Decline in inflation as the main reason for Fed optimism

Investment Policy, February 2024

Decline in inflation as the main reason for Fed optimism

The advance of the equity and bond markets since December comes on the heels of the US Federal Reserve (Fed) signalling a potential turnaround in its monetary policy. Following its final meeting of the year, America’s central bank indicated on 13 December 2023 that it anticipates three interest rate cuts of 0.25% each in 2024. However, the financial market consensus is now expecting almost twice as many, in other words six interest rate cuts of 25 basis points during the current year. It ostensibly appears that the change in communication from the Fed comes against the backdrop of a further decline in US inflation. However, political considerations may also be playing a role in the background. It should be kept in mind that a significant weakening of the US economy as a result of interest rates remaining very high for too long would play into the hands of Donald trump and boost his chances of winning the presidential race. A key question for the equity markets will now be whether the optimism expressed in the market consensus will be potentially dampened once more by weaker economic growth. Focussing on quality in both the equity and bonds spaces will be the sensible approach in 2024.

Since the Fed indicated its expectation of three interest rate cuts in 2024 on 13 December of last year, the equity and bond markets have priced in a sense of greater optimism. Both asset classes have posted clear gains, while the futures markets and the market consensus are expecting almost twice as many interest rate cuts as the Fed itself. Economic developments have continued their previous trends without any surprises being observed over recent weeks, meaning that the US economy is growing better than that of the Eurozone. Growth in the Chinese economy remains at a below-average level relative to the previous 10 years and the Swiss economy is outperforming both the German economy and the Eurozone as a whole. The reduction in market interest rates and corporate bond credit spreads has led to an improvement in financing conditions. In principle, this is a positive development, provided there is no countermovement owing to the optimism now prevailing everywhere on the financial markets or a renewed weakening in demand for goods and services for other reasons, including mortgage interest rates that remain at historically very high levels or the emergence of new geopolitical tensions.


The equity markets are currently working on the assumption of massive interest rate cuts. This is not only true for the US, but also the Eurozone. They are also anticipating a return to significant growth in corporate earnings in 2024, with gains of in excess of 10% expected in the US. This is not least due to the dominance of highly capitalised IT and Internet stocks. The end of the period of interest rate hikes will prove positive provided inflation falls even further towards the central bank target of 2% and economic growth does not weaken significantly at the same time, instead only declining slightly, thus ensuring the global economy enjoys a soft landing. Should the economy suffer a harder landing, it is likely that the consensus expectations for corporate earnings growth will prove overly optimistic. With this in mind, our preference for Swiss equities and global high-quality stocks, which have proven their worth during past phases of slowing economic growth, remains unchanged.

The financial markets are anticipating both massive interest rate cuts and strong growth in corporate earnings.

Gérard Piasko, Chief Investment Officer


Should the global economy fail to achieve the soft landing that is now generally expected, bonds with good credit quality could make up the ground lost in 2023 in terms of their relative performance compared to equities. If economic developments are weaker than currently anticipated by the market consensus, investment-grade bonds (corporate and government bonds) are likely to be preferable to the high-yield segment. In the event of a hard landing for the global economy with corresponding negative consequences for corporate finance, it would come as no surprise if a significant increase in payment difficulties for high-yield corporate bonds were to be observed given the now clearly reduced risk premiums. At present, we continue to prefer domestic bonds denominated in Swiss francs with a good credit rating and still favour investment-grade bonds over their high-yield counterparts.


The US dollar, which has weakened against the Swiss franc and to some extent against the euro since September, is clearly pricing in US interest rate cuts. This may well speak in favour of the US dollar. However, in light of the elevated level of US debt and the very high US budget deficit, it is likely to be difficult for US President Biden to keep fiscal stimulus and thus US economic growth as high as it was in 2023, which would weigh on the greenback. Less government support for the economy can also be expected in the Eurozone, however. As is well known, Germany especially has had to reduce government spending since the decision of the country’s Federal Constitutional Court, a move that will also not offer much support for the euro. As a result, 2024 could once against be characterised by a fairly stable Swiss franc, at least in part. In particular, this would come as no surprise if political tensions were to intensify, be this in the run-up to the US elections or due to geopolitical conflicts between the US and China over Taiwan, technology rivalries or increased tensions in the Middle East.


The price of gold has been in a marked uptrend since October 2023. The initial upward movement came as a response to the increased level of geopolitical risk following the massacre of more than 1,200 civilians by the Palestinian Hamas and Israel’s military retaliation. The second part of the upward thrust is related to the reduction in US interest rates, in particular with respect to inflation-adjusted real interest rates, which have come down significantly since November. This has not only lent support to equities and bonds, but also commodities, including gold despite some consolidation. The oil price, on the other hand, has suffered from the massive increase in US oil production, a move intended to act as a counterweight to the extended cuts in OPEC+ oil production. Should tensions in the Middle East increase, however, the price of oil is likely to rise once more.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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Editorial deadline: 31 January 2024

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