Financial markets entered 2024 with a strong sense of optimism after robust performance across a range of asset classes. That mood was tested in April, when the Federal Reserve kept its benchmark interest rate unchanged while inflation readings were rising. The decision was poorly received, sentiment reversed, and volatility and profit-taking increased. Markets recovered fairly quickly, helped by strong corporate earnings reports, and indices traded higher in May and June. In US equities, the S&P 500 fell 4.2% in April and had risen to approximately 15% for the year by the end of June.
On the economy, US inflation, which had spiked in April, eased in the following months. Goods inflation turned negative, while services inflation remained persistent, driven mainly by high rents. The report linked this to pressure on real disposable incomes and to very low savings rates among US households. The European Central Bank and the Swiss National Bank had already begun to cut interest rates, while the Federal Reserve had not yet done so.
Europe followed a different path from the US. The European economy was gradually recovering from a technical recession, Germany had returned to slow but positive growth and Italy had posted strong figures. France and the UK faced weak activity and substantial budget deficits, and the report noted that France had exceeded the Maastricht criterion of a 3% budget deficit for the fifth consecutive year. Upcoming elections in both countries added uncertainty. In China, GDP data for the latest quarter were robust, although problems in the property market persisted despite government support measures. Geopolitical risks remained high. Commodities, which had been strong until April and May, corrected afterwards.
In fixed income, global high yield bonds performed well in the first half of the year, helped by their shorter durations and lower sensitivity to interest rate movements, and emerging market debt issued in hard currencies also delivered positive performance. The report also set out an outlook for the second half of 2024, covering monetary policy, equity valuations and geopolitical uncertainty.
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