In November, at 46.7, the ISM Manufacturing PMI remained in contraction for the 13th month and the S&P Global Manufacturing PMI slipped from 50.0 to 49.4. Alongside this, Fed Governor Christopher Waller has also said that monetary policy should now be sufficiently tight to slow the US economy and to pull inflation back into the 2% target range, and so further hikes will likely be unnecessary.

Against a backdrop of weak household savings and a slowdown in wage growth, the rising cost of borrowing is increasingly dragging on US growth. Given this environment and the likely softening of both growth and inflationary pressures, we expect the Fed to leave the policy rate at 5.25-5.50% through to mid-2024.

Eurozone

Economic indicators point to continuing softness in the Eurozone, and there is a significant possibility that the bloc will enter recession in Q4. In October, private credit dropped from 0.8% to 0.6%, while in November, headline and core inflation slowed from respectively 2.9% to 2.4% and from 4.2% to 3.6%, its weakest since May 2022. Beyond this, although the HCOB Manufacturing PMI ticked up from 43.1 to a 6-month high of 44.2.

The widespread slowdown in the Eurozone points to the elevated risk of recession in 2H23. The European economy is under pressure from tight monetary policy, weakness in export markets and deteriorated consumer and business sentiment. However, inflationary pressures should continue to ease through 2024 and labour markets remain strong, thus helping to offset the impacts of high interest rates and restricting any recession to a relatively mild contraction. We therefore expect that the European Central Bank carried out its last rate hike in October, and we see the key ECB deposit rate remaining at 4.00% through to 2Q24.

China

Economic recovery remains uncertain in China, and the outlook for the service sector is at its weakest since the reopening. In November, the Caixin and S&P Global Manufacturing PMI edged up from 49.5 in October to a 3-month high of 50.7, but this ran counter to the official NBS Manufacturing PMI, which fell for the 2nd straight month to 49.4 from 49.5. The Services PMI also slipped from 50.6 to 50.2, its weakest since December 2022.

The latest indicators show growth remaining patchy and soft across the Chinese economy. Government stimulus measure is boosting growth for small and medium-sized manufacturers, but output by large manufacturers has slipped on weaker export orders. Industrial profits slumped from 11.9% in October to 2.7% YoY in November. Over the first 10 months, a rise in profits was seen in electric/power industry, machinery & equipment and general manufacturing. However, profits dropped in chemical industry, petroleum & coal industry, computer manufacturers, and raw materials sector.

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