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Wednesday 17 January 2024
January 2024 | The US Federal Reserve has indicated that its "Higher for longer" narrative is over. The Fed does not want to restrict the economy longer than necessary, and is attentive to the impact of higher rates on growth. It is now back to the point where both mandates (price stability and maximum sustainable employment) are important. Despite recent positive developments, Christine Lagarde said the European Central Bank (ECB) shouldn't lower its guard as inflation tumbles, admitting that "we did not discuss a rate cut at all." The divergence between the Fed and the ECB is particularly notable given the eurozone's recent weaker economic performance and more rapid disinflation compared to the US.
01 | The public finances of eurozone countries began to improve in 2023 and we believe fiscal consolidation will intensify in most eurozone countries during 2024.
02 | The "easier part" of the disinflationary process is past, and the path to bringing core inflation back to target will require a substantial moderation in demand and growth.
03 | After a strong Q3 performance, we expect the US economy to progressively weaken driven by moderating domestic demand impacted by tighter credit conditions.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management as of January 12, 2024. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the [author] and not necessarily Amundi Asset Management and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product or service. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not indicative of future results. Amundi US is the US business of Amundi Asset Management.
RO ID# 3334514
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Three key arguments support the Japanese market: (1) A recovery in profits (2) A strong incentive from the Tokyo Stock Exchange for companies to improve their capital efficiency and (3) The shift out of deflation is boosting a market rerating. The risks to these positive arguments are mostly linked to the yen. A strong comeback by the yen, should global equity volatility increase sufficiently in 2024 to encourage the unwinding of carry trades, would weigh on the performance of Japan's equities in local currency It would penalize profits and, everything else being equal, slow the process of increasing inflation, weighing on valuations at the same time.
We believe 2024 will see the tide turn for the economic and monetary policy outlooks, while fiscal policy may experience constrained consolidation with the focus remaining on the energy transition. We expect the United States to face a recession in H1 as stringent financial conditions begin to impact consumers and businesses. In H2, we expect growth to stabilize below its potential and inflation to move closer to its target. We expect a gradual weakening of global growth, while inflation is expected to temper but stay above central bank targets. We call this a fragmented outlook, marked by divergent economic trajectories.
The significance of energy trends for the US economy has declined over the last three decades; the consumption of energy for each real dollar of gross domestic product has fallen by 3% every year and this will likely continue with the energy transition. While the importance of energy has gradually declined, the issue has returned to the fore following a series of energy shocks that have boosted price volatility. Oil prices pass through to the economy via various channels, including inflation, consumption, corporate margins and investment, productivity, the balance of payment and global savings (through petrodollars), and in the long run may accentuate social stress.
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