Global market drivers in 2024

The factors that drive stock markets will change as we progress through 2024, allowing more clarity on several issues that have been of great concern to investors. The direction of macroeconomic issues such as inflation, central bank action and consumer spending will be key market drivers that affect investments globally – but how will events unfold throughout 2024?

1. Inflation

Inflation needs to continue to fall for central banks to even start discussing the potential for rate cuts. Current expectations indicate a very orderly decline in the annual inflation rate. If achieved, this will please the central banks and prompt a less restrictive stance on policy – well, maybe. Even if inflation is falling, monetary policy may need to remain tight for the rate of price increases to continue to fall towards target levels.

The energy component is clearly the most volatile. Over 2023, Brent Crude futures had a range of $71 and $96 per barrel, averaging around $82. Demand expectations have been falling given the economic slowdown. Even though supply is being restricted from key producers, there is still an increase from non-OPEC+ countries, which is pushing prices down.

Depressed prices will be met with potentially more supply cuts and the likelihood for a restocking of strategic reserves. We therefore expect continuing volatility and for the energy sector to flip from detractor and contributor to overall inflation over 2024.

The importance of weather patterns to crop yields makes it very difficult to forecast the price outlook. Grain prices also impact livestock markets through feedstock prices. As climate changes impact seasonal rainfall, uncertainty will continue to lead to price tension. The Ukraine war has also underscored the sensitivity of food supply chains. Like energy, we assume more volatility ahead.

Core goods inflation is already near 0% and the likelihood is that this will move into deflationary territory – but for how long?

Over the last 30 years, outsourcing of manufacturing to cheaper areas of the world has kept a lid on inflation – but there is a trend towards de-globalisation fuelled by national security issues as well as security of supply following the lessons of the Covid-19 pandemic. So, it is likely to be a weaker consumer that will force greater discounting on these core goods to see further deflation instead.

The core services component is key for the US inflation outlook over the next year. It holds the ‘stickiest’ elements and is the biggest inflation contributor. It has a very high linkage to wages and will require high interest rates to persist in order for inflation to remain sustainably around target levels.

The key question for central banks is whether inflation will slow enough to warrant substantial rate cuts, which the market is currently expecting, over 2024.

Unfortunately, inflation is a by-product of economic activity and is considered a lagging indicator of the economy. Therefore, we need to see slower economic growth to see this slowing inflation trend continue.

2. Consumer spending

We still haven’t seen the full impact of higher interest rates on the consumer as yet. Household consumption accounts for around 69% of US gross domestic product (GDP) and around 64% in the UK. To understand consumer activity, we need to look at the input drivers in the UK and the US, as the latter is very relevant from a global-demand-growth perspective.

Two key factors for consumer demand are household levels of income (wage rises) and the reliability of this income (job security). Real wages, after adjusting for inflation, have now started to rise in both the UK and the US. This is likely to have a positive influence on consumer activity as we move through 2024.

Despite the deteriorating economic outlook, unemployment rates have remained very low. Price rises have supported company earnings, despite falling volumes. It has also been difficult in the post-pandemic period to find – and keep – suitable workers. This has made companies more willing to keep hold of their staff and take a short-term hit.

However, the longer economic activity is depressed, the more pressure there will be on managers to cut costs. This is more likely in the UK – and the risk of a recession is very high as a result. When people think their jobs are at risk, spending behaviours can change very quickly.

During the Covid-19 pandemic levels of savings soared, supporting recent consumption as we catch up on holidays and entertainment. However, a big household buffer is no longer there. A big driver of consumer activity is the wealth effect, which is a function of the appreciation in house prices, equity markets and the more attractive interest rates available for savers.

3. House prices and mortgages

House prices in the US and the UK have not depreciated much, despite higher interest rates. At this stage, we think the house-price wealth effect is neutral in terms of impact. Equity-market performance is more relevant for the US consumer and, after a very good year in 2023, it can be seen as a positive influence for consumption going into 2024.

As interest rates rise, lending standards are tightened, reducing access to credit from banks. We think the access to credit will become more difficult in 2024 and will be a detractor to consumer activity.

Shelter costs and interest expenses are still rising and will materially impact cash flows in many households. In the UK, a significant proportion of fixed rate mortgages, taken out when rates were low, are ending and need to be refinanced. Thankfully, mortgage rates have come down recently and some of the increase has been mitigated.

However, increasing mortgage costs will take its toll on the UK economy. Rents have also increased substantially and continue to rise in both the UK and US.

The impact of higher rates in the US has been more muted as mortgage holders have locked in very low rates for the long term which only need changing if they sell their house.

The higher cost of food and clothing and other staples remains a headwind. Thankfully, price rises are easing so will have more of a neutral impact on consumption levels.

Taxation, and the overall degree of fiscal support from governments, is only going to be of marginal benefit (if any) in the year ahead. It might not be a negative in an election year, but it will also not be hugely positive either as public finances are in need of repair post pandemic.

Prices for goods and services are still very high compared to a few years ago. This is the area that will feel the loss if consumers think twice about going out or buying bigger items. Central banks want to see more discounting here to achieve lower inflation.

4. Interest rates

To try and determine the timing and extent interest rate cuts, it is necessary to assess the impact of inflation and consumption on the overall economy.

Markets are likely to extrapolate good news, and bad news, to work out the policy implications. This means 2024 will have some similarities to 2023, as investors become too optimistic about rate cuts and potentially too pessimistic should growth spur a re-acceleration in inflation.

We think central banks will start to cut rates towards the middle of 2024, once evidence emerges in the data that inflation is continuing to decline and that growth, particularly consumption, is easing more substantially.

Rates will be cut slowly unless the lag effects of higher borrowing costs start to have a more material impact. In this case, they will be pressured to cut interest rates to ensure the slowdown in activity is not too severe. This is more of a risk in the UK than in the US, given the mortgage rate resets we are likely to see. This means aggressive policy easing in the US is not currently warranted.

We do not expect to see the US Federal Reserve start to cut interest rates until the latter part of the second quarter in 2024, at the earliest, with potential for the UK to start cutting rates slightly earlier if the domestic economic conditions continue to deteriorate.

We think central banks will start to cut rates towards the middle of 2024, once evidence emerges in the data that inflation is continuing to decline and that growth, particularly consumption, is easing more substantially.