Finimize - ⏪ A look back at 2023…

👀 What happened in 2023?

• Three lenders joined the ranks of the biggest US bank failures.
• The US economy defied predictions for a major slowdown.
• Fitch Ratings stripped the US of its top-tier national debt rating.
• The Federal Reserve (the Fed) signaled that it would begin cutting rates in 2024.
• China’s 2023 growth target was the lowest it’s been in over three decades.
• India surpassed China as the world’s most populous country.
• OPEC doubled down on oil supply cuts.
• An AI frenzy helped propel the Nasdaq 100 toward its best year in over a decade.

✍️ What does all this mean?

Higher interest rates resulted in some deep bond portfolio losses, including for banks. Silicon Valley Bank (SVB) collapsed after its customers yanked out their cash amid rumors about its troubled financial position. Spooked by the news, customers withdrew their funds from Signature Bank, leading to a loss of 20% of its deposits mere hours after SVB's collapse – a critical blow that eventually led to its failure too. Then, months later, US regulators shut down First Republic, which had seen its deposits dwindle as its business model (providing cheap mortgages to wealthy customers) was upended by rising interest rates. The three lenders now rank among the top five biggest US bank failures since 2000.

Against all odds, the US economy defied predictions for a major slowdown in 2023. In fact, in the most recent quarter, it grew at its fastest pace in nearly two years. The key driver of this resilience was strong consumer spending, thanks to the surplus funds that Americans accumulated during the pandemic. That excess cash, which at its peak hit $2.3 trillion, allowed folk to continue spending despite sky-high inflation, shielding the country from a potential recession even after the Fed hiked interest rates more aggressively than it had in four decades. However, those extra savings are diminishing, with an estimated $1.1 trillion remaining, according to JPMorgan.

Fitch Ratings stripped the US of its top-tier government debt rating in August, criticizing the country’s ballooning deficit and an “erosion of governance” that’s led to repeated clashes over the debt ceiling in the past two decades. The cut took the US’s credit rating down one level, to AA+ from AAA, just two months after political confrontations nearly pushed the economy into default. Fitch’s decision echoed a move made more than a decade ago by S&P Global Ratings.

The Fed, acknowledging the country’s much-lower inflation but emphasizing that the battle wasn’t over, kept borrowing costs unchanged at its last three meetings of the year. And in December, it clearly hinted that it’s reached the end of its interest rate hikes, and could cut them three times next year. The central bank’s decision-makers see the benchmark lending level dropping to about 4.6% in 2024, and as low as 3.6% in 2025 – far lower than the current 5.4%. That message got markets partying like it’s 1999.

China officially set an underwhelming economic growth target of “around 5%” for 2023. The objective – set early in the year – was the lowest in over three decades and down from last year’s goal of 5.5%. Economists were expecting (and investors were hoping for) a goal of above 5%. But many people guessed that the country had purposely set a conservative target that would be easier to meet, after falling far short of its goal the previous year. The IMF certainly believes that the target is achievable: it recently increased China’s 2023 growth forecast to 5.4% on the back of stronger policy support from the government.

India surpassed China as the world’s most populous country in April, in a pivotal moment for the two neighbors and geopolitical rivals. The two are a study in contrasts: while China’s population is aging and shrinking, India’s is younger and growing. And most – about two-thirds of people in India – are of working age (between 15 and 64 years old), so the country can produce and consume more goods and services, and drive more innovation. That’s why India is poised to become the world's fastest-growing major economy – projected to surpass both Japan and Germany in size by 2027, securing its position as the third-biggest economy globally.

Central banks that were trying to fight inflation didn’t need any more obstacles, but it’s exactly what they got in April after OPEC announced plans to cut oil output by 1.66 million barrels per day (BPD) from May until the end of the year. The pledge came on top of previous trims to production announced in 2022 and brought the total volume of cuts by OPEC to 3.66 million BPD, or 3.7% of global demand. A couple of months later, Saudi Arabia made a unilateral decision to shrink output by an additional 1 million BPD from July. Russia soon joined with a voluntary supply reduction of 500,000 BPD, with both countries recently announcing that they’re rolling those cuts over into the first quarter of 2024.

The world's leading tech firms propelled the Nasdaq 100 index to its best year in over a decade, as enthusiasm for AI outweighed concerns about the effects of higher interest rates in 2023. The seven biggest tech and internet-related stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla – saw their combined weighting in the S&P 500 rise to a record 29% in November. Investors gravitated toward these companies, betting on their superior ability to leverage AI given their huge scale and financial heft. As of mid-December, the cohort had contributed to approximately two-thirds of the S&P 500’s 23% rise in 2023.

🔍 Year-end focus: the global monetary tightening cycle

Central banks in the US, the UK, the eurozone, Japan, and Switzerland all started keeping interest rates unchanged in late 2023. And that led the chief global economist at consultancy Capital Economics to declare that “the global monetary tightening cycle has ended”. Put differently, central banks worldwide are nearly ready to hang up their hiking boots. And, look, this conclusion wasn’t based on some gut feeling: for the first time since the end of 2020, more of the world’s 30 biggest central banks were expected to cut rates in the final quarter of 2023 than raise them, the firm found.

The shift in stance among major central banks didn’t just happen: prices cooled way down in many parts of the world throughout this year. In November, the annual inflation rates in the US, eurozone, and UK were 3.1%, 2.4%, and 3.9%, respectively. Those are all still above their central banks’ 2% targets, sure, but consider just how far they’ve fallen: in January, inflation in the US, eurozone, and UK was running at 6.4%, 8.6%, and 10.1%, respectively. So they’ve made huge progress in cooling consumer prices. And now it’s onto the next task: making sure those economy-crushing, high interest rates don’t stick around for longer than necessary. That’s why you should brace for lower interest rates in the new year.

📅 The week ahead

• Leftovers
• Family arguments
• Hangovers
• Make New Year’s resolutions that you won’t keep

Stay classy ✌️

Your Finimize Analyst team