Global Economic Outlook for the Second Half of 2024

APAC
Europe
Greater China
Macro Economy
United States
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July 4, 2024
  • US: Equities are expected to rise gradually, fueled by market optimism on big tech and consumer confidence. Our view on the S&P 500 remains at 5500-5550 (please refer to our last write-up 2024 Q2 Global Economic Outlook (I) - US and Europe ). Persistent inflation, driven by low unemployment, is anticipated though showing signs of slow-down. The Fed may hold its stance with one rate cut possible, and potentially two if inflationary data cools down. We recommend gradually reducing equities exposure going into Q4 and increasing fixed income allocation, employing a barbell strategy.
  • China: China faces challenges from geopolitical tension, wall of tariffs and lukewarm domestic consumer spending. We see RMB to stay on the weaker side so as to boost exports. In addition, United States-Mexico-Canada Agreement (USMCA) review should be monitored due to its impacts on export dynamics. In equity markets, limited support and confidence from international investors will continue to drag the market, with hot money favoring selective top players like Tencent and Meituan.
  • EU: Right-wing populism rises, weakening the Euro in the short run. Macron’s strategic moves aim to maintain political control amid Le Pen’s rise. This shift has diminished investor confidence, raising concerns about the stability of the EU's unified policy framework. Increased geopolitical tensions with China are expected, with Germany likely to assume a stabilizing role.
  • Japan: Discord between the Ministry of Finance (MOF) and the Bank of Japan (BOJ), coupled with low Prime Ministerial approval ratings, has created market tension. The BOJ is likely to intervene more aggressively in July to support the Yen, as current subtle measures have proven ineffective, necessitating explicit policy actions. However, we anticipate that the Yen will struggle to climb to the 145-150 range.

US

On July 3, 2024, the S&P 500 (SPX) impressively shattered the 5500 barrier, closing at 5537 and marking its 33rd new all-time high, with an adjusted price-to-earnings (P/E) ratio of 24.42—substantially above the five-year average of 21.21.  As we move into the second half of 2024, we believe US equities will continue their upward trajectory, albeit at a more moderated pace. Key drivers include the resilience of mega-cap technology stocks and sustained consumer spending. While growth rates in the equity markets will be tamer compared to previous periods, the overall direction remains positive, with our target range for the S&P 500 standing at 5500-5550. This optimism is further supported by anticipated robust earnings reports from major tech companies in August, which are expected to bolster investor confidence.

S&P 500 Index, Bloomberg

Consumer spending, though showing signs of constraints, is projected to remain healthy through the summer and August figures are typically stronger due to back-to-school buying behavior – which needs to be observed carefully this time. The inflationary pressures will persist driven by a relatively low unemployment rate at 4.0 compared with the past 10 years and resilient economic conditions. Monitoring delinquency rates on credit cards will be crucial to gauge the impact of high rates on consumer debt. Despite these challenges, we believe the overall economic environment supports a soft-landing scenario, as consumer spending and corporate capex continue to underpin economic activity.

US Total Unemployment Rate, Bloomberg

We do not expect The Federal Reserve to cut rates through this summer. We anticipate one rate cut before the end of the year, with the possibility of two if summer figures indicate a cooling of inflation. While the market generally expects CPI to lower to under 3% in the latter half of the year, we believe this will be challenging. The ongoing strength in consumer spending, persistent inflation, and CPI base effects suggest that significant declines in CPI are unlikely. Last year, we observed a reduction in CPI from 5% in the first half to approximately 3% in the latter half. Given these dynamics, achieving a substantial CPI reduction in the latter half of this year remains a formidable task.

US CPI Forecast, Bloomberg
US CPI Historical Data, Bloomberg

As we approach the end of summer, it is prudent to embrace a short-term market fluctuation. Quarterly earnings reports in August from major companies are expected to be strong. However, those companies that primarily benefited from a recent market frenzy may not show the same strength.  As a result, we would advise a gradual reduction in equities exposure going into Q4, coupled with an increased allocation to fixed income. Implementing a barbell strategy that favors the long end of the yield curve is recommended.

The recent presidential debate in June has introduced significant implications for the market. Former President Trump, as we expected, emerged as the dominant figure, with 67% of debate watchers declaring him the winner. Although discussions on China were limited, both Biden and Trump are expected to increase tariffs on China if elected. Trump's stronger performance has led to market expectations of a more aggressive tariff policy under his potential administration. However, the political consensus on dealing with China also depends on Congress, suggesting potential escalation of tensions in the coming months. This event has already catalyzed short-term market fluctuations as investors digest the potential policy shifts and continues to influence market sentiment.

The imposition of tariffs on all Chinese exports to the US could lead to an appreciation of the USD/CNH exchange rate. Conversely, if these tariffs are not implemented, it is expected that the People's Bank of China (PBoC) will prioritize maintaining overall stability in the foreign exchange market. Given the strengthened predictions of Trump's election and his potential tariff policies, the US dollar is expected to remain robust even if the Federal Reserve announces rate cuts.

USD/CNY Exchange Rate, Bloomberg

China

China is poised to face significant economic challenges as it navigates through the remainder of 2024 and into 2025. While exports continue to be a critical driver of the economy, bolstered by robust government-backed investments, consumer spending remains a notable laggard. The resilience of China’s export sector is being tested by recent "coordinated" efforts among the European Union, China, and soon Canada, regarding tariffs on Chinese exports, particularly in industries such as electric vehicles, solar panels and battery. These protectionist measures are expected to dampen the outlook for Chinese exports, a key pillar of its economic growth. Although some manufacturers have strategically relocated their operations to Mexico to circumvent these tariffs, the impending review of the United States-Mexico-Canada Agreement (USMCA) in 2026—whose discussions should commence before the renewal—foreshadows heightened scrutiny and potential policy adjustments. This evolving landscape suggests that the current workaround may encounter increased regulatory obstacles, thereby exerting additional pressure on China’s export dynamics.

China Exports Forecast, Bloomberg

With consumer spending—one of the three critical pillars of economic stability —continuing to underperform, the Chinese government is likely to maintain a weaker RMB to boost export competitiveness. This strategic devaluation is crucial in supporting the export sector amid global trade tensions and tariff barriers. Furthermore, the high savings rate in China, hovering around 40% - 45%, signifies the nation's status as one of the world's highest-saving economies, reflects a deep-seated "save for the rainy day" mentality among consumers. This behavior indicates a lack of confidence in the economic environment, further suppressing consumer spending despite government efforts to stimulate domestic consumption.

Savings Rate by Country, World Population Review

In the equity markets, both Hong Kong (HK) shares and A shares are expected to continue facing a shortage of support and confidence from international investors, with the only exception being short-term rotations driven by valuation perspectives. The influx of hot money into Hong Kong is likely to be allocated to top industry players such as Tencent and Meituan, which continue to deliver solid top-line growth due to their dominant market positions and strong operational capabilities, hence drawing the attention of investors seeking stability and growth in a volatile market environment.

EU

The resurgence of right-wing politics within the EU has brought protectionism and populism back into the limelight. This shift is epitomized by the bold moves of French President Emmanuel Macron, who dissolved the parliament. While some perceive this as a gamble, these actions appear to be calculated decisions aimed at stabilizing his political influence. With Marine Le Pen likely to ascend to power, Macron's strategic objective seems to be maintaining control over the political landscape during this transitional period.

The political uncertainty has exerted downward pressure on the Euro (EUR), and we anticipate a weaker currency in the near term at around 1.08 in Q3 this year. The volatility surrounding the potential rise of right-wing governance has diminished investor confidence, contributing to the Euro's depreciation. Additionally, rumors suggest that a victory for the right-wing party could lead to France initiating a 'Frexit'. While we consider the actual occurrence of Frexit to be a “non-existence” event due to its potentially severe global ramifications, if it were to happen, it could result in a disastrous impact on EUR.

EUR/USD Exchange Rate Forecast, Bloomberg

The return of populism is expected to escalate tensions between the EU and China. This geopolitical friction, however, may have a silver lining. Germany, the EU's strongest economy, is likely to assume the role of the 'big brother' to navigate these choppy waters and sustain the EU's cohesion. Given the domestic challenges faced by France and Italy, it is unrealistic to expect these nations to lead the charge. Consequently, Germany will likely adopt a cautious approach in its dealings with China, acting as a stabilizing force and mitigating potential economic disruptions.

Japan

In Japan, the discord between the Ministry of Finance (MOF) and the Bank of Japan (BOJ) is creating significant political tension and market anxiety. The approval rating of the Prime Minister is alarmingly low, dropped to a new low at 25%, which has heightened the stakes for the BOJ to support the currency. Given these pressures, we are convinced that the BOJ has already intervened covertly to support the Yen. However, without explicit and forceful actions, the market will continue to push for a weaker Yen, rendering the BOJ's subtle measures largely ineffective.

Considering the ongoing political and market dynamics, we foresee that the Bank of Japan (BOJ) will be compelled (though reluctantly) to make a significant policy move in the coming months. Specifically, we anticipate a more hawkish policy action in July meeting, driven by the need to assert its stance more explicitly to counteract the market's bearish outlook on the Yen., driven by the need to assert its stance more explicitly to counteract the market's bearish outlook on the Yen.

We believe that the central focus will likely shift towards the pace and scale of reducing buying of Japanese Government Bonds (JGBs) and implementing a rate hike at or more than 15 bps. However, despite the normalization policy, it remains challenging for the Yen to climb into the 145-150 range due to the prevailing strength of the US dollar. This anticipated policy shift underscores the importance of closely monitoring BOJ actions and adjusting portfolios accordingly to navigate the potential impacts on the currency and bond markets.

USD/JPY Exchange Rate, Bloomberg

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