2024 Q4 Global Economics Outlook (I)

Global Economic Outlook for the Second Half of 2024

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United States:

The US economy is poised to continue its upward trajectory, with equities led by mega-tech companies advancing, though at a slower growth rate than previously seen in tech stocks. Consumer spending remains robust, buoyed by low unemployment, unexpectedly strong non-farm payroll at 254K in October, as well as better than expected retail sales and jobless claims this week, supporting a potential soft-landing scenario rather than a recession. However, inflationary pressures persist, but are expected to remain manageable. Investors should focus on trends rather than individual data points, such as the recent adjustments in non-farm payroll, retails sales, PCE, CPI, labour figures, to establish a medium-to-long-term perspective.  

The upcoming US presidential election adds uncertainties to the markets, with neither democrat or republican gaining a decisive lead in swing states. Depending on the election outcome, the international and diplomatic landscape could shift dramatically. For instance, if Kamala Harris wins, so called blue sweep, the administration might initially follow Biden's policies, especially in the geopolitical sphere where she has less experience. Conversely, Donald Trump could position himself as a key figure in international diplomacy, particularly concerning Russia, Ukraine, and the Middle East. Regardless of the outcome, tensions with China are expected to persist, and China exports would be suffered.  

The Federal Reserve is expected to cut interest rates one or two more times within this year, a consistent prediction since Q4 2023. Inflationary factors, including recent high oil prices driven by conflicts in the Middle East, will likely continue. Furthermore, recent strong labour market data and re-inflated Core CPI in October, implying a 25 bps cut in November’s FOMC meeting to avoid reflation if a big cut. Meantime, the US dollar is predicted to stay strong through the year’s end, with central banks like the ECB, BOE, and SNB expected to continue rate cuts, in the same rate cut cycle, the US is the most resilient economy which brings USD stronger. However, if the market falters and the US enters a recession, on the FX side, shorting USD/JPY and USD/SGD would be a great hedge against a weakening dollar.  

Moreover, ongoing port strikes may drive inflation higher due to supply shortages, leading to panic buying and increased prices for goods ranging from steel and cars to agricultural products. However, confidence in the overall health of the US economy and stock market remains strong, both before and after the election, with private sector growth, driven by technology from AI to its supply chains, continuing to be a key factor to support the overall markets. On the fixed-income front, short and mid duration bonds are favored for now, with consideration for longer-term bonds (10-year UST yields over 4%) toward the year’s end if more data suggests a soft landing.

On equities side, if the US does enter a recession, emerging markets (EM) could present significant opportunities for investors, especially given their higher volatility, which often leads to greater potential returns. Among Asia EM countries, Taiwan, India and Korea equities stand out, as they have exhibited the most negative sensitivity to oil prices, making them attractive as now Middle East tension volatile the oil prices, further enhancing their appeal during periods of global economic downturn.

China:

China faces challenges heading into 2025, with exports continuing to drive the economy, supported by government investment. However, consumer spending lags behind even Sep retails sales rose 3.2%, beating consensus of 2.5%, overall does not affect much on China economy. Moreover, the government’s recent coordinated efforts have bolstered market stability, leading to soaring equity markets in both Hong Kong and mainland China. The simulations have revived investor confidence in short-term, though some remain cautious, viewing the short-term market enthusiasm as a “fear of missing out” (FOMO) phenomenon, HSI declined 13% after China National Day holidays by reason of the economy is leak of fundamental supports.

The key challenge for China’s stimulus measures is whether they will drive the actual economy demand rather than simply addressing supply-side issues in the financial market. What the market wants to see is consumers spending more and real estate recovery, not just investing in stocks, long-term recovery policies are needed. Credit growth, especially in SMEs and consumers, will be a key indicator of success. Investors are also watching closely to see how these policies will be implemented at the consumer level, as liquidity injections alone may not be enough to sustain growth for long term.

At this point, long-term investors, such as insurers, pensions, sovereign wealth funds, have not yet established significant positions in A-shares, preferring to wait for credible trends to emerge. Hedge fund flows remain low, focusing mainly on short-term volatility. With consumer spending still underperforming and infrastructure-led growth constrained by resource limitations, the Chinese government will likely keep the RMB relatively weak to boost exports. The country’s low facility rate, currently around 2.0%, creating a better business environment for locals and commercials; however, consumers are still hesitant to spend due to negative economy outlook.  

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Japan:

Japan is grappling with high inflation, which has been elevated for almost two years. The new Prime Minister and the Bank of Japan (BOJ) have adopted a dovish stance, emphasizing the need to maintain inflation. However, the reality is that Japan must keep its currency weak to maintain competitiveness, as much of its corporate revenue is derived from international markets. A hawkish approach, such as raising rates, could undermine investor confidence in the Nikkei, leading to increased volatility.

Wage increases from successful spring negotiations have helped sustain inflation above 2%, supported by growth in tourism and favorable tax policies. However, the government faces a delicate balancing act between corporate profits, stock market performance, and the rising cost of living. Inflation is unlikely to ease anytime soon, making it difficult for the government to maintain this balance without significant trade-offs.

A more hawkish move from the BOJ is expected before year’s end, though it may not take the form of a direct rate hike. Instead, the BOJ might further reduce its bond-buying program, which would have a more limited impact on the yen. This approach would allow Japan to manage inflation without causing undue disruption to the broader economy. If the BOJ commences the rates hike, we forecast USD/JPY will climb to at 145 level or lower.

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