2024: Q4 Macro Review

Macro Review – Q4 CY 2024

Global Markets

Global equities fell in Q4 due to the Fed’s reduced 2025 rate cut projections (two, down from four), reversing November’s Trump-driven rally. Trump’s election win fueled hopes of deregulation and tax cuts, but his protectionist stance sparked concerns. Resilient economic data and declining rates contrasted with diverging central bank policies: the Fed turned hawkish, while the ECB signaled further rate cuts. Eurozone business activity neared expansion, but manufacturing struggled. Germany’s government collapsed, France changed premiers, and Japan’s ruling coalition lost its majority. Geopolitical risks remained high with ongoing wars and regime change in Syria.

Fixed income markets declined as sovereign yields rose, led by the US and UK. Commodities gained 3.8%, driven by energy and agriculture, while metals lagged.

United States

US equities (S&P 500 Total Return Index) performed well in Q4 2024, gaining 2.4% and achieving a 25.0% annual return, the fifth consecutive quarter of positive returns. Mega-cap tech companies led growth stocks to outperform value stocks. Economic data showed continued expansion, with 3.1% annualized GDP growth in Q3, driven by consumer spending. However, December saw stocks retreat after the Fed’s projections indicated a less aggressive path for 2025 rate cuts, with only 50 bps expected, down from 100 bps.

December’s CPI report offered some relief, with Core CPI (excluding food and energy) rising a milder-than-expected 0.2% MoM (3.2% YoY, down from 3.3% in November). Headline CPI met expectations at 0.4% MoM and 2.9% YoY (up from 2.7% in November). Q4 economic data showed a healthy economy with some labor market moderation. November saw 227,000 new jobs, a slight unemployment uptick to 4.2%, and increased jobless claims. Consumer spending remained strong (retail sales +0.7%, personal spending +0.4%). Consumer confidence peaked then dipped in December due to tariffs. Home sales improved despite high prices and rates. Small business optimism hit a 3-year high. Manufacturing neared expansion, while services boosted the Composite PMI to a 33-month high.

In December, the FOMC lowered the Federal Funds rate by 0.25%, totaling a 1.0% decrease for the year, top end now stands at 4.5%. Projections suggest further cuts to 3.9% in 2025 and 3.4% in 2026. Corporate earnings surpassed expectations, with S&P 500 companies’ Q3 earnings up 5.8% YoY. Analysts forecast a robust 11.9% growth for Q4.

In Q4, the 10-Y Treasury yield rose 79 bps to 4.57%, and the 2-Y yield increased 59 bps to 4.24%. This yield increase caused bond prices to fall, leading to a 3.1% decline in the Bloomberg US Aggregate Bond Index (Agg).

S&P 500 performance in Q4 and CY 2024: In Q4, 4 out of 11 sectors had positive results. Consumer discretionary led with a 14.3% gain, driven by automobiles (+49.2%) and retail (+17.4%). Communication services (+8.9%) and financials (+7.1%) also outperformed. Materials (-12.4%) and healthcare (-10.3%) were the worst-performing sectors, with healthcare providers & services (-14.7%) and pharmaceuticals (-9.9%) dragging down the sector. Real estate (- 7.9%) and utilities (-5.5%) also lagged.

  In 2024, Large-cap stocks significantly drove the S&P 500 performance. While smaller companies delivered respectable returns around +10%, they underperformed relative to the index. Mid-cap stocks returned +12%, while small- and micro- caps achieved +10% and +12%, respectively. This concentrated rally meant that less than 30% of S&P 500 companies outperformed the index for the second consecutive year, well below the 49% average since 2000.

The US economy demonstrates resilience, driven by rising real wages, falling interest rates, and constant innovation. Tax cuts and deregulation promise further growth, while protectionism could provide near-term benefits to US industry, potentially broadening earnings growth beyond Magnificent Seven.

The US economy presents both opportunities and challenges. While current conditions are favorable, potential risks associated with the administration’s policies, such as rising debt and inflation, cannot be ignored. With the IMF projecting 2.7% GDP growth in 2025, a balanced approach is necessary. Navigating the potential headwinds ahead will require both a steady hand from the Fed and a watchful eye from investors.

Europe

European equities fell by 2.8% in Q4. The Eurozone economy grew by 0.4%, beating expectations of 0.2%. However, 2025’s outlook is uncertain due to industrial challenges, potential US tariffs, and slowing Chinese demand. The HCOB Flash Eurozone Composite PMI showed near-expansion in December, driven by services growth, but manufacturing remained weak. Germany and France’s performance hindered overall business activity. Despite a record-low 6.3% unemployment rate in October, December saw the fastest employment contraction in four years.

The ECB cut rates for the third consecutive time and shifted focus from inflation control to economic growth risks. Eurozone core inflation stayed stable at 2.7%. STOXX 600 companies’ Q3 earnings are projected to rise by 7.8% year- over-year. Eurozone manufacturing contracted further in December, with declining orders, output, purchasing, and inventories. Input costs were stable, and output prices fell. Business confidence improved slightly. Services saw modest growth, but with rising input costs and output prices.

Germany and France faced political turmoil, adding to economic and security uncertainties. Germany (+1.6%) is set for early elections in February after Chancellor Scholz lost a confidence vote. The ZEW Indicator of Economic Sentiment rose due to falling interest rates and expected accommodative policies, but Germany’s current economic assessment worsened.

The UK (-0.2%) economy contracted by 0.1% in October, the second consecutive month of decline, as Chancellor Reeves introduced an expansionary budget seen as inflationary. The S&P Global Flash UK PMI Composite Output Index showed a slight increase in UK business activity in December, but employment fell at the fastest rate since January 2021. In France (-3.2%), President Emmanuel Macron appointed his long-time ally François Bayrou as prime minister to stabilize the political situation following the collapse of Michel Barnier’s government.

China

October markets retreated after September’s stimulus announcements, awaiting key events. A brief rally followed PBoC action and positive PMI, but equities still fell 5% for the month. November saw further declines due to US elections and weak stimulus. December brought partial recovery as markets anticipated policy signals from the Central Economic Work Conference and Politburo meeting.

Leadership shifted to a “moderately loose” monetary policy and called for “more proactive” fiscal policies, though stimulus focused on expanding existing programs rather than significant cash handouts. Falling bond yields suggest deflationary concerns. The MSCI All China Index rallied 1.5% in December but finished Q4 down 7.0% in USD terms.

Emerging Markets

Emerging market equities fell 4.2% in Q4, with Latin America (-7.8%) leading the decline, followed by Asia (-4.5%; excluding China -3.8%) and EMEA (-0.4%).

• Asia: US tariff threats loomed. South Korea (-9.0%) saw its president impeached after imposing then revoking martial The central bank announced liquidity measures after downgrading growth forecasts. Taiwan (+7.1%) exports rose 9.7% y-o-y in November, and the central bank raised its 2024 growth forecast to 4.25% (from 3.82%).
• India: In India (8.7%), economic growth slowed to 5.4% in Q3, a seven-quarter low. This was primarily due to weaker performance in the manufacturing and private consumption sectors. The fiscal year 2025 GDP growth forecast was lowered to 6% (from 7.2% in October) by the central bank. The cash reserve ratio was also reduced by 50 bps, now stands at 4%. CPI slightly eased to 5.22% YoY in December from 5.48% YoY in November.
• EMEA: OPEC+ delayed its oil output hike and extended production cut unwinding. Saudi Arabia (-1.3%) planned 2025 spending cuts due to oil price pressures, though non-oil activity was The central bank cut rates by 25 bps to 5%. South Africa (-3.6%) saw Q3 output unexpectedly fall 0.3%, and rates were cut by 25 bps to 7.75% as inflation slowed. The UAE (+9.0%) announced plans to reduce oil shipments in 2025.
• Latin America: Brazil (-10.0%) raised rates by 50 bps in November and 100 bps in December, signaling further 100 bps hikes. The Brazilian real weakened, and stocks fell due to deficit concerns (9.5% of GDP). Mexico (-5.0%) declined amid Trump’s tariff threats, though the central bank cut rates by 50 bps, signaling more Peru (-9.1%) saw inflation rise to a five-month high (2.27% in November), but the central bank held its key interest rate at 5%.

Pacific Basin

Pacific Basin equities rose 3.6% in Q4.

• Australia (-0.7%): RBA held rates at 35% despite slow growth (Q3 GDP up 0.8% YoY), sticky inflation, and tight labor. Core inflation accelerated to 3.5% in October. Strong November job growth and low unemployment (3.9%) lessened rate cut expectations. RBA board was split into policy and operational committees.
• Japan (+5.9%): Despite rising inflation (core CPI up 2.7% YoY in November), BOJ held rates steady in December, hinting at a possible January ¥21.9 trillion (US$ 141.7 bn) stimulus package approved. Q3 GDP growth slowed to 1.2% from 2.2% in Q2. Ruling coalition lost its parliamentary majority.
• Hong Kong (+19.3%): Q3 GDP growth moderated to 1.8% year-on-year (3.2% in Q2), with 2.6% growth for the first three quarters as a The unemployment rate remained low at 3.0%. Underlying inflation was modest at 1.1% year-on-year (1.0% in Q2). Market sentiment improved after US rate cuts and mainland support measures.
• Singapore (+8.6%): Q4 economic growth (4.3% year-over-year) beat estimates of 8%, and core inflation fell to a three-year low of 1.9% year-over-year in November, potentially paving the way for easier monetary policy in 2025. Even so, the government remains cautious about 2025 due to possible US tariff risks.
• New Zealand (+6.8%): Economy entered recession with Q3 GDP contracting 1.0% QoQ, increasing pressure for more aggressive rate cuts.

Commodities

Energy (+7.5%) rallied, with crude oil, heating oil, gasoline, and gas oil surging on geopolitical production disruption fears, OPEC+ output delays, declining stockpiles, and strong US demand. Colder weather and increased Chinese import quotas further boosted oil prices. Natural gas (+5.9%) surged due to a tighter global market, limited LNG supply growth, pipeline flow changes, and weather-driven demand.

Industrial metals (-7.5%) fell, with nickel, copper, lead, zinc, and aluminum all lower. A stronger US dollar and seasonal slowdown in activity weighed on prices. Precious metals (-1.1%) declined. Silver and gold fell after the US election, as tariff and immigration policies could fuel inflation.

Agriculture & livestock (+3.1%) rose. Cocoa (+56.4%) soared to a record high on West African weather concerns and a global deficit. Coffee (+19.9%) surged due to a Brazilian drought and poor Vietnamese harvesting conditions. Feeder cattle (+9.9%) rallied on potential Mexican import restrictions. Wheat, cotton, and sugar declined on improved supply, ample inventory, and a strong dollar.

Currencies

The US dollar strengthened in Q4 on expectations of growth-boosting, inflation-lifting policies. Among G10, the New Zealand dollar, Australian dollar, and Japanese yen underperformed, partly due to China’s manufacturing slowdown. The yen hit a five-month low. EM currencies were broadly weaker, with the Brazilian Real (reaching an all-time low on spending concerns), South Korean Won (hitting a 15-year low on Fed policy and political uncertainty), and South African rand leading the losses. Indian rupee weakened (-2.1%) against USD due to FPI outflows and higher hedging.