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In the US, the Fed is now sufficiently confident about the downward path of inflation and projects cuts of 75bp in 2024. This came with confirmation that lower inflation will allow the Fed to cut rates even if the economy achieves a soft landing. Despite the Fed’s own projections, exactly how much policy may be eased in 2024 is open to reasonable doubt. A ‘hard landing’ would validate current market pricing which runs well ahead of the Fed, implying up to 145bps of cuts. However ongoing strength in the labour market and any renewed impetus in inflation will give the Fed much less room for manoeuvre.

In Europe, the ECB has been much more reluctant to signal any shift towards an easing bias. At one level this is surprising because growth data and several forward-looking indicators suggest that the Eurozone is already feeling the effect of the rate hikes to a greater extent than is evident in the US. However, the ECB is sticking to the script of its inflation mandate. Very weak growth data implies the risks are now tilting towards a hard landing in 2024. We do expect the ECB to ease policy but not by as much as implied by the market, which is pricing in 150bps of cuts this year.

In China, serious and ongoing weakness in both households and businesses has been confirmed by the recent data. The government’s 5% growth target for 2024 will likely be missed with further downside pressure. Falling property valuations are still undermining balance-sheets to an extent that is posing a serious systemic risk to the economy. The authorities have accepted that any escape from a deflationary spiral will require large-scale structural, monetary and fiscal interventions. Intervention will probably be targeted at stabilizing property sector liquidity on the basis that consumer sentiment will not be restored without it. Failure to act in coming months and in sufficient size will risk a very serious debt deflation across the economy and a serious political problem. Our base case assumes an expansive intervention, but a policy mistake cannot be ruled out.