The next two weeks will see the last monetary policy meetings of the year in the eurozone, the US, the UK and Japan. Key indicators will come out early, with flash purchasing managers’ indices (PMIs) for the main developed economies due on 16 December. That should give investors time to get ready for their Christmas festivities, drink mulled wine and mull over prospects for 2025.
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Year-to-date equity and bond market performance (see Exhibit 1) speaks for itself.
- Investor appetite for US equities has been strong, as illustrated by the record highs set by major indices.
- Bond markets have been notably volatile and monetary easing has led government bonds to rise.
- The search for yield in the context of lower interest rates has benefited the credit market.
2024 saw a new monetary easing cycle begin as inflation gradually returned towards central banks’ target levels. While this trend will likely continue in 2025, the remarkable strength of the US economy and the new political landscape there after the November election still leaves questions about the US Federal Reserve’s (Fed) next moves.
One of the consequences of Donald Trump winning the presidential election was a lowering by investors of their expectations for cuts in US policy rates over the coming quarters. The expected level of the Fed’s key fed funds rate in March 2026 as reflected by futures markets was revised up by 100bp between end-September and mid-November.
It is well known that when investors have doubts about the Fed’s decisions, it can have enormous impacts on all financial markets.
Some contradictory indicators
In the US, October’s underwhelming employment figures recovered in November. Net job creations met analyst expectations (at 227 000) and there was a slight upward revision to the previous two months’ figures.
Beyond monthly changes, the pace of job creation has been less dynamic since July (148 000 in total, of which 110 000 in the private sector) than it was in the first half of the year (207 000 and 180 000, respectively).
Unemployment has risen by 0.1 percentage points to 4.2%, and the share of ‘permanent unemployed’ (as opposed to those in temporary layoff schemes) is rising steadily.
According to the University of Michigan’s preliminary estimate, consumer confidence has now returned to its highest level since April
The message from two services sector surveys (PMI and Institute for Supply Management) was contradictory in November: The PMI rose to 56.1, its highest since April 2022, while the ISM index fell from 56 to 52.1. The comments accompanying the ISM survey were, however, positive (‘the sector has regained sustained growth’), especially as new orders improved in 13 of the 14 sub-sectors.
After 2.8% annualised third quarter GDP growth, the Federal Reserve of Atlanta’s GDPNow’s running estimate of fourth quarter growth is a stronger 3.3%, based on data available as at 5 December.
Even before the measures Donald Trump promised during the campaign, some of which are likely to support growth, the US economy is ‘in remarkably good shape right now’ as Fed Chair Jerome Powell said on 4 December.
Not entirely contradicting that, we should also note that Fed board member Christopher Waller has pointed out that ‘demand relative to supply is moderating’.
The growth differential is widening
The questions hanging over the eurozoneare different. Despite the 0.4% rise in GDP growth in the third quarter, the composition of that growth appears fragile.
On the positive side, private consumption rose quite substantially (+0.7% compared to the previous quarter) thanks not only to France (+0.5%) – helped by the Olympics – but also Italy (+1.4%) and Spain (+1.1%). By contrast, excluding Ireland where this component is highly volatile, business investment has declined.
Falling consumer confidence may limit personal consumption spending in the coming quarters. The confused political situation in France and the upcoming general elections in Germany are likely to weigh on corporate investment decisions.
Faced with questions about domestic demand, it will be interesting to see if the ECB maintains its relatively optimistic growth scenario in new forecasts due on 12 December.
Note that in its Autumn Forecast, the European Commission foresees 0.8% growth in the eurozone in 2024, accelerating to 1.3% in 2025 and 1.6% in 2026 while adding the caveat that ‘uncertainty and downside risks to the outlook have increased.’
As the year draws to a close, the theme of growth divergence on both sides of the Atlantic appears to be firming up. It implies a monetary policy divergence that already seems largely to be reflected in the EUR/USD exchange rate.
A decisive step in China, at last?
For the past three months, business surveys in China have recovered and hard data on production and consumption has improved. Although the Caixin services PMI fell slightly in November (from 52 to 51.5), the outlook remains favourable as companies await further support measures from the government.
In addition, elements including car sales and real estate transactions have pointed to an acceleration in growth at the end of 2024. In terms of foreign trade, threats of higher tariffs seem to have led some companies to push forward their exports to the US, which has boosted manufacturing activity.
The communiqué from the Politburo meeting in early December reflected the authorities’ willingness to support activity, pointing out that:
- The stance on monetary policy is ‘moderately accommodative’ (not ‘stable’, as in recent years)
- Fiscal policy needs to become ‘more proactive’
- The need for an ‘extraordinary countercyclical adjustment’ has been retained to stabilise the real estate sector and stock markets.
Finally, ‘strongly boosting consumption’ was explicitly mentioned while investment efficiency will need to be increased.
The tone of the statement and changes in the wording reflect the authorities’ willingness to facilitate the transition to a more consumption-driven economy rather than the ‘model’ of an investment-driven economy.
The key question is whether global investors will be convinced given that domestic equity markets are clearly on the up. China’s awakening after a year in which hopes were often dashed could change the picture for international markets.
How to start 2025?
While the broad outline of President-elect Trump’s agenda is known (corporate tax cuts, deregulation, immigration legislation, protectionism), and is similar to that of his first term, the details remain sparse. The consequences for the economy and markets will differ depending on the extent and nature of the policy measures.
In the days following the election, investors chose to go with factors favourable for US companies and equities: Short-term domestic demand boosted by economic policy and, in the longer term, by the increasingly broad applications of artificial intelligence beyond the technology sector alone.
Being overweight to US equities thus looks to be a no-brainer. The latest position adjustments, however, have taken some technical indicators to extreme levels and further accentuated the concentration of performance.
Given all of that, we believe it appropriate to strengthen and broaden our exposure to US equities (which has so far been limited to the tech sector that has seen solid earnings growth in 2024), via the equally weighted S&P 500 index (EWI – Equal Weight Index).
We are maintaining our exposure to euro investment-grade credit given the appetite for this asset class, which should continue to benefit from the search for yield and the financial health of corporate issuers in this segment.
In 2025, investors should not neglect the path that the Fed’s monetary policy and bond yields could take. The wider budget deficit may lead some players to ignore US exceptionalism and demand higher long-term yields.
In the eurozone, bond yields seem to us to fully incorporate future cuts in key ECB rates. We believe some caution is appropriate in government bonds as political factors could increase nervousness on both sides of the Atlantic.
After a 20% rise between the end of June and its all-time high on 30 October, the price of gold corrected in November (-3.7%). This fall, which should be seen in the context of the appreciation of the US dollar, offered us an opportunity to strengthen our position after taking some profits a few weeks ago.
