EUROPE

According to data from Eurostat, economic growth across the Eurozone declined (-0.1% quarter over quarter) in the third quarter, as the region faced headwinds from inflation, rising interest rates, and tightened fiscal policies.  Among the larger economies, France, Spain, and Belgium experienced growth while Germany contracted from persistent inflation, high energy prices, and weak foreign demand.  Forward-looking economic indicators weakened for the region; the HCOB's final Composite PMI came in at 47.0.  Manufacturing activity continued to contract and demand for services declined as consumers pulled back on spending.  However, there was some signs of improvement in the manufacturing sub-indices tied to new orders and purchasing activity.  Additionally, Eurozone unemployment remained at a record low of 6.4%; employment increased in both services and construction, offsetting weakness in the manufacturing sector. Overall, job vacancy rates have come down from their peaks but remain relatively high by historical standards.

After declining for much of the past year, the rate of inflation across the Eurozone rose to 2.9% in December. The uptick in inflation was primarily due to technical factors, as the impact of base effects and the timing of government subsidies overwhelmed slower price growth for other goods. (Note, core inflation, which doesn’t include energy, food, alcohol, and tobacco prices, ended the year at 3.4%, down from its 2022 peak.) In its last meeting of the year, the European Central Bank (ECB) reaffirmed its benchmark interest-rate policy and announced plans to phase out the last of its COVID-19 era bond-buying programs. The ECB also changed its language around inflation—from describing it as “expected to remain too high for too long,” to saying that it will “decline gradually over the course of next year.”  In her statements following the meeting, ECB President Christine Lagarde assumed a more measured tone and argued against calls for imminent cuts to interest rates, stating that it’s too early to “lower our guard” and that the bank is “data dependent, not time dependent.”

CHINA

China’s economic data in Q4 2023 presented a mixed picture.  Industrial output experienced a significant rebound, growing by 4.6% (year on year) in October and an impressive 6.6% in November.  This growth—the fastest pace since February 2022—underscored the sector’s recovery and contribution to the economy.  On the other hand, already affected by a downturn in the property sector, reduced land sale revenue, and a slowdown in export manufacturing, consumer spending was further impacted by household deleveraging.  Credit cards and mortgage loans saw a decline, indicating caution among consumers.  Overall spending remained below pre-COVID levels, suggesting a slow and gradual path towards recovery.

In response to the property market's challenges, the Chinese government rolled out several initiatives, including reducing down-payment thresholds and mortgage interest rates, and easing restrictions on second-home purchases.  Such measures were designed to ease financial pressure on homebuyers and stimulate market activity.  Another notable development was the provision of low-cost financing, amounting to CN¥1 trillion, for urban village renovations and affordable housing projects.  This significant investment is intended to support the real-estate sector, a critical component of China's economy.  Early indications suggest a positive reception from homebuyers, particularly in major cities, signaling a potential upturn in the real-estate market.

The November 2023 meeting between Chinese President Xi Jinping and US President Joe Biden was a landmark event.  Key topics included curbing illicit fentanyl production and military cooperation, alongside a dialogue on artificial intelligence emphasizing the importance of managing risks and safety issues.  Described as ‘constructive and productive,’ the meeting underlined both leaders' desire for peaceful coexistence and the necessity of avoiding miscommunication.  While it did not resolve all critical geopolitical issues, the meeting was viewed as a positive step towards stabilizing US-China relations.  The meeting's conciliatory tone and focus on cooperation in specific areas signaled a potential easing of the strained relations between the two nations.

JAPAN

Japan’s economy contracted at an annualized growth rate of 2.9% in the third quarter, as a decline in private consumption, which makes up more than half the economy, weighed on economic growth. Although nominal salaries rose year over year, higher prices and inflation wiped out the wage growth in real terms, negatively impacting consumers' purchasing power. In November, Prime Minister Fumio Kishida’s administration announced a new economic stimulus package (approximately $113 billion), aimed at helping households with rising costs. The packages included cuts to income and residential taxes, direct benefits to low earners, extended fuel and electricity subsidies, and funds to support the semiconductor sector.

Japanese business sentiment continued to improve during the quarter as measured by the Tankan survey.  Results were especially strong among large manufactures; automakers' moods brightened as the industry benefited from a weak yen and an easing of supply constraints.  Non-manufacturing sentiment was positive as well, improving for the seventh straight quarter; recovering inbound tourism gave a significant boost to non-manufacturers.  Year to date through November, foreign visitors to Japan topped 20 million for the first time since 2019.

December data showed consumer core inflation trending downwards.  Energy and fuel prices declined due to a combination of government subsidies and base effects.  However, services inflation persists, driven primarily by demand for accommodations and food.  The Bank of Japan (BOJ) ended the year with its low-interest polices in place.  In his statement following the BOJ’s December meeting, Governor Kazuo Ueda cooled speculation about future rate hikes, stressing that more data is needed to confirm a positive wage-inflation cycle and the uncertainty surrounding inflation’s sustainability.

COMMODITIES

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter down with a total return of 10.73%, driven mainly by price gains for industrial metals and precious metals failing to offset weaker prices for energy, agriculture, and livestock.  Contrary to Q3 2023, energy (16.74%; S&P GSCI Energy—SPGSEN) underperformed all other SPGSCI sub-index constituents, with sharply lower prices for crude oil, natural gas, and gas oil.  These detractors to performance occurred despite output cuts from OPEC+. Agriculture (0.73%; S&P GSCI Agriculture—SPGSAG) ended the quarter with higher prices for soybeans, coffee, wheat, and cocoa failing to offset considerable price declines for sugar, corn, cotton, and Kansas wheat.  The precious metals segment outperformed all other commodity constituents during the quarter (10.99%; S&P GSCI Precious Metals—SPGSPM), as both gold and silver achieved robust price gains during Q4 2023.  The industrial metals segment realized a modest gain during the quarter (0.82%; S&P GSCI Industrial Metals—SPGSIM), as prices for aluminum, copper, and zinc offset weaker prices for nickel and lead.   

Following a relatively quiet period in Q2/Q3 2023, the digital-assets market performed well during Q4.  The premier digital token, Bitcoin, was up 57% in Q4 2023, while the second most-popular digital token, Ethereum (ETH), was up 37%, bringing the yearly returns to 155% and 91%, respectively.  Speculation over the approval by the Securities and Exchange Commission (SEC) of a US spot Bitcoin exchange-traded fund (ETF) was a significant driver of price movements during the period; this was subsequently approved in January 2024.