From the Desk of GFC - Mid-January 2025
Global Financial Consultants Pte Ltd (GFC)
Unbiased Advice and customised financial solutions for Expats, Permanent-Residents and Singaporeans.
What happened over the last month??
After the “volatile” month we reported in mid-December, markets trended downwards, concerned by the Federal Reserve’s reference to “inflation uncertainty” (even as it cut rates by another 0.25%), which ruined a potential “Santa Claus rally”.??
December jobs figures in the US came in unexpectedly hot, Nonfarm payrolls rising by 256,000 (well above the 160,000 expected) and further depressing markets (as expectations for rate cuts fell, accordingly).? Unemployment in the US eased slightly to 4.1% and, as we write this, the consensus expectation for the December CPI (Consumer Price Index) is for a 0.38% rise from November to 2.9% year-on-year (the sixth consecutive month under 3%, but up from 2.7% in November), with Core CPI (excluding volatile food and energy) rising 0.26% to hold the annual rate at 3.3%.
As a result of all the above:
compared with my mid-December update, when looked at in USD terms.? For clarity, we’ve included on the chart below:
over the same 1-month period.
Global Equity Markets, EUR, SGD, GBP – 3-month view (in USD terms)
What’s on the horizon?
1. Inflation, Central Bank policy & Trump
A stronger-than-expected CPI report for December (due to be released at 8:30 EST today) would further reduce expectations for rate cuts this year.? Already, the futures market is pricing in just one 0.25% cut in 2025, according to the CME Fed Watch tool, resulting in a 400-425 target range (vs. today’s 425-450 range) and a 27% chance that we will end 2025 with no rate cuts at all, all of which is reflected in the strengthening of USD vs. other major currencies.??
The elephant in the room this month, though, is Trump and it’s fair to say that markets globally will be impacted in one way or another after he takes office on January 20th.? He has already announced tariffs on imports from Mexico, Canada and China, to be signed on his first day, and these could well lead to an increase in US inflation and, ironically, a decrease in other parts of the developed world (e.g. EU) as Chinese goods end up there (instead of the US) at lower prices.??
领英推荐
Jerome Powell is confirmed to stay in his post as Federal Reserve chair until 2026 and has signalled a slow-down in rate cuts in his Dec 18th speech (“It's not unlike driving on a foggy night or walking into a dark room full of furniture, you just slow down”), so will surely come into conflict with Trump who, with the mentality of a NY Real Estate developer, simply wants rates lower.??
Another post-Trump news item worth watching with be Bitcoin, for which he suggested during his campaign that the US will create a strategic reserve.? We do, indeed, live in interesting times!
2. Elevated Equity Valuations vs. Corporate Earnings?
Referring to the gauges above we see that US equities have moved back from “neutral” to “fear” sentiment territory and remain “overvalued” vs. historical averages.??
US Market - Valuation & Sentiment gauges (click images to view details)
That said, we re-reiterate the point that equities can stay expensive (or cheap) for long periods of time and therefore that valuations are not a useful signal for market timing.??
While we await Q4 earnings, it’s probably worth reflecting again on one of the contributors to the “overvalued” status; the fact that the S&P 500 forward P/E is currently standing at around 22.? This is well above the 10-year average of 17.8 and a mean-reverting fall back to that 10-year average level would involve a 22% decline.??
Conclusion
2024 has ended on something of an unhappy note, with uncertainty and volatility (not least of rising Government bond yields and falling currencies) continuing, as we start 2025. We are still cautiously optimistic to see what transpires in terms of actual policies as the new Trump administration takes over.? Trump himself has admitted, on occasion, that his threats of tariffs are a negotiating (read “deal-making”) tactic and so may well not be so obviously inflation-stoking as the threat suggests.? If he can indeed end the conflicts in Ukraine and Gaza, then this will certainly be very positive for global sentiment and, therefore, markets.
In its latest, generally positive, economic outlook, the OECD projects higher GDP growth, and inflation easing in most G20 economies by the end of 2025, whilst noting that risks such as tight monetary policy and heightened geopolitical tensions remain.? Both categories of risk are firmly on Trump’s agenda.