Global stock markets have been impressive in  2023. The three major U.S. indices ended at their highs for the year, with the Dow Jones hitting a historic peak. Most major indices have nearly fully recovered the losses since 2022. However, looking ahead to 2024, can the bull market continue? MacroMicro, as per its annual tradition, has released ten charts we believe are crucial, hoping to give you a snapshot of 2024. Note: All the charts in this article can be clicked and bookmarked for easy tracking in the "Bookmark" section, allowing you to follow them at any time.

Inflation and Interest Rates: Focus on Core Inflation Decline

1. Liquidity Risks: U.S. banks maintaining excess reserves above $3 trillion signals no liquidity issues. 

The decline in inflation during 2024 holds significant importance as liquidity buffers dwindle. After the pandemic-triggered era of extensive easing, surplus market funds flowed into the Federal Reserve's overnight reverse repurchase agreements (ON RRP) to capitalize on risk-free rates. By the close of last year, as rates reached their peak, ON RRP saw a reduction from approximately $2.3 trillion to just over $700 billion. Considering the Fed's ongoing monthly reduction of $95 billion from its balance sheet, the release of $1.6 trillion in ON RRP funds nearly counteracts the liquidity withdrawal experienced last year. It's noteworthy that a swift decline in ON RRP could result in a decrease in bank excess reserves. According to a report from the New York Fed, if bank reserves fall below 10-12% of commercial bank assets (roughly a $3 trillion threshold), liquidity risks may arise. To prevent a liquidity crisis, the Fed might need to consider rate cuts or temporarily pause quantitative tightening (QT) this year, as suggested by the report.


2. Inflation & Oil Prices: Keeping crude oil prices below $90 is key to managing inflation. 

The key factor influencing inflation in 2024 revolves around oil prices, primarily driven by uncertainties on the supply side. With the energy inflation baseline set at approximately $75 per barrel in the first half of the year, maintaining control over oil prices below $90 could effectively limit the inflation contribution to less than 1.5 percentage points. This, in turn, would contribute to a continued downward trend in inflation during the third quarter.


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3. Core Inflation Forecast: U.S. Core PCE Needs to Drop to 2.5% by Mid-Year

Based on the Federal Reserve's recent 2023 rate decision and SEP forecast, there's an anticipation of a decrease in core PCE to 2.2% by the close of 2024, along with a three-digit rate cut window. The most recent December core PCE inflation, recorded at 3.16% (down from the previous 3.39%), represents the lowest figure since mid-2021. To attain the targeted 2.2% by year-end, we posit that it's prudent for core PCE to dip below 3% in the initial half of the year and approach 2.5% by mid-year. The real-time inflation projections and core PCE annualized values (3M, 6M) from the Cleveland Fed serve as leading indicators for inflation trends.

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