The Japanese economy has become more dynamic in 2023 with more shareholder proposals and higher M&A activity, see charts below.
Japan Becoming More Dynamic
US Housing Outlook
A recovery in the housing market has started, driven by the Fed’s pivot, rising consumer confidence, falling mortgage rates, solid job growth, solid wage growth, and pent-up demand. The Fed will soon be forced to reverse course and be more hawkish. Our latest US housing outlook is available here, key charts inserted below.
Outlook for Wage Growth
The NFIB survey of small businesses asks 10,000 firms if they plan to increase wages over the next three months. The recent acceleration in the share of firms saying yes suggests that wage growth could increase in the first half of 2024, see chart below.
What’s Next After the Fed “Pivot?”
Listen to Apollo’s Global Head of Content J.P. Vicente and Chief Economist Torsten Sløk discuss the implications of the Fed’s surprising December 2023 “pivot” and its potential effects on the economy and capital markets in 2024. It’s a wide-ranging conversation, covering the outlook for rates, inflation, consumer spending, corporate profits, bank lending, and a whole lot more.
Housing Inflation Rebounding
The Fed will not be able to get inflation under control with a booming housing market because housing makes up 40% of the inflation basket, and with housing currently rebounding, the risks are rising that the shelter components of inflation will stay elevated and complicate the Fed’s path back to the 2% inflation target, see charts below. The bottom line is that the Fed will keep rates higher for longer than the market is currently pricing.
Extreme Concentration in S&P 500 Returns
A record-high share of stocks in the S&P 500 have underperformed the index this year, see chart below.
Outlook for Japanese Demand for US Fixed Income in 2024
The Bank of Japan now owns almost 60% of Japanese government bonds outstanding, see chart below. This statistic is truly remarkable. As this number approaches 100%, there is no economic theory for what will happen.
As the only G7 central bank, the BoJ has not raised short-term interest rates in response to rising inflation. With the Fed now talking about rate cuts in 2024, the BoJ may end up never raising short-term interest rates during this cycle.
With Japanese interest rates staying low and US rates coming down, the implication for markets is that Japan may return as a US fixed income buyer in 2024.
This presentation discusses this topic and the outlook for Japanese demand for US fixed income.
G7 Inflation Outlook
Our inflation outlook for the G7 is available here, there are three conclusions:
1. Headline inflation is coming down in most G7 countries because of falling energy prices and global supply chains normalizing after Covid.
2. Core inflation is more sticky in the US and Canada, where easier financial conditions and a rebounding housing market could lift inflation over the coming quarters. Core inflation is also more sticky in Japan.
3. In Europe and the UK, both headline and core inflation are moving faster down to 2%, driven by normalizing supply chains, falling energy prices, and a faster slowdown in their economies because of the energy transition, a more interest rate-sensitive housing market, and slower growth in China.
Apollo Academy Participants Plan to Increase Alts Allocation in 2024, ‘More Concerned’ About Inflation After “Fed Pivot”
A majority of participants in the Apollo Academy class on my 2024 Economic and Capital Markets Outlook said that they are planning to allocate more to alternatives in 2024. In a poll taken during the live class on December 20, 59.7% of respondents said they planned to increase alts allocations in the year-ahead, while 20.3% said they didn’t plan to augment allocations (see chart).
Interestingly, a small majority of participants, 51.4%, said they were “more concerned” about the future course of inflation when planning client allocations than they were before the “Fed pivot” on December 13. Another 35.3% said they were “less concerned,” while 13.3% said they weren’t concerned (see chart). These results point to an interesting paradox: By signaling that they weren’t as concerned with the course of inflation as they had previously been, the FOMC’s board members may have inadvertently prompted an economic boomlet, leading to the increase of the very thing of which they themselves had expressed a decrease—concerns over inflation.
We asked a similar question about participants’ expectations of a US recession after the “Fed pivot.” A majority, 54.8%, said they were “less concerned” about a recession in 2024 than before the pivot; 32.4% were “more concerned” than previously; 12.8% said they weren’t concerned.
Easy Financial Conditions Boosting Growth and Inflation in 2024
Financial conditions are easier today than when the Fed started raising rates in March 2022 (see chart below), and the same picture can be seen for the measures of financial conditions from the Chicago Fed, St. Louis Fed, and the Kansas City Fed. With core CPI inflation still at 4.0%, this will be a problem for the Fed in 2024.
