- The Fed’s (bumpy) last mile. February CPI data show that US inflationary pressures have not dissipated yet. Year-on-year CPI inflation has now been stuck above the 3% threshold since June 2023, with services inflation remaining stubbornly high. Easing financial and credit conditions, as well as the accelerating monetary base, suggest that the Fed should remain cautious in an economy still running close to full capacity, with a still tight labor market. We now expect the Fed to pivot in July rather than June but continue to see four 25bps rate cuts by the end of the year.
- Bank of Japan: the art of going against the tide. While most central banks are preparing to cut interest rates, the Bank of Japan (BOJ) will soon hike, ending nearly a decade of negative interest rate policy. While markets increasingly expect the first hike since 2007 at the 18-19 March meeting, we think the BOJ will only increase its policy rate to 0.1% at the 25-26 April policy meeting instead, when it also releases new growth and inflation forecasts. The BOJ will however maintain an accommodative stance, implying manageable impacts on Japan and the rest of the world. The US, France and Australia have been the top destinations for Japanese investors in overseas debt in the past years, but sovereign bonds in Ireland and the Netherlands seem the most vulnerable to the risk of Japanese investors pulling funds out. We expect Japan's GDP growth at +0.6% in 2024 and +1.0% in 2025, and inflation at 2.4% in 2024 and 1.6% in 2025.
- US equity markets: dotcom déjà vu? The exponential rise of US tech stocks is raising concerns of a repeat of the dotcom bubble. But today’s tech companies have significantly stronger balance sheets, benefiting from record growth in profits and strong cash reserves. They have also adeptly navigated the rising interest rate environment – a feat given the sector's historical sensitivity to interest rates. At the same time, today's price-to-earnings ratios are also significantly lower than the ~50x PE ratios that characterized the dotcom bubble. This suggests that the current market enthusiasm is nowhere close to the fervor of the late 1990s and early 2000s. In this context, we continue to expect US equity returns at around 10% in 2024, followed by a cool-off towards 7% in 2025.
What to watch
The Fed’s bumpy last mile, it’s Bank of Japan’s time and why the AI rally is a cash-rich version of the dotcom bubble
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Authors
Ludovic Subran
Allianz SE
Allianz SE
Maxime Darmet
Allianz Trade
Allianz Trade
Jordi Basco Carrera
Allianz SE
Allianz SE