China's recovery - patience is wearing thin.
Recent data from China are another reminder of just how disappointing the post-COVID recovery has been this year. Deflation, weak imports and Moody’s downgrade of its credit outlook on China are all signs that the country’s economy is slowing. That’s despite the raft of stimulus measures introduced in recent months in an attempt to boost growth, which is being held back by problems in the property sector and lacklustre domestic consumer spending.
There is no doubt that Beijing's fiscal policy will be crucial in 2024. The decision to increase the budget deficit back in October is a proactive step aimed at building up the firepower needed to speed up the recovery. Chinese growth is on track to reach the target of around 5% in 2023, and economists believe it could reach the same level in 2024. This new growth target reflects the Chinese government's eagerness to bolster its economic support measures, particularly in the absence of favourable base effects. At this stage, proof of a more ambitious stimulus plan is needed to prevent consumers’ and investors’ confidence dropping even further.
Triumphant or vigilant
The major central banks are likely to dominate the financial news again this week. All of them are holding their last meetings of 2023 over the next few days, with the Bank of Japan (BoJ) wrapping things up next week. We’ll be keeping a close eye on the outcome of the BoJ’s meeting, as it’s the only central bank that has not yet begun tightening its monetary policy, although it looks unlikely to end negative rates before early 2024. Elsewhere, no major changes are expected. Yet the contrast with 12 months ago is striking, particularly in the US and the eurozone. In late 2022, Jerome Powell and Christine Lagarde were grappling with the steepest rise in consumer prices since the second oil price shock. With inflation nearing 10% in late 2022, the risk of a period of hyperinflation in both the US and Europe was extremely high. Swift and decisive action was needed, even if that meant stalling growth by raising interest rates. A year on, inflation is slowing rapidly and in many cases is coming close to the 2% target. The SNB has even managed to reach that target. So will these end-of-year meetings be a chance for central bankers to give themselves a pat on the back and head off for a worry-free holiday? Maybe not. Having long underestimated the risk of a prolonged period of inflation after COVID, central bankers certainly do not want to run the risk of a rebound, which is what happened when inflation was high in the 1970s and 1980s. Both Mr Powell and Ms Lagarde will no doubt be looking to manage investors’ expectations in their statements. Investors have been quick to anticipate rate reductions – with the first cut expected in the spring, and total cuts of 100 bp or more forecast for 2024. So central bankers may decide not to bring out the champagne just yet in order to rein in investors’ expectations temporarily. Against this backdrop, it’s hard to imagine that US 10-year yields will quickly drop below the key technical support level of 4.25%. And there may have to be a period of consolidation before the major stock market indexes start recording new all-time highs.
This week’s figure : 0.94
The euro has never been so weak against the Swiss franc – except on 15 January 2015, when the Swiss National Bank (SNB) removed its partial peg. The SNB will no doubt be discussing the strength of the franc at its meeting this week.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
