We maintain our sceptical belief that we will see dramatic rate cuts this year. There are still too many unknowns, with the US rebounding, Europe stumbling, and an increasingly real possibility of Trump pt II later this year - arguably, the biggest unknown. It is easier for central banks to maintain the status quo.
Inflation remains sticky. After the sharp inflation falls, we now see a new inflationary baseline, proving difficult to break. You saw this in the US, where inflation ticked up on one count and dipped below in another, but UK inflation was up to 4% in December, and in Germany, it was back up at 3.8%. Unfortunately, this is unlikely to change anytime soon, with growing instability in the Middle East raising the possibility of oil and global supply chain/trade pressures only adding to the ongoing inflationary pressures.
But even with these inflationary headwinds, the US economy is growing at a healthy 3.3% clip in the three months to December. Although this is below the 4.9% of the previous quarter, it is far above the expected 2%, while job vacancies rose to 9 million, coming in above the expected 8.75 million. Europe, however, is teetering, with the once great economic powerhouse, Germany, languishing on the cusp of a recession, with growth estimates of 0.7% this year (Ifo Institute), down from 0.9% a month previously.
A lot is going on and this is where central bankers earn their keep. It is against this backdrop that the ECB has said that they will keep rates steady for the time being, while in the US, it is more of a delicate balance, for although rate cuts are used to stimulate growth, traders are betting on rate cuts this year - the US doesn't need a massive amount of stimulation. Rates were held steady this month, with little indication from the ECB, Bank of England or Fed as to when they will look to lower and although easing is undoubtedly on the cards, it will be later than traders expect.
January is also the month of Davos. Amidst the splendour of mountains and snow, what was a chance to discuss the global economy's opportunities, problems and potential, now appears to be more of a peacock parade and a backwards-looking event. The result weighed on the downbeat, with most of the commentary out of the resort being less than favourable.
Against the grain of what we just wrote, China sought to defy expectations, with the number two premier Li Qiang, speaking at Davos, saying China's economy had grown at an estimated 5.2% in 2023. However, most economists rightly question whether there is much truth in these numbers - the more reliable statistics point to contraction and China's stuttering problems are such that President Xi is planning emergency intervention.
In equities, the S&P 500 hit new highs during January, partly backed by upbeat earnings reports and the S&P 500 closed the month +1.6%, followed by the Nasdaq, +1.0%, with the likes of Amazon and Alphabet were +3.6% and +2.9%, respectively, while Tesla dropped -22.3% and lost its position as the largest manufacturer of EVs to rival BYD. In Europe, the FTSE 100 fell -1.3%, and the Dax marginally rose +0.9%. The standout Western market was Japan, with the Nikkei 225 +8.4%. Conversely, China continued to fall, down 6.3% at the end of the month, as question marks continued to hang over the market.
Oil started the month under pressure, but concerns about Middle East instability, as the US and UK attacked Houthis, saw oil back up to $80 before paring back. By the end of the month, WTI was up +5.9% and Brent +4.6%. The lack of geopolitical stability, alongside general economic uncertainty, impacted precious metals, with gold falling marginally, -0.6%, and silver rather more, -4.1%.
The entire crypto crowd eagerly awaited the SEC's decision on bitcoin ETFs, to which they gave the green light. What was seen as a chance for Bitcoin to reach for the sky as investors piled into crypto ETFs proved more of a damp squib, with volumes up but prices initially down. And by the end of the month, Bitcoin was up by only 2.0%.