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No fireworks in December, investors smile

December was a relatively quiet month on surprises, save for the Federal Reserve’s interest rate expectations. And it made investors smile a bit wider. However, the trouble in China continues – and all indications are that it will be decades rather than years for China to address its challenges. Likewise, hard decisions will be necessary for South Africa to move to a sustainable economic growth track of 4% – as this is the rate needed for the country to make inroads into its economic and social challenges.

In the United States’ (US) the final estimate for Q3 2023 economic growth was adjusted down to 4.9% from the second estimate of 5.2%. However, growth is expected to slow markedly from Q4 2023 onward. Nevertheless, the most notable news accrued from the Federal Reserve’s view on interest rates in 2024. While the Federal Open Market Committee (FOMC) kept rates unchanged at its December meeting, Federal Reserve Chair Jerome Powell also suggested a strong likelihood for rate cuts in 2024, confirmed by the “dot plot” forecasts of the individual members of the FOMC. FOMC members expect a decrease of 75 basis points in the Federal Funds rate in 2024, less than the 150 basis points priced by futures markets. Markets nevertheless reacted strongly as share prices surged, the yield on the Treasury’s 10-year bond decreased to below 4% (peaked at 5% in mid-October), while the US$ depreciated against some major currencies. These market reactions suggest an expectation of a strong decrease in consumer price inflation (CPI). However, November’s CPI indicated stickiness. CPI decreased to 3.1% from 3.2%, but core CPI remained at 4%, causing concern that core CPI may increase at a level consistent with wage increases while the labour market is remaining tight. As such, markets’ expectations of shares and rate cuts may prove to be overly optimistic. Nevertheless, optimism about rate decreases since end September caused the S&P 500 to end the year 24.2% higher compared to the end of 2023 (only 9% higher by end September), while the US$ Index ended the year 2% weaker (still 3% stronger by end September).

Although the European and UK Central Banks also kept interest rates unchanged in December, there were no strong signals on when rate cuts may be forthcoming. Despite a very weak economy, the ECB is holding out on rate cuts as it expects wages to increase faster than CPI. However, futures markets expect the ECB to cut rates by 140 basis points, starting in April. As for the Bank of England, the Monetary Policy Committee may keep rates a bit higher for longer as CPI is higher than in the US and Europe, while wages are rising comparatively faster. In the three months up to October, wages were 7.3% higher than a year earlier, versus 4.7% in Europe and 4% in the US. Nevertheless, as in the US the optimism about rate cuts caused a surge in share markets, with the FTSE ending the year 3.8% higher (weaker by end September), while the German Dax and French CAC respectively ended 2023 20.3% and 16.5 % higher.

China’s economy continued to struggle (in December) from its well-known ills. Indeed, China will do well if economic growth surpasses 5-6% in future. In Japan, where monetary policy was kept at relaxing levels amid tightening elsewhere, policymakers recently have sent signals that tightening may occur in 2024.

South Africa experienced more stable electricity supply in December, but the country’s structural problems and low pace of reforms remained. Economic growth will be less than 1%, way less than the 4% needed for the country to make progress in solving its problems. CPI for November did ease further to 5.5% from 5.9%, mainly due to declining fuel prices, but the decrease is much slower than in other countries – mostly due to high food prices and municipal rates. The petrol price in Gauteng ended the year at R22.17/l, almost R1/l lower than the end of 2022. The JSE ALSI ended the year 5.3% higher compared to end 2022. The Rand ended the year at R18.31/US$, 12.3% weaker than end 2022.   

Multivest Economic Division

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