- The CNB lowered interest rates for the first time in 2 and a half years
- The US Fed has indicated that it will also cut rates from the next meetings
- From 1.1. 2024 Long-term Investment Product (DIP) entered into force
Changes in selected stock indices and commodities:
In December, we will recap how the main stock indices and/or commodities fared this year. Both the S&P 500 index and the NASDAQ 100 technology index reached new highs at the end of the year, and after two years, investors are once again in the profit. The S&P 500 returned 25.92%, and the technology NASDAQ 100, which has been in a bigger decline, has returned investors as much as 54.43% over the past year. A decent profit was also achieved by investors investing in Europe (19.83%) and also after a longer period in Japan (20.77%). But where the economy and stock markets are still not doing well, is China, where the MSCI China index lost 2.20% for 2023. As for commodities, gold reached new highs and at one point touched $2,150 per troy ounce. For the year 2023, it also brought positive results to investors in the form of a return of 13.66%. Bitcoin came out of a deep decline, crossing the $40,000 mark and its return for 2023 was 155.77%.
The Fed, as the most important central bank in the world, indicated at the last meeting that it will start lowering interest rates from 2024. A reduction is expected from the next meeting, which will take place at the end of January 2024. At the end of the year, according to predictions, the Fed’s interest rate should end up somewhere at the level of 4.5%.
This is a clear signal that the financial markets have been waiting for for several sessions. Although there has not yet been a real reduction in the so-called Fed funds rate, the stock and bond markets have already incorporated the expected reductions into the price development, and even the S&P 500 index and the technological NASDAQ 100 reached their peaks after almost 2 years.
Even so, it is not possible to 100% rule out the possibility that interest rates will not be reduced or that they could even be increased. So far, however, the Fed and economic data indicate expectations of interest rate cuts.
The year-on-year inflation rate for November is at the level of 3.1% and is therefore on a downward trend. We are probably past its peak. We see similarly positive data in the case of the real growth of the US economy, and the recession expected by everyone has not yet arrived. The unemployment rate has been at a stable level in recent months, and even these data do not indicate problems in the economy.
For now, it looks like a so-called soft landing could occur. This means that there will be no recession, inflation will subside and the Fed will gradually reduce interest rates to a long-term level of, say, around 2 to 3%.
The ECB has been more or less copying what the Fed is doing for the past few years. At least when it comes to raising and lowering interest rates. It didn’t start raising them until a few months after the Fed started, and it will probably start to lower them in 2024, too, just like the Fed.
However, at the last meeting in December, the members of the ECB commented that the reduction in the next meetings is unlikely to happen yet, and interest rates will thus remain at a stable level for some time.
The year-on-year inflation rate also falls to 2.4% in November, but the ECB itself expects it to increase in the coming months. It is for these reasons that he wants to keep interest rates at the current 4.5%.
Although the CNB reduced the repo rate by only 0.25%, many banks reacted to this change by reducing interest on savings accounts by as much as 1 or even 2% or more. Banks approach raising interest rates on savings accounts gradually and cautiously, but when it comes to reducing them, it happens almost immediately and to a greater extent.
As a result, there should also be a reduction in interest rates on mortgages, and the CNB expects further reductions in interest rates in the coming months.
The year-on-year inflation rate for the month of November is at the level of 7.3%, and the CNB expects it to decrease further. Even up to the level of the inflation target, approximately 3% in 2024. But the inflation figures for the month of January 2024 will give us the most information, when the biggest price increases, changes in price lists and the like usually occur. At the same time, there should also be an increase in the regulated component of the price of electricity both for households and, to a greater extent, for the companies themselves. And that puts additional pressures on prices.
The economy is still in recession, perhaps it could be called stagflation, but real GDP growth is expected for 2024 and the economy should thus return to a growth trajectory.
The announced reduction of interest rates by the CNB is finally taking place, and further reductions are expected in 2024. Instruments focused purely on the two-week repo rate will therefore reduce their attractiveness over time.
Therefore, Czech bond funds, whether focused purely on state or investment-grade corporate bonds, may make more sense for the medium term. You can find a comparison of large bond funds previously compiled by the SAB service in this Excel table (see attachment).