Dear all,
I hope everyone’s doing awesome! At the start of the year, we released our Global Economic Diagnosis for 2024, which outlines three major trends that would make the first half of the year a sweet spot for both stocks and bonds. As of the writing of this article, I see no major issues with this assessment. Market prospects are indeed looking increasingly promising.
Let's dive straight into the January market conditions. U.S. stocks, Taiwan stocks, and the Nikkei all hit record highs, while Chinese and Hong Kong stocks continued to slide, remaining relatively downbeat. Meanwhile, in the bond market, yields fluctuated with rate cut speculations in recent weeks. The U.S. Dollar Index (DXY) saw a rebound, while commodities delivered mixed performance: oil prices rallied from previous plunge, while many other commodities continued their descent.
Now, why do we see no major issues with the three major trends supporting a bullish outlook on stocks and bonds (global central banks cutting rates, U.S. shifting to moderate growth, and the manufacturing cycle back in the growth phase)? Let me break it down with two charts:
1. Path to easing inflation solidifies, setting stage for mid-year rate cuts
On the inflation front, we maintain our view that core inflation will continue to ease. This is supported by the pattern illustrated in the following chart: the easing of sticky and flexible price inflation follows a particular sequence.
Respectively, sticky and flexible prices refer to prices that on average take more/less than 4.3 months to change. Looking back over the past 50 years, when inflation took a downturn, flexible prices (like energy and food prices) declined first. Then, at least six months later, sticky prices (such as rent, medical bills, entertainment expenses) started coming down. The rationale behind the sequence is quite straightforward–sticky prices often only start adjusting after the more volatile flexible prices ease, which influences market expectations.
