Declining inflation pressures and a relatively dovish Fed caused bonds and risk assets to gain in recent weeks. But risks related to speculation are rising, as markets have already priced in lot of gains expected in 2024. We agree that central banks (CB) will pivot in 2024, but believe rate cuts would start from May/June. The reasons behind this moves are also important. In our view, a slowing economy (not just slowing inflation) will push the Fed towards easing, as the bank will be watchful of any upside surprises on inflation. We see the below themes as the likely main drivers for the global economic environment:

• Inflation is declining, but it’s too soon to declare victory. US core inflation is displaying stickiness, and the ECB is concerned about wage rises as it pushes back against market expectations of cuts in the near future. CBs could wait a few months before easing policy.
• US and Europe weakening. Labour markets are loosening, and consumers’ views of worsening job security adds to our forecasts of a mild US recession in H1. This, coupled with a slowdown in China, would affect Europe, where forward-looking indicators are weak, while the rest of Asia and EM should remain resilient.
• Fiscal constraints in the US and Europe. Currently, markets are ignoring the long-term US debt sustainability issues and are driven by the Fed policy outlook. In Europe, the German budget deal is a compromise that seeks to cut spending, but it could affect growth.
• Geopolitics is in focus as we enter a year of elections, starting with Taiwan in January.

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