As we turn the page on 2024, one thing is clear: the world we invest in continues to evolve. The past year defied expectations, surprising us with economic resilience even as markets braced for turbulence. So, what did we learn, and how can we better prepare for what 2025 might bring?
All eyes are on the US inflation data release this week, which is expected to have continued to slow down compared to January 2022 (headline and core). However, it remains to be seen if the recent disinflationary comment from Fed Chairman Jerome Powell holds true.
This matters for markets. Both equities and bonds rallied following those comments at the recent 25 bps rate hike announcement, but the recent blockbuster jobs report and services activity data quickly cooled the optimism.
In addition to inflation data, US activity data (such as retail sales and industrial production) are also out this week, which is likely to have benefitted from the mild weather in January, putting this disinflation story at risk.
For now, the most obvious consequence of a more hawkish tone from the Fed and strong data has been a deeper yield curve inversion. A yield curve inversion is usually bad omen for the US economy, but we believe that any recession in the US will be shallow given the lack of imbalances that characterized previous recessions.
UK & Europe
On the other side of the Atlantic, UK Inflation is also due this week. Although it’s expected to slow, consensus predicts a double-digit print. This could lead to a policy dilemma for the Bank of England as the British economy flirts with a recession (growth was flat in the last quarter of 2022).
In Europe, there are no major economic data releases so markets will likely take cues from global developments this week. Over the medium term, Europe, as well as the broader global economy, should find some support from China’s reopening as Beijing continues to support growth (evidenced by strong liquidity and credit data last week).
Markets
Government bonds and equities fell, and the US dollar rose across the board last week and any disappointment in the inflation data this week could weigh on investor sentiment.
Overall, we continue to believe that bond yields have peaked as central banks reduce the pace of increase in interest rates and should stop raising them in the first half of 2023.
On the equities side, we’re about halfway through the earnings season and the big takeaway so far is that fewer companies are beating estimates on average compared with the past 10 years.
