Outlook for 2024 could be all about the 3 D’s – the dollar, deflation and soaring deficits…

1.The US dollar enters a secular bear market in 2024. Weighed down by growing fiscal indebtedness, rising debt servicing costs, and a complete lack of bipartisan support to rein in fiscal spending, the US dollar index sinks well below 100 with a 10% decline by year-end.

Rising US deficits, elevated government spending, and wrangles on the debt ceiling weigh on the greenback. The Fed, which led the world and hiked rates much faster and higher than other countries due to a much more insulated mortgage market, pivots and eases much quicker than most generally expect. There is a significant recovery in the euro and pound as the ECB and Bank of England are much slower to cut. After being the worst performer in recent years, the yen leads the rally amongst the major currencies.

The rise of BRICS and the rapid growth in trade outside the US dollar bloc surprises many. Collectively, the constant ebbing and decline of dollar use in global trade eat away at the greenback. By year-end, the dollar comes to be seen as the ‘redback’.

2. With US oil output surging, Saudi Arabia abandons the production cuts. To drive down prices, Saudi Arabia floods the market with crude oil to squeeze out higher-cost producers. Saudi Arabia successfully drives oil down into the low $60s, at which point higher-cost producers exit the market. Saudi Arabia regains control and market share and curtails production, lifting prices above $80 by December.

3. Tight monetary policy finally begins to take effect on the US economy, with growth slowing materially in the first two quarters of the year. The Fed is alarmed at the sharp rise in unemployment and the slowdown in consumer spending.

4. With lower oil prices, consumers are paying less at the pump. Inflation will decline rapidly next year. Falling prices and deflation in China also help drive down global CPIs. The Fed resists cutting rates initially, which risks pushing the economy into a deeper contraction. By the middle of the year, the Fed commences lowering the base rate. Rates are reduced by 125 bps next year, driving a big bond rally, particularly at the short end.

5. The US yield curve steepens and reverses the negative inversion to finish ’24 with a positive upward slope. Bonds at the shorter end of the curve perform well, especially with the Fed cutting rates by the 3rd quarter of next year. The 2yr falls towards 3%.

6. Demand remains stagnant at the long end of the curve. Supply is a big issue, given that there is no slowdown in fiscal spending. More debt needs to be rolled over at higher interest rates. Foreign appetite for US debt diminishes with Japan and China net sellers of their Treasury bond holdings. The 10yr stays above 4% next year.

Bond vigilantes become concerned that governments are up to their old tricks and spending and borrowing too much, which ultimately could see the printing presses fired up again.

7. Gold rises above US$2300 as the dollar slides. Often considered high beta gold, silver does even better and rises well above $30oz. Precious metals equities take out their 2020 highs. Cryptocurrencies also do well, with Bitcoin making a new record high. Copper breaks out and rises well above $4 per pound during the year.

With downward earnings revisions coming through on Wall Street reflecting the slowdown in the US economy, the S&P500 rolls over by the end of the first quarter. The Magnificent 7 eventually lead a selloff with valuations just too rich amidst the slowing economy. Companies cite recession fears, margin pressures, sticky labour costs, ongoing supply disruptions and waning consumer demand. Overearning by corporations in the aftermath of the pandemic finally results in a ‘payback’ on the demand side. Consumer sentiment weakens, and retail spending comes under pressure.

But the downturn is mild, and investors look through the dip in earnings and focus on the coming Fed rate cuts on the other side. The S&P500 retests support at the 4400 level before rebounding in the second half to make a new record high.

8. Climate change becomes increasingly apparent to even the harshest sceptics. The world has another one of the hottest years on record, leading to crop failure in many geographies. In democratic nations, populations take to the streets in widespread political protests. People are angry at the slow pace of progress.

The global transition path to renewables is not smooth. Renewable energy has a problem – cost. The infrastructure required to support renewables is expensive and time-consuming to roll out. Countries increasingly turn towards nuclear power and the rollout of smaller modular reactors to reduce carbon emissions and reliance on fossil fuels as climate change forces political change. Uranium spot prices surge above $120 a pound, with uranium stocks delivering double-digit gains. Silver and copper are both materials used in next-generation solar panels, and both perform well as the pressure is on to ramp up power generation from renewables.  

9. US politics have a tumultuous year. Trump wins the Republican nomination and goes head-to-head with President Biden for a monumental battle to occupy the White House. While the incumbent and former presidents prepare to fight it out in November, the ageing Joe Biden has a health scare and must withdraw from the presidential race. This opens the field for a new Democrat contender to face Trump. While there is a push within the Democrat party for Vice President Kamala Harris to be the nominee – a new contender emerges from the left of the field to secure the nomination. The US election in November is one of the most closely contested elections of all time, with a record number of people turning up to vote.

10. With higher inflation than most other countries, Australia’s RBA is forced to keep the cash rate elevated for longer to reduce inflation. The economy skirts with recession as consumer confidence evaporates during the year. By next September, there is a light at the end of the tunnel, with inflation coming down quickly in tandem with the economic slowdown.

11. A slowdown of immigration eases demand pressures on the economy but causes a 10% correction in the housing market. The stock market perks up as rate cuts draw closer towards year-end, and investors look forward to growth in ’25, which helps drive the ASX200 to a new record high well above 7625. The A$ climbs north above 73 cents during the year. UK stocks have a better year, and the FTSE also makes new record highs above 8000.

12. Tensions between China and the US improve even further as President Xi is forced to prioritise his economy and security in his own backyard. China continues extending olive branches and mending relationships with key trading partners and the US. With easing geopolitical tensions between the world’s economic superpowers, China finally stabilises the property sector, and the stock market concludes a multiyear bear market early in the new year.

13. Japanese equities have another solid year in ’24 although an appreciation in the yen weighs down exporters. The Bank of Japan moves to normalise monetary policy in the first half and scrap NIRP. Whilst the cash rate is still kept low, the JGB 10-year yield rises well above 1% during the year, placing upward pressure on the yen. Bank stocks continue to do well. Global investors see Japanese equities in a different light and upweight the TOPIX/Nikkei, which drives relative outperformance in the stock market.