18/03/24 - DEUTSCHE BANK - Economic Outlook and Market Trends

GDP GROWTH AND INFLATION

EUROZONE

In 2024, the Eurozone's GDP growth is expected to remain subdued at 0.7%, despite a modest tailwind from easing trends. Inflation, which averaged 5.5% in 2023, has been falling primarily due to lower energy prices. Core inflation stood at 3.1% in February 2024, with headline inflation expected to average 2.5% in 2024. Subdued economic activity and a tight labor market will contribute to the inflation outlook.

JAPAN

Japan achieved robust GDP growth of 1.9% in 2023, despite weak domestic demand and real consumption in the second half of the year. In the coming quarters, ongoing Shunto wage negotiations could result in significant wage hikes, contributing to a rise in private consumption and reinflationary tendencies. GDP growth is projected at 0.5% in 2024. Inflation, which averaged 3.2% in 2023, fell to 2.2% in January 2024. Core inflation fell to a 22-month low of 2.0%. Inflation is expected to continue easing, averaging 2.3% in 2024.

UNITED STATES

In 2023, headline consumer price inflation in the U.S. averaged 4.1%. It has eased in recent months to 3.2% in February 2024. Core inflation has been steadily trending down to 3.8% in February, but sequentially, it has risen over the past three months, suggesting that the next steps towards the 2% target rate will be challenging. Inflation is expected to average 2.8% throughout 2024.

CENTRAL BANK POLICIES AND INTEREST RATES

EUROZONE

The European Central Bank (ECB) is expected to deliver a first rate cut of 25 bps in June and two further rate cuts of the same magnitude over the rest of the year, as well as an additional cut in the first quarter of 2025.

JAPAN

The Bank of Japan (BoJ) is expected to end its negative interest rate policy (NIRP) in spring 2024, with the policy rate expected to be 0.25% at the end of the forecasting period.

United States

The Federal Reserve (Fed) is expected to lower its interest rates, with an initial 25 bps cut in June 2024, followed by two additional cuts by the end of the first quarter of 2025.

MARKET TRENDS

EQUITIES

Strong economic growth in the U.S., coupled with subdued growth in Europe and Japan, has led to mixed performances in equity markets. Developed market (DM) stock indices, such as the S&P 500, STOXX Europe 600, and TOPIX, have surged to new all-time highs. However, emerging market (EM) indices have shown more varied results, with Indian, Korean, and Taiwanese stocks joining the DM rally, while Chinese and Latin American stocks underperformed.

CURRENCIES

The U.S. dollar is expected to remain strong due to its safe-haven status, but a potential setback in equity markets and accelerating growth in the second half of the year could lead to a decline in safe-haven flows, counteracting the drag from more sluggish economic growth in the Eurozone on the EUR. The EUR/USD forecast remains at 1.10 at end-March 2025.

COMMODITIES

Oil supply is expected to track demand growth and keep oil prices around current levels. Central bank buying and the pricing of rate cuts are likely to help gold higher. Green infrastructure build-up is providing support for industrial metals.

CORPORATE BONDS

Investment Grade (IG) bond markets across the Atlantic are seeing strong demand, with inflows rising significantly and new issuances being well oversubscribed. The weakening of fundamentals is unlikely to cause a deteriorating USD market. The EUR market should see further tightening given balance sheets remain strong with leverage at historical lows. Refinancing risks in High Yield (HY) markets have eased slightly, but lower-rated issuers continue to struggle, pushing default rates higher in both HY markets. Some correction in spreads is expected despite the reduction in refinancing risks.

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