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Economic Tides Turning

The US financial landscape is on the brink of change as companies, governments, and investors with debt await a potential shift in central banks' strategies in 2024. Following an aggressive round of interest rate hikes in 2023, there's a collective hope for a more lenient approach to borrowing costs to sidestep a challenging economic landing. This adjustment is prompted by a global economic slowdown, indicated by the weakest consumer price gains for advanced economies  in two years. The critical question revolves around whether the upcoming inflation readings will allow central banks to pivot seamlessly. If this doesn’t happen, a delayed shift raises concerns about heightened negative impacts on businesses, households, and the overall economy. Not to mention increasing debt volumes causing additional financial strain. Investors are closely scrutinizing central bank meetings for signs that a monetary policy shift could sway the global economic outlook.

The Fed’s Forecast

The Federal Reserve is currently awaiting the November report on consumer prices. If prices remain stable, there's a possibility of considering interest rate cuts. This is due to a significant drop in short-term inflation expectations. Recent months have seen inflation slowing down more than anticipated, leading to discussions about potential rate cuts in the coming year. While the Fed welcomes this slowdown, they're proceeding cautiously, taking into account challenges in reaching the 2% inflation target. If the upcoming report aligns with expectations, the Fed may opt for rate cuts to manage economic risks. Disinflation trends are anticipated to persist, particularly in rental prices throughout 2024, with analysts projecting core Consumer Price Index (CPI) inflation hovering just below 3% in Q1 2024, assuming an economic cooldown. This disinflation is likely unless the job market experiences a more rapid slowdown.

BOJ’s Rate Dilemma

The Bank of Japan (BOJ) is taking its time with any changes to the negative interest rate situation this December. Reports suggest they're holding off until they see more convincing evidence of wage growth that indicates "sustainable inflation" before making any major moves. As a result, the upcoming two-day policy meeting ending on December 19 may not bring the anticipated shift, contrary to recent market speculation. In response to this news, the yen experienced a roughly 1% decline against the dollar, with Nikkei futures gaining some ground. Keep an eye on the Federal Reserve's policy outlook and the specifics from the imminent BOJ meeting for a clearer picture. Present market assessments give an 8% probability of a rate hike in December, while full policy normalization remains a possibility by the end of April.

Oppenheimer Predicts Stock BOOM

Wall Street bull, John Stoltzfus, predicts that the S&P 500 will reach 5,200 points in 2024, marking nearly a 13% gain from last Friday's close and pushing the index more than 8% above its current all-time high. Stoltzfus, who accurately forecasted this year's rally, is expecting the Federal Reserve to shift from a restrictive to an easier monetary policy stance in 2024. Despite a correct 2023 rally call, his previous forecast for the S&P 500 hitting 4,400 points fell short of the current benchmark level. The 2024 target is based on expectations of 9% earnings growth and a price-to-earnings ratio multiple of around 21.7, aligning with the current valuation level. Expectations of a soft landing for the US economy in 2024 are driven by a resilient consumer and job market, slowing inflation, and more dovish central bank rhetoric. Meanwhile, Stoltzfus is less optimistic about the bond market's current pricing, which suggests Federal Reserve interest rate cuts in the first half of 2024. He sees this as "too rosy" and expects the Fed to delay rate cuts until at least the second half, potentially as late as the fourth quarter if inflation proves persistent.

Billionaires Flock to Abu Dhabi

Abu Dhabi has become a favored haven for billionaires seeking to safeguard their wealth, with over 5,000 Special Purpose Vehicles (SPVs) established in its international financial center. Notable high-net-worth individuals, including crypto mogul Changpeng "CZ" Zhao, the Adani family, hedge fund billionaire Ray Dalio, and Russian steel magnate Vladimir Lisin, have set up SPVs in Abu Dhabi. An SPV is a dedicated legal entity formed for specific purposes, often temporary. The emirate's attractiveness lies in its financial safeguards, benefits from the UAE's double tax treaty network, and the potential for long-term residency and passports. Abu Dhabi's SPVs offer confidentiality to wealthy individuals. Its strategic location, policy stability, and proximity to capital make it an appealing alternative to traditional havens like the Cayman Islands and the British Virgin Islands. This shift positions Abu Dhabi as a growing wealth hub, reflecting global trends in wealth protection, with the potential for job creation and economic development in the region and beyond.

Occidental on Purpose

Occidental Petroleum has entered into a cash-and-stock deal valued at about $10.8 billion to acquire Texas shale driller CrownRock LP, marking Occidental's largest purchase since its takeover of Anadarko. The deal is expected to close in the first quarter of 2024 and reflects a broader trend in the oil sector, where companies are consolidating to secure new drilling sites amid a maturing North American shale sector. CrownRock, the third-largest closely held oil producer in the Permian Basin, complements Occidental's existing assets gained from the Anadarko takeover. The deal also includes Occidental assuming $1.2 billion in debt held by CrownRock, giving it an enterprise value of approximately $12 billion. Occidental plans to increase its dividend by 22% and initiate a $4.5 billion to $6 billion divestiture program to reduce debt.

An ‘Epic’ Legal Battle

This week in a San Francisco court, a jury sided with Epic Games., declaring Google's app store practices both “anticompetitive” and comparing it to a monopoly. This decision challenges the prevailing app store model, where commissions of up to 30% are levied on developers. Epic Games accused Google of imposing its billing system on developers and engaging in anticompetitive conduct. The jury found Google guilty, stating it harmed Epic and violated fair business practices. The potential impacts include changes in the app store ecosystem that may lead to better terms, increased options, and more access for developers, thereby improving app experiences and possibly lowering costs for consumers too. On a broader scale though, the verdict prompts major tech companies to reassess their app store practices, with potential repercussions for the entire $200 billion app store industry

Bond Market Shift 

Prominent U.S. bond forecasters, including experts from Goldman Sachs and BMO Capital Markets, are advising caution, signaling that the year-end rally might not extend into 2024. Projections indicate a potential increase in the 10-year Treasury yield to around 4.5% by the end of the next year. Analysts contend that markets could be underestimating the economy's robustness and the lingering pressures of inflation, aiming to avoid past forecasting pitfalls. Recent indications of an economic slowdown contributed to a substantial gain in the U.S. bond market last month, hinting at a possible shift in interest rates with implications for borrowing costs and investments. In a broader context, these forecasts underscore the risk of prematurely discounting the Federal Reserve's potential decision to maintain elevated rates until inflation is effectively managed, potentially impacting global markets.

Big Impacts on Small Businesses

In the U.S., small businesses are playing it safe, despite ongoing customer spending and a reluctance to talk about a possible recession. The November survey from the National Federation of Independent Business shows that small business owners are persistently wary about future business conditions, citing concerns about inflation, softening sales, and worker shortages. 

These 33 million small businesses, responsible for two-thirds of job growth over the past 25 years, serve as crucial indicators of economic health. With rising interest rates due to Federal Reserve hikes, business owners are worried, leading to more cautious spending among consumers. Small-business optimism is at a six-month low, with about a third reporting a significant drop in earnings in the past three months. This cautious stance by small-business owners may signal a broader economic slowdown, impacting consumer confidence and spending habits. Small businesses, often seen as economic indicators, facing challenges due to high borrowing costs, might contribute to a more substantial economic downturn, affecting broader economic trends.