{"id":202266,"date":"2024-02-09T11:00:00","date_gmt":"2024-02-09T16:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=202266"},"modified":"2024-02-12T12:12:07","modified_gmt":"2024-02-12T17:12:07","slug":"stock-mania-heightens-as-global-growth-gets-upgraded-feb-9-2024","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/stock-mania-heightens-as-global-growth-gets-upgraded-feb-9-2024\/","title":{"rendered":"Stock Mania Heightens as Global Growth Gets Upgraded: Feb. 9, 2024"},"content":{"rendered":"\n

The headwinds of troubled real estate markets in China and the US combined with growing geopolitical risks and challenges associated with monetary policy are adding risks to economic prospects. Nevertheless, bright spots exist, such as the potential for artificial intelligence to enhance productivity, businesses right-sizing headcounts, the accelerating development of alternative energy and China\u2019s growing electric vehicle market. A trend of nearshoring and onshoring is likely to support inflationary pressures, however, as corporations and countries select reliability over profitability. In the interim though, US stock indices have reached new all-time highs, including the S&P 500 benchmark marching north of the pivotal 5,000 level. Yields are cautious though, as an excessive degree of animal spirits incrementally keeps central bankers at bay while propping up price-pressure expectations. Indeed, rates have likely bottomed, with three strong auctions this week and this morning\u2019s favorable downward revisions on the US\u2019s Consumer Price Index failing to bring relief on the yield front.<\/p>\n\n\n\n

IMF Expects Below Average Global Growth<\/strong><\/h2>\n\n\n\n

The International Monetary Fund (IMF) recently set the stage for lackluster-economic expectations with its 2024 global GDP growth estimate of 3.1%, up only slightly from the organization\u2019s 2.9% estimate in October. The revised rate would equal the estimated expansion for 2023, which is below the average annual growth of 3.8% occurring from 2000 to 2019. The IMF expects headline inflation of 5.8%, down from an estimated 2023 rate of 6.8%. It will allow certain central banks to become accommodative, but high debt levels will cause many countries to reduce fiscal support amidst unclear productivity trends. When central banks turn dovish, the lag of accelerating economic growth after the reduction of interest rates is likely to cause most of the year to feel the brunt of current restrictive policies.<\/p>\n\n\n\n

Commercial Real Estate Presents Risks<\/strong><\/h2>\n\n\n\n

In the near term, I expect real estate to be a considerable challenge for capital markets and economic stability with China having a surplus of developed properties and banks in the US and other countries struggling with troubled commercial-property loans.<\/p>\n\n\n\n

China\u2019s economy is expected to grow 4.6% this year and slow to 4.0% next year after climbing 5.2% in 2023, according to the IMF. Domestically, China\u2019s glut of real estate is a significant headwind with investment in the sector dropping 9.6% last year as construction starts tumbled 20.4% and residential sales dropped 6.0%. Beijing has responded with billions of dollars in funding to lower mortgage rates and other programs to shore up the sector. Meanwhile debt-ridden municipal budgets are feeling the impact of the issue. The success of efforts to revive the sector will ultimately be determined by the willingness of gun-shy banks to provide loans. Meanwhile, a slow global economy that is feeling the strain of tighter monetary policy has crimped demand for Chinese manufacturing, with the country\u2019s exports falling from $3.54 trillion in 2022 to $3.38 trillion last year. In addition, Mexico has recently topped China as the top exporter to the United States, pointing to continued stress on Beijing\u2019s manufacturing orders and pricing power. The reduced pricing power is depicted in the nation\u2019s deflationary trend. On an annualized basis, Goods prices have declined every month since March while overall consumer prices have declined every month since September.<\/p>\n\n\n\n

The Far Reach of US Real Estate Troubles<\/strong><\/h2>\n\n\n\n

In the US, the saga of regional banks and commercial real estate surfaced again with Moody\u2019s Investor Services slapping New York Community Bank (NYCB) with its lowest possible investment grade rating. During the past few days, shares of NYCB dropped over 60% after the company disclosed that it increased its reserves for faulty commercial real estate loans, cut its dividend and suffered a $252 million net loss in the fourth quarter. The vast majority of commercial real estate loans are provided by regional banks that face the risks of property owners struggling to service debt payments as demand for their office properties weakens due to work-from-home arrangements. Other asset classes within commercial real estate are having problems as well but to lesser extents, as retail and apartment building properties contend with loftier interest rates alongside rising costs for labor, maintenance, insurance, etc. The problem isn\u2019t limited to the US. Just recently, Aozora Bank in Tokyo announced a $221 million charge for bad US commercial real estate loans, resulting in the company generating a loss in 2023. South Korea banks are believed to also have exposure to US commercial real estate and underperforming real estate in Europe. Germany is also feeling the turmoil with Deutsche Bank quadrupling its commercial debt loss provision.<\/p>\n\n\n\n

Canada Rate Cuts on Hold<\/strong><\/h2>\n\n\n\n

Canada, meanwhile, is dealing with persistent inflation while high interest rates hit the construction industry. New building permits in December dropped 14% from November, missing the expectation for a 1.8% increase. Meanwhile, in the fourth quarter, residential building construction costs increased 0.9%, following a 1.2% increase in the previous quarter. Non-residential building construction costs rose 0.7% in the fourth quarter, following a 1.3% increase in the previous quarter. The broader economy, furthermore, appears strong enough to support additional price pressure with the January Ivey Purchasing Managers Index (PMI) reaching 56.5, its highest level in nine months. A reading above 50 indicates an increase in activity. The country\u2019s central bank this week said it needs to see more data that shows that core inflation, currently at 3.5%, isn\u2019t transitory before it embarks on monetary policy loosening. Indeed, this morning\u2019s employment report saw job gains beat expectations by 22,000 while the unemployment rate dipped to 5.7% while economists were expecting an increase to 5.9%. Wages are also rising at a pace that isn\u2019t conducive to 2% inflation, with today\u2019s average hourly earnings rising 5.3% year over year (y\/y).<\/p>\n\n\n\n

\"Canadian<\/figure>\n\n\n\n

BOJ Likely to Ease<\/strong><\/h2>\n\n\n\n

The Japanese yen weakened following dovish comments from Uchida Shinichi, the Deputy Governor of the Bank of Japan. He indicated that the central bank is not looking to aggressively raise interest rates following a period of negative costs of capital. Shinichi pointed to real rates being significantly negative and monetary conditions highly accommodative, conditions that the BOJ would like to sustain. Japan, unlike other nations, is likely to remain relatively accommodative, with perhaps just a few occasional rate hikes occurring in the future. The position, however, is likely to keep pressure on the yen, as its attractiveness is impaired relative to its major counterparts. Dynamics concerning yield differentials and a stronger dollar as a result may incrementally tilt financial conditions toward the tighter side.<\/p>\n\n\n\n

Europe Economy Limps Along<\/strong><\/h2>\n\n\n\n

On Tuesday, Eurostat reported that December retail trade declined 1.1% in the euro area month over month (m\/m) and 0.8% y\/y. For calendar year 2023, the average level of trade declined 1.8%. The food, drinks and tobacco category experienced the largest decline of 1.6% while non-food products declined 1.0% and automobiles saw a 0.5% drop. Automotive fuel sales were flat. As the economy weakens and prices stabilize, expectations are growing for the central bank to cut rates. Much like the Bank of Canada and the US Federal Reserve, however, policymakers are cautiously waiting to cut rates with hopes of avoiding a second round of inflation that could result from turning dovish too quickly. In a Financial Times interview, ECB board member Isabel Schnabel noted that financial conditions have loosened, price expectations for services have increased, the supply chain is threatened by violence in the Red Sea and the labor market is resilient, all of which have intensified the debate about the timing of rate cuts.<\/p>\n\n\n\n

\"European<\/figure>\n\n\n\n

Monetary Policy Will Hinder Growth<\/strong><\/h2>\n\n\n\n

The European Central Bank and central banks of other developed countries such as Canada, the US and the UK are expected to loosen monetary policy this year. Meanwhile, various Latin American central banks have already shifted to dovish policies. Broadly speaking, economic data for developed countries has been stronger than expected, which could delay the easing of monetary policies and dampen growth in the coming months, while the lag in economic growth following the loosening of policies will be an obstacle among countries that have implemented rate cuts.<\/p>\n\n\n\n

Geopolitical Risks Intensify<\/strong><\/h2>\n\n\n\n

Geopolitical risks have escalated in recent months and could support price gains by hurting the supply chain, including the shipping of energy commodities and other products through the Red Sea. In the Israel-Hamas conflict, the multi-national Operation Prosperity Guardian established to safeguard the Red Sea hasn\u2019t entirely eliminated the risks of Tehran-backed Houthi rebels who are attacking cargo ships as a show of support of Hamas. Meanwhile, the US has been attacking various targets in Iraq and Syria that are linked to Iran\u2019s Islamic Revolutionary Guard and Iranian proxies. As the US carries out strikes, it will need to do so in a manner that doesn\u2019t widen the Israel-Hamas conflict. Meanwhile, the Russia-Ukraine war that started roughly one year ago shows no sign of abating while the US Congress continues to debate providing additional support to Ukraine. In a final note, China appears to be in an uneasy holding pattern regarding its controversial desire to annex Taiwan. So far, peace has resulted from the view that Taiwan lacks formal independence, but at the same time, formal reunification hasn\u2019t occurred.<\/p>\n\n\n\n

Earnings Reflect Tough Macro Environment<\/strong><\/h2>\n\n\n\n

A variety of economic cross currents influenced recent earnings reports as illustrated by the following examples:<\/p>\n\n\n\n