The end of the Federal Reserve’s rate increases has sparked global market optimism and currency strengthening, prompting central banks worldwide to adapt to changing economic conditions by balancing growth and inflation concerns, forecasted Thomas Planell, portfolio manager at DNCA Investments, in his 15 December report.

Planell argued that since October 2023, the Dollar Index has decreased by nearly 5%, influencing emerging market central banks to consider monetary easing. This easing is beneficial for their economies without significant concern for currency devaluation, stated the .

He noted that the US 10-year yields have dropped from 5% to below 4% since October. This decrease positively affected various asset classes, reasoned Planell. For instance, the Russell 2000 and Stoxx Europe small and mid-cap stocks have appreciated by 20% and 15%, respectively, while European blue chips have seen a 10% increase. The MSCI Emerging Markets ex-China index also rose by 14%.

However, China’s economic situation presents a contrasting picture. Planell pointed out that, in November, China experienced its most significant decline in consumer prices in three years, at -0.5%, following a similar trend in producer prices at an annualised -3%. Facing potential deflation, China is focusing on renewable energy investments and low-cost exports to counteract the property market’s downturn and reduced domestic consumption. Despite challenges in the construction sector, China’s industrial output, particularly in refining zinc and nickel, remains robust, contributing to a 35% increase in iron ore prices since May, although steel prices have declined, stated DNCA in the report.

The Chinese government’s focus on exporting products like electronics, electric vehicles and photovoltaic panels at competitive prices aims to sustain a 5% growth rate. This strategy, however, leads to exporting disinflation to its main trading partners, a phenomenon seen as beneficial by countries seeking to move away from restrictive monetary policies, underscored DNCA.

In the United States, the economy has shown resilience, with a nominal growth of 8.9% in the third quarter of 2023. Despite concerns indicated by Citigroup’s economic surprises index, recent data on retail sales and jobless claims suggest a lower recession risk than anticipated, expected Planell.

The European Central Bank, led by Christine Lagarde, remains cautious, not considering rate cuts despite ongoing inflation concerns in the eurozone, which reached 2.9% in November. The ECB’s focus is on the accelerating unit cost of labour, up 5.3% in the third quarter, driven by wages and declining productivity. According to Planell, Lagarde remains unconvinced of a lasting inflation decline without evidence of companies absorbing rising labour costs without increasing prices.

Planell added that the Bank of Japan continues to maintain negative interest rates, showing reluctance to shift from this long-standing policy.

Overall, Planell anticipates that while the Federal Reserve and other central banks are adjusting their strategies in response to global economic trends, the ECB and the Bank of Japan remain more cautious in their approach. As 2024 approaches, the markets are more confident of potential rate cuts, but caution is advised amidst global economic uncertainties, concluded DNCA’s Planell.