Good morning! Yesterday, the Federal Reserve concluded its last meeting of the year with a shift from a balanced tone to a more dovish one. The new rate path suggests three cuts for 2024, up from the two communicated in November. The market has already priced in six cuts, front-running a period of restrictive monetary policy from the US central bank. Projections for 2024 indicate deteriorating employment markets (4.1 unemployment), GDP growth at 1.4% down from 2.6% in 2023, and PCE inflation at 2.1%, signaling what they consider a soft landing.
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It's worth noting that soft landings are rare economic events, especially when the economic cycle is not muted (like in the Eurozone). Recent US inflation prints have not been entirely positive (super core CPI edging up, consistent with service inflation trending back to the 6% area), and it might be premature to declare victory over inflation, considering artificially low energy prices and a receded commodity cycle.
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Fed Chair Powell, being a political animal, seems to have chosen to ride the market wave instead of fighting it, especially with an election year ahead. The FX market has responded notably, and there might be a new DXY equilibrium below 100. However, international investors need positive real yields to hold the USD, and next year's net issuance is substantial. As a Euro-based investor, you may find better prospects in EM and Europe. Let's see what the ECB says today, but I believe the rate path in the continent is more clear as the relative values between sectors and countries. The question lingers on the pace of ECB QT for 2024 regarding the massive PEPP portfolio (15-20b per month) but liquidity is abundant here as well.
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In equity markets, euphoria is widespread after last month's breakout in market breadth, with global names participating in the bull market. However, the situation appears a bit overheated, prompting a decrease in exposure to US small-cap indices for my book. European mid-caps, still perceived as cheap and beneficiaries of lower credit spreads, become a more attractive option. There's also an argument for materials and commodities due to a weak USD, with a preference for precious metals as a clearer theme. Financials might take a breather, and money could rotate towards consumer discretionary, where there's beta, low relative valuations, and hopes for more debt-fueled spending. European utilities, considered decent longs from a relative perspective, are seen as quality investments with debt-loaded growth.
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Alexandros Tavlaridis
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