When will central banks cut rates in 2024?

We were recently asked to update and review our Market Outlook and unsurprisingly (or maybe thankfully), most of our calls remain in place. We keep highlighting that central bank policy is ‘leaving the danger zone’ as the year goes on. The disinflationary effects are not only due to new technologies and their strength on equity markets; they are also due to supply chains having healed to the extent that they even show resilience to geopolitical tensions.

As a result, central banks will start cutting rates sooner rather than later. In combination with solid real wage growth, this will continue supporting the global economy. As for China, the policy measures there will keep the world’s second-largest economy from imploding but are not designed for major upside surprises going forward.

Central Banks: When will banks globally cut rates?
For the past two years, central banks have restlessly tightened monetary policy to address a runway of inflation. In 2024, there is a good chance that central banks will start to leave the monetary danger zone by cutting interest rates. Out of a whopping 15 central bank meetings this week globally, markets are expecting four emerging market central banks to cut rates (Brazil, Colombia, Mexico, and the Czech Republic).

Uncertainty around the US inflation trajectory will likely delay US Fed rate cuts until June, while the European Central Bank (ECB) and the Swiss National Bank (SNB) could cut rates earlier.

US Federal Reserve
In the first months of 2024, US inflation surprised to the upside and coupled with positive economic data surprises created a hawkish environment that challenges the expectations of imminent interest rate cuts by the US Federal Reserve (Fed). We expect US inflation to decline enough by the June Federal Open Market Committee (FOMC) meeting for a first rate cut, followed by two more cuts in the July and September FOMC meetings.

European Central Bank and Swiss National Bank
The opportunity for the ECB and the SNB to cut rates may arise earlier. Inflation in Switzerland declined in January and February, and a highly valued currency makes an early rate cut this week a plausible decision that would surprise financial markets. For the ECB, the time for a rate cut could come in April when the low underlying inflation trend is confirmed.

Bank of Japan
The Bank of Japan (BoJ) is the only central bank shifting from the other direction towards a more neutral policy stance. The negative interest rate policy (NIRP) introduced in 2016 looks increasingly inappropriate with wage demands surging this year to 5.3% after 3.6% last year. January inflation is above target and the revision of gross domestic product growth points to a better-than-feared economic backdrop. Ending NIRP is on the agenda, and we expect the BoJ to carry out this exit at its policy meeting in April together with the release of the quarterly Outlook Report.

Equity market: Get ready for the rotation
In equities, the start of 2024 has been characterised by a continuation of last year’s best performers. While we correctly anticipated that the quality/growth segment would continue driving performance, we now prepare for the opportunity to rotate into more cyclical parts of the market.

As the first quarter of 2024 comes to a close, momentum strategies deliver the best year-to-date returns, followed by last year’s winners: quality and growth segments. Information technology and communications are still on top of the performance grid, while our regional preference for the US and Japan is also printing the best result. US earnings continue their recovery after the positive 2023 Q4 reporting season and we maintain our forecast for high-single-digit earnings growth for the S&P 500 in 2024.

We keep our base-case scenario of a peak in long-term yields coupled with a ‘soft landing’ of the US economy. For the time being, we maintain a preference for US stocks, as they exhibit higher earnings potential, spurred in part by the euphoria surrounding artificial intelligence and the resilient US economy. We also see opportunities in Japanese equities, which, beyond their cyclical nature, are supported by a wind of change in the corporate landscape.

What does this mean for investors?
Reviewing our 2024 outlook so far, we reiterate our calls for assets with quality and growth features, such as information technology and communications stocks, as well as US, Swiss, Japanese, and Indian equities from a regional point of view.

In anticipation of the new cycle, we expect to see an opportunity to rotate into more cyclical parts of the markets. Investors eager to increase their cyclical exposure should already be looking out for names in our favourite subsectors, including automotives, semiconductors, machinery & equipment, and transportation.

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  Bank Julius Bär & Co. AG (company entry)