Charts of the Week: Soft Landing Narratives

The policy rate consensus The latest Blue Chip Financial Forecasts survey reveals a broad consensus that easing cycles will begin within the next few months in most major developed economies. In chart 1 below we show the spread between the consensus forecast for policy rates in 12 months’ time versus 3 months’ time. Since those forecasts for policy rates in 3 months’ time are more or less the same as their current level, the data suggest that the Bank of Canada (BoC) is expected to embark on a relatively aggressive easing cycle during the latter stages of this year. The Reserve Bank of Australia (RBA), in contrast, is expected to be more hesitant compared with, for example, the Fed, the ECB and the BoE.

Equity markets Equity markets in the US experienced a strong year in 2023, with investable market assets logging more than 25% of total dollar returns (chart 2). By sector, US equities were lifted by a strong performance in information technology and communication services, while utilities and energy partially dragged. On the flip side, emerging market (EM) equities posted a comparatively weaker outturn, with total dollar returns of only 10.5%. By region, China was among the key drags on EM equity performance, amid chronic investor pessimism regarding the economy. However, relative outperformance by economies with more promising narratives (e.g., Brazil, India) or by those with tech-heavy bourses (e.g. Taiwan) helped to reverse China-induced declines.

The US dollar The trade weighted value of the US dollar ended 2023 roughly where it started the year, with fluctuations through the course of the year driven mainly by market perceptions of the Fed’s monetary policy (chart 3). On balance, the US dollar depreciated by about 2%, driven mainly by the euro’s relative strength over the past 12 months. The dollar was partially buoyed, however, by significant yen depreciation, driven, in turn, by the Bank of Japan ultra-loose monetary policy compared with other major economies.

Commodity prices Headline CPI inflation rates have drifted lower over the last few months partly thanks to falling global commodity prices. In chart 3 below we illustrate this via a newly revised commodity price index for the OECD from the Hamburg Institute of International Economics (HWWI) and which has been newly added to our commodity price database (CMDTY). The real-time version of this index specifically fell by 29.4% y/y in November. And as chart 4 below suggests that bodes well for the likely evolution of headline CPI inflation in the advanced economies in the period immediately ahead.

Market expectations of Fed policy Falling US inflation coupled with the aforementioned interest rate revisions from the FOMC have marshalled further declines in market expectations of Fed policy over the past few weeks. Futures markets are specifically now pricing in nearly 150bps of Fed rate cuts by the end of this year (see chart 5 below). That’s around 50bps more easing than implied by the Blue Chip consensus forecasts shown in chart 1 above and 75bps more than the FOMC anticipates.

China’s economic outlook China faces a difficult start to 2024, with many of the challenges it faced persisting from last year. For one, China faces continued weakness in consumer confidence, which plummeted in early-2022 and has not recovered meaningfully since. The consumer aside, China has to contend with a continued fallout in its property sector too, amid dwindling investment and sales. Besides the property sector, China may also face increased pressures to address investor concerns regarding its local government debt, which has grown significantly over recent years (see chart 6).