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Despite the remarkable resilience of US domestic consumption, the global economic slowdown continues. In the United States, the surplus financial reserves built up by households during the pandemic have prevented a major weakening in demand throughout 2023, despite the considerable tightening of monetary conditions, note Guy Wagner and his team in their latest monthly market report "Highlights".

“However, as the extra savings gradually run out, domestic consumption is beginning to show slight signs of weakening, which could intensify in 2024”, says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “In the eurozone, higher energy costs and less generous fiscal spending explain the more pronounced weakening in economic activity, which continued to slow in the fourth quarter.”

Overall, the global economy remains fragile, especially as central bank monetary tightening is only expected to have its maximum effect in the first half of 2024. Guy Wagner

The global economy remains fragile

In China, the lack of a recovery in the construction sector remains the main obstacle to a more favourable economic climate, especially as the public authorities do not seem ready to launch large-scale support programmes to be financed by additional debt. In Japan, high inflation is weighing on real household incomes, despite favourable wage settlements during the year. “Overall, the global economy remains fragile, especially as central bank monetary tightening is only expected to have its maximum effect in the first half of 2024.”

The Federal Reserve hints at a cut in key interest rates

In line with expectations, the US Federal Reserve left its key rates unchanged at its December meeting. Chairman Jerome Powell even suggested for the first time since the start of the monetary tightening campaign that the next move in key rates could be downwards. “The analyst consensus is now for 6 interest rate cuts in 2024, double the official forecasts of the Monetary Committee, with the first easing expected in March”, guesses the Luxembourgish economist. In the eurozone, the European Central Bank also left its key rates unchanged in December. However, it was more reluctant to signal a pivot in the direction of its key rates, despite weaker economic growth than in the United States. According to its President Christine Lagarde, a possible interest rate cut was not discussed at any point at the December meeting of the Governing Council.

Bond yields are falling

The US Federal Reserve's forecast of monetary easing in 2024 has accentuated the downward trend in bond yields that began in November on both sides of the Atlantic. In the United States, the yield to maturity on the 10-year Treasury note fell. In the eurozone, the benchmark 10-year rate declined in Germany, France, Italy and Spain. In December alone, the JP Morgan EMU Government Bond Index rose by 3.6%, bringing the increase for 2023 as a whole to 7.0%.

Euphoric end to the year for many stock market indices

The Federal Reserve's pivot, reinforcing hopes of monetary easing in 2024 without the onset of a recession, enabled the stock markets to continue their rebound after the sharp rise already recorded in November. “Thanks to a euphoric end to the year, many stock market indices came close to, or even surpassed, their previous records set around 2 years ago,” concludes Guy Wagner. “By sector, real estate, industrials and materials benefited most from the prospect of lower interest rates, while most energy, consumer staples and utilities stocks barely participated in the rise in share prices.”

Guy Wagner, Chief Investment Officer

Originally from a family of entrepreneurs in Luxembourg and with a degree in Economics from the Université Libre of Brussels, Guy joined Banque de Luxembourg in 1986, where he was successively responsible for the Financial Analysis and Asset Management departments, then became Managing Director of BLI - Banque de Luxembourg Investments, an asset management company newly created in 2005.

From July 2022 on, he devotes himself exclusively to his role as Chief Investment Officer, to the management of the portfolios and to the management of the team in charge management of the various funds.

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