Executive summary
This week, we look at three important issues:
- First, Red Sea crisis: not a red flag for the global economy (yet). Houthi attacks in the Red Sea have disrupted a vital trade route, leading to costlier and time-consuming rerouting around Africa. Shipping prices, including container freight, surged by +240% since November 2023, reaching levels seen in Q4 2022, but well below the 2021 peak for now. Short-lasting disruptions would contain the impact on the global economy. As demand in the US and Europe is –10% below those levels, stocks remain high and industrial firms’ margins have room to absorb rises in input prices. However, if the crisis persists for several months, a doubling of shipping prices would push global inflation up by +0.5pp, resulting in a -0.4pp reduction in GDP growth. Energy prices are the most vulnerable factor, as 12% of seaborne oil and 8% of liquefied natural gas pass through the Suez Canal, causing energy prices in Europe to remain highly volatile.
- Second, US inflation – back to the Fed’s target in 2024 ? The December CPI data was stronger than expected. Nevertheless, forward-looking indicators on food and shelter inflation appear encouraging. With wages expected to keep growing strongly in 2024 (though easing from 2023) our analysis suggests that a mere 0.3pp drop in corporate margins could bring inflation to around 2.3%, broadly aligning with the Fed’s target. This seems achievable, considering corporate margins currently stand well above the pre-pandemic implied trend and amid a slowing US economy.
- Third, the Taiwanese head to the polls this Saturday to elect a new president and parliament. Apart from domestic concerns, these elections involve high stakes for Taiwan’s relationship with China, US-China tensions and global supply chains. Recent polls indicate that the more China-sceptic candidate, Lai Ching-te, will likely win the presidential election. Nevertheless, cross-strait tensions should be contained (at least in the short-term) with the opposition likely snatching a majority in parliament.
- Fourth, everything is higher all at once – capital markets posted strong returns in the final quarter of 2023 due to a sudden optimism about faster rate cuts. This shift followed dovish central bank meetings and a rapid disinflation trend. However, valuations for bonds and equities appear stretched, raising concerns for 2024, especially if central banks fail to deliver the number of cuts currently priced in by the markets. We still expect positive but considerably lower returns amid heightened volatility.