showing resilience,” though policymakers noted that it is poised to “decelerate during the fourth quarter.” Closer to home, the Mexican economy “has continued experiencing robust growth and the labor market remains strong.” Headline inflation, however, had increased slightly since the November 9 monetary policy meeting, while core inflation, which was still at high levels, had continued decreasing.
While policymakers expected the disinflation process to continue, they now anticipate “a more gradual decline in both food merchandise inflation and services inflation,” which prompted them to revise higher their near-term headline and core inflation forecasts. Nevertheless, they continued to anticipate that inflation will fall to the central bank’s 3% inflation target by the second quarter of 2025, and they concluded that the benchmark interest rate “must be maintained at its current level for some time.”
Major Index Returns
Total returns unless noted
|U.S. Equity Indexes
|Dow Jones Industrial Average
|Nasdaq Composite (Principal Return)
|Global/International Equity Indexes
|MSCI Emerging Markets
|MSCI All Country World
|Bloomberg U.S. Aggregate Bond
|Bloomberg Global Aggregate Ex‑USD
|Credit Suisse High Yield
|J.P. Morgan Emerging Markets Bond Global
What we’re watching next
Sébastien Page, CIO, Head of Global Multi-Asset
The coronavirus pandemic and the subsequent recovery continue to distort the economic data, forcing economists who rely on traditional recession signals to continually revise their assumptions. As a result, the most anticipated global recession in history has become the most delayed recession in history.
Forecasts that linked rate hikes with higher unemployment have spectacularly missed the mark. For example, back in December 2022, the Fed’s Summary of Economic Projections predicted that the unemployment rate would be 4.6% in the fourth quarter of 2023. As of December, we were at 3.7%.
To be sure, there are reasons for caution regarding the global economic outlook. Europe looks likely to endure stagnant growth in early 2024 before recovering in the second half. In Asia, China’s economic outlook remains gloomy, with few signs of improvement in the country’s property market. Commercial real estate sectors remain fragile in several other countries as well.
Meanwhile, the U.S., Asia, and Europe are at different stages in the balance between growth and inflation, meaning the Fed, the European Central Bank, and the Bank of Japan are likely to pursue increasingly asynchronous monetary policies in 2024, adding to the potential for increased market volatility.
Geopolitical uncertainty also could bring further volatility, particularly if ongoing conflicts in the Middle East and Ukraine cause a resurgence in energy prices. Recent election victories for far-right populist candidates in Argentina and the Netherlands raise the question of whether further victories for populist parties could occur elsewhere, especially in the U.S., where next November’s election will be the most consequential currently known political event of 2024.
As of December, most global economies were showing surprising resilience to higher rates, and the U.S. economy was performing better than expected. The unprecedented levels of cash generated by pandemic support and other fiscal stimulus measures have been a key support for U.S. household and corporate balance sheets. Excess consumer savings should continue to provide support for U.S. economic growth going forward.
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