ECB expected on hold again, China ready for new stimulus and high-yield debt on the radar.

12 January 2024

Executive summary

This week, we look at three important issues:

  • ECB expected on hold again and pushing back on early rate cuts. At its next meeting on 25 January we expect the ECB to keep the deposit rate at a highly restrictive 4.0% for the third time in a row as the disinflation trend continues. Our projection is for a first rate cut in July (-25bps) as the Governing Council shows reluctance to cut rates prematurely, particularly given upside risks from real wage growth – expected at more than 2% annually for around two years – and potential upcoming supply-chain disruptions should the Red Sea crisis last for more than three months, which will push Eurozone inflation above 3%.
  • China: ready for new stimulus. China’s 2023 GDP growth came in at +5.2% as we expected, exceeding the (easy) official target but reflecting weaknesses, including stubbornly low consumer confidence and the real estate slump. Further policy easing is needed in 2024 to restore confidence. We expect GDP growth to muddle through to +4.6% this year. Emerging industries and advanced manufacturing (new energy vehicles, renewable energy, batteries, industrial robots to name the best performing) could become more sustainable growth drivers in the long run, but they are not large enough for now and further development will face challenges.
  • US high-yield debt on the radar. The US high-yield corporate market is drawing substantial capital, driven by revised policy expectations and a more resilient economic outlook, compressing spreads and raising overvaluation concerns. While corporate fundamentals, rating agency trends and manageable refinancing needs in 2024-25 offer some support, global uncertainty and the high downside risks to the current economic environment should be considered. Our models suggest a modest spread widening in 2024 (~400bps, in line with 2023 levels) but the market should remain appealing for risk-tolerant investors due to relatively high yields.

Ludovic Subran

Allianz SE

Françoise Huang

Allianz Trade

Jordi Basco-Carrera

Allianz SE

Bjoern Griesbach

Allianz SE