Global economy developments, global trade dynamics are shifting, influenced by ongoing supply chain adjustments and changing consumer preferences.
Recent business surveys indicate that the clean election outcome has prompted companies, which had previously delayed investments and hiring due to election and regulatory uncertainties, to begin allocating funds. The confirmation of a favorable low taxation environment is also expected to support economic growth.
However, risks loom from President-elect Trump’s policy proposals. Stricter immigration controls could lead to labor shortages, constraining growth and increasing wages in certain sectors. Additionally, uncertainty surrounding trade tariffs may enhance the competitiveness of domestic manufacturers but disrupt international supply chains.
Exporters could face retaliatory measures, and consumers may encounter higher costs, eroding spending power and keeping inflation elevated. Consequently, the Federal Reserve has indicated it may slow the pace of interest rate cuts this year due to concerns over persistent inflation.
Another significant risk is the potential for sharp increases in Treasury yields, as Trump’s policies might worsen the government’s fiscal position. Elevated debt sustainability concerns in the context of high inflation suggest that the 10-Year Treasury yield could surpass 5%, raising borrowing costs for consumers and businesses and potentially hindering medium- to long-term growth.
European economic news: indicators in the Eurozone continue to reflect economic weakness. The composite PMI remained below the critical threshold in December, although the services sector showed some growth. Loan growth to the private sector decelerated in November, with only a 1% annual increase in loans to non-financial companies.
While the new German government may introduce some fiscal stimulus, its impact is not expected until the second half of 2025. Several countries are under excessive deficit procedures, necessitating tighter budgets. We anticipate stagnation over the winter months, followed by a modest recovery, resulting in GDP growth of only 0.7% in 2025.
HICP inflation rose for the third consecutive month in December to 2.4%, with core inflation steady at 2.7%. Services price inflation climbed to 4%, and the disinflationary effects of energy prices are diminishing. With higher energy prices, we expect headline inflation to rise further in the first quarter.
Long-term consumer inflation expectations have also increased to 2.4%. Given the ECB's restrictive monetary policy, the central bank can continue to cut rates in response to the weak growth environment, although rapid easing is not anticipated.
Recent developments in China have centered on the policy outlook. The Politburo meeting and Central Economic Work Conference indicated a shift toward a “more proactive” fiscal policy, prioritizing the stabilization of consumption, with the budget deficit target likely raised from 3.5% to 4% of GDP.
Monetary policy is expected to adopt a “moderately loose” stance for 2025, marking the first significant change since 2011. The People's Bank of China (PBoC) hinted at further rate cuts and reductions in the reserve requirement ratio (RRR) at an appropriate time.
In December, the government loosened its grip on Chinese government bond (CGB) yields after previous interventions aimed at maintaining yields above 2%. Lower yields will decrease borrowing costs amid anticipated increases in bond issuance for 2025 but may also lead to a weaker renminbi.
Following a period of monetary easing, markets remain cautious, but indications suggest that policymakers are prepared to respond to potential shocks in 2025.
South Korea has recently been in the spotlight due to political turmoil following President Yoon Suk-yeol's declaration of martial law on December 3 and a tragic plane crash on December 29. This situation has significantly dampened consumer and business confidence. We anticipate that the domestic economy will remain weak until political stability is restored; however, strong global demand for semiconductors and transportation equipment should drive solid export growth.
Macroeconomic policy will play a crucial role in restoring sentiment and stabilizing financial markets. With inflation below 2%, the Bank of Korea (BoK) is expected to implement rate cuts in the first quarter to maximize policy impact, likely including 25 basis point cuts in January and February. The weakening Korean won (KRW) poses a concern for the BoK, but supporting growth remains the priority. The government is also expected to promote stability and recovery through prompt fiscal spending, including a substantial supplementary budget in the first quarter.
Despite last year’s underwhelming economic performance, central banks in Central and Eastern Europe are taking a cautious approach to further rate cuts. While we expect economic recovery this year, growth in most areas is likely to be weaker than consensus estimates, with potential downside surprises. Higher food and energy prices may also complicate inflation dynamics, making additional rate cuts challenging.
As the new year begins, fresh fiscal plans and political challenges emerge. Although the four countries in the CEE region are promising lower public deficits compared to last year, election campaigns may introduce upside risks to spending.
Trump’s proposed policies, including extended tax cuts and immigration controls, are expected to support growth in the near term. However, the Fed is concerned about the inflation implications of trade protectionism and labor supply constraints. We forecast fewer and more gradual rate cuts in 2025 compared to the latter half of 2024.
We anticipate 25 basis point cuts in each of the first three quarters of 2025, while the market and the Fed are favoring two total cuts for the year. The cooling jobs market and rising long-term Treasury yields will increase borrowing costs for consumers and corporations. The dollar has reached a two-year high, which may also act as a brake on economic growth, leading the Fed to consider more rate cuts than currently priced in by the market.
Recent macro data following the ECB’s December rate cut suggest the possibility of stagflation, particularly if trade tensions escalate. This poses complications for the ECB, which may widen the gap between hawks and doves within the bank.
Higher inflation rates in December and potentially January are unlikely to deter the ECB from further cuts. The current deposit interest rate remains restrictive for the weak state of the Eurozone economy. Even as some argue that monetary policy has limited ability to address structural issues, the ECB is expected to continue playing a significant role, especially given political instability in several member countries.
While current inflationary pressures are anticipated to diminish over the year, the ECB is likely to overlook the present uptick in inflation, seeking to return interest rates to neutral as swiftly as possible.
The dollar has maintained substantial gains from late 2024 into the new year. The narrative of US exceptionalism is strong in FX markets, with investors highly sensitive to developments related to Trump’s policies. The dollar, adjusted for inflation on a trade-weighted basis, is nearing levels not seen since 1985, which previously prompted the Plaza Accord. There have been few complaints from the incoming administration regarding these dollar levels, but this remains a risk.
Dollar strength is creating challenges for Japan, China, and many emerging markets. The USD/JPY exchange rate is approaching the 158/160 range, where Japanese authorities previously intervened. Chinese authorities are resisting further depreciation of the renminbi, while Brazil’s central bank has also engaged in FX intervention. If US trading partners do not offer significant fiscal stimulus to bolster domestic demand amidst a tougher export environment, non-USD currencies are likely to remain under pressure.
Looking ahead in 2025, we expect the US 10-year Treasury yield to move toward the 5-5.5% range. Currently, a 4% SOFR rate aligns with a 4.5% 10-year Treasury yield. Historically, during the 2000s, the average Treasury yield was around 4.5%, with inflation averaging 2.5% and the Fed funds rate averaging 3%. This suggests a potential equilibrium.
As the ECB normalizes monetary policy, the Euribor 10Y swap rate should approach its long-term fair value. We estimate that the fair value of the 10Y Bund yield is around 2.7%. Our baseline scenario predicts the ECB settling at 1.75%, with the 10Y Bund yield rising to 2.7% by year-end. The spread between US and Eurozone rates is likely to remain wide throughout 2025, with the potential for further widening.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
