2024, Wrapped

For the final post of the year, we’ll be running through some of the assumptions made in January, whilst looking ahead to some of the core themes worth paying attention to over the coming 12 months. In short though, the market was somewhat wrong about a lot that has actually come to pass. So what have we learnt, and how might that guide us as we look ahead?

Macro

Oil is up again following military strikes now also taking place in Syria. Whilst the removal of inter-generational Assad rule is seen as positive for democracy, it may make the path to peace in the region more complicated given direct involvement of the US and the deposed leader’s ties to both Russia and Iran. Should the promise made by Trump for peace in Ukraine within 48 hours of being in office be achieved, this would of course be hugely welcomed but, as yet, a little hard to believe. More broadly, sentiment in markets, judging by asset prices, looks in better shape than predicted at the beginning of the year. Inflation though, across much of the world, has remained stubbornly high along with benchmark interest rates. There are of course outliers, but more on that later. The general theme has also been US dollar strength. As a consumer-led and importing economy (for now!), this has certainly helped with what appears to be an unstoppable tailwind to growth thus far. Political uncertainty continues with the collapse of the German government and France revisiting its shaky coalition. With nine of the ten most influential central banks deciding policy in the next fortnight, it is going to be a photo finish!

Risk

Performance in stock markets has been solid. In the US, equity indices are up between 20-33%! For Europe, the picture is a little more mixed. A range of 8-12% (bar France which is currently down a little) represents a relatively strong year despite much of its population going to the polls and voting for change. Apparently, for the most part, change is good? The NASDAQ was projected to be over 10% lower at this time back in January, and it was a similar story for the FTSE100. Somewhat surprisingly, given the turmoil, the main German index, the DAX, is sitting 5% above earlier projections. The main laggard is France, where the CAC 40 sits on 5% below those January forecasts. Reassuringly, the Euro Stoxx 50, made up of what are considered industry leaders spanning 11 countries in the Eurozone, has also beaten expectations by almost a full 10%. Looking ahead, gains continue to be priced in, but do remain muted in comparison to performance year-to-date for the most part.

Credit

Higher for longer in rate land has certainly been the theme of the year. This has not stopped companies issuing in size, with volumes across the board breaking records in the investment grade space. One theme has endured, which is that the premium to borrow has remained cheap, flirting with all-time lows for much of the year. The path forward though is likely less exuberant. The longer rates remain elevated, the more folks who are looking to refinance will be caught by the current and future path of interest rates leading to higher debt servicing?

costs. No easing of inflationary pressures to be found here! Despite what will likely affect the future path of the global currency and interest rates being the US, the term premium, which assesses the perceived risk of owning longer-dated government debt, has held in rather well. The government bond sell-offs in markets (leading to higher yields), when drilling into the data a little more closely, appears to neatly match expectations and performance around growth.?

Should this remain, it would certainly be useful in aiding a stable funding environment as we roll into 2025. What is also worth highlighting at this juncture is the potential for a reduction in support by the FDIC in the new year. The President Elect made his views crystal clear at the time of the collapse of Silicon Valley Bank. He strongly opposed the government bailout. Unrealised losses on bank balance sheets pertaining to held-to-maturity securities currently exceed $300 billion.

EUR

Domestic uncertainty has not been helpful, although, as always, the ECB is willing to do whatever it takes. Expectations were for a cut at December’s meeting, with a further cut expected at the next meeting taking place at the end of January, taking a total 0.50% off the target rate. Whilst the most aggressive of easing cycles across the majors, we have fallen behind predictions from late ’23, with the target rate having been projected to be 2.5%, versus 3.25% right now. Looking ahead to expectations for January 2026 (frighteningly just over a year away), it is expected that the ECB will have cut an additional 1.5% from here. Tariffs are certainly expected to bite a region already struggling to generate meaningful growth; it is the timing though that is important to consider. Any such policy impact would affect the latter part of next year, thus it might be advisable to cool the cutting so as not to run out of that all important ammunition of easing by too much too soon.

GBP

The outlier for upcoming rate decisions for the three regions we cover in depth is the Bank of England. Scrolling back to the beginning of the year, expectations were actually closest to reality with the base rate expected to be sitting around 4.5%. Not far off. Additionally though, this is the only place we are not expecting to see a pre-Christmas 0.25% cut. Inflation, particularly in services (a proxy for wage growth), has remained above target. The good news remains that the employment market continues to hold in well, and the impact of higher rates this time around causing less pain as households moved from floating to fixed rate mortgages. The downside of course, is that the transmission of monetary policy has been curtailed. The outlook for now is that come the end of 2025 we’ll be sat around 4.00%. The neutral rate, seen as a level at which the economy is being neither curtailed nor over-stimulated, has risen over the year from what was expected to be closer to 3%, to almost a full percentage point higher. The danger of course is that over-stimulating takes us back to square one where the inflation genie re-emerges and Mars bars shrink.

USD

Much has already been said on tariffs and the potential impact on the US and global economy. Whilst Trump continues to show no fear in firing folk, compliments have been paid to Jerome Powell by way of his existing tenure to 2026 being acceptable to the President Elect. Looking at the data, it does appear as though the more measured approach of the Fed, not succumbing to pressure from the market to ease as rapidly as projected at the beginning of the year, and thereby inflating asset values further, has worked. As a reminder, investors had believed base should have been close to 4%. Come Christmas, with a cut all but done next week, the upper band is likely to come in at 4.50%. Just a couple of weeks ago though, the market remained on the fence, more recent price data along with what some interpret as a slowing job market, have made space for that additional cut. To what extent further action might be required come January is yet to be seen given the policies coming down the pipes.?

As a consumer-led society, the removal of Federal income tax will reverse the 10 to 37 percent deduction currently felt by employees. Quite the stimulus. Also quite the gamble, as tariffs are supposed to cover the deficit, a topic that is naturally being hotly debated. Sceptics are pointing to a significant funding gap that would potentially lead to yet larger debt piles.

So what?

It is worth reminding ourselves of the exuberance of markets and their sometimes whimsical nature. The past and future 12 months will see economies continue to grapple with finding that neutral base interest rate where everything is great. We do know that nobody knows where this is. Attention is worth being paid to growth, productivity, and potential shocks which may come from the impact of higher for longer, as there are always victims who have made false assumptions and mispriced the cost of funding. For now though, all that is left is to wish you all a very happy and healthy holiday season. Hoping it gives you time to recharge, surrounded by loved ones, or peace in solitude.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.