Important note from the ECB Minutes released today. The ECB is looking to push back against the market's rate cut expectations for 2024. Members expressed concern that rates falling too low could ease financial conditions too much as the disinflation job is not finished. Directly from the Minutes:

"Concern was expressed that the sharp market repricing threatened to loosen financial conditions excessively, which could derail the disinflationary process... it was widely regarded as important not to accommodate market expectations in the post-meeting communication."

It looks like they are following through. ECB member comments at Davos have been hawkish for the most part. I expect some repricing in euro equities in Q1.

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Emerging markets are largely cheap compared to US markets, and this is mainly because of China. As a value play, it is probably better to diversify away from being solely exposed to Chinese equities with general EM exposure instead.

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UK Defense Secretary Shapps yesterday: "Now is the time for all allied and democratic nations across the world to ensure their defense spending is growing."

It's hard to see a world where the defense industry doesn't outperform the market in 2024.

$XAR https://seekingalpha.com/news/4054999-uk-warns-of-world-entering-pre-war-phase-marking-end-of-peace-dividend

Some good macro news for UK stocks today:

Bottom Line: Improvements in inflationary pressures will give the Bank of England more leeway to cut rates and ease monetary conditions which is naturally favorable to equities.

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Two Chinese PMIs came in over the weekend, the S&P and NFLP (this one is put out by China's statistical bureau). The results of the two were slightly contradicting.

The recovery in manufacturing has continued for the last 4/5 months, but it is marginal at best. The soft recovery comes from weak export business (6-month low). The domestic recovery has helped production increase, but it hasn't done much to improve hiring sentiment. However, in general, the outlook for the new year seemed to be good: "Chinese manufacturers anticipate production to rise over the course of 2024 amid forecasts of firmer global demand, higher client spending, and new product investment"

China's government appears to have found a sample of manufacturing firms that were a bit more pessimistic than the S&P. The NFLP PMI found that manufacturing firms in general were seeing the worse conditions of the year. While production (50.2) was marginally increasing, new orders (48.7) and foreign orders (45.8) were both decreasing with the latter at the lowest level of 2023. In the end, Chinese manufacturing firms can't seem to maintain pricing power or staffing levels (both at the lowest of Q4 in Dec) as demand is just not strong enough to support any kind of recovery in manufacturing.

Manufacturing malaise is a major problem for China and its ability to kickstart its economy in 2024. Both domestic and foreign demand are struggling with the latter being the main factor in keeping conditions harsh. Domestic demand seems to be improving slightly. One positive that can be take from the S&P PMIs is that the slight recovery that was reported for China in the S&P PMI is stronger than its neighbors. The general ASEAN region posted a weaker 49.7 in Dec while Australia was even worse off at 47.6. I am still cautiously optimistic that China can maintain a positive trajectory in 2024 because it can be dragged up by improvements in foreign economies like the euro area. The key to growth will be in that export orders subindex which should be monitored closely.

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Energy ruled and goods cooled, but in general, there wasn't much movement in inflation. However, the core disinflationary trend remains intact.

The mostly nonevent shouldn't sway FOMC opinions on the next policy decision much.

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The trend in core producer prices continues to point to disinflation, but the elephant in the room is rising energy prices.

With many upside risks, they could be a significant source of inflationary pressure through the end of 2023.

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Small businesses are caught in a perfect storm: rising inflation and tighter credit conditions. Is a small business recession on the horizon?

A surprise beat in September and some upward revisions distort the labor market downtrend...

if there even is one!

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Euro area inflation reaches a 2-year low in September thanks to base effects in the German report.

Regardless, the new lower rate could be a confirmation of a peak in ECB rates.

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