US inflation fears brought wave of take profits last Friday, growth stocks and bonds hurt, ahead of US CPI and Q4 earnings
WEEKLY TRENDS
WEEKLY TRENDS
- The Dec US job report released last Friday showed a strong job creation still (at +256k vs +165k expected) added to a Trump pro-growth policy that could lead to renewed inflation
- As revealed by the last FOMC meeting minutes, the FED is also concerned about the risk of higher inflation despite being in a rate cut cycle, indicating only 2 rate cuts of 25bps this year (June and Oct) instead of 4 forecast previously
- US LNG and Oil prices are up due to the US cold wave and the new sanctions placed on Russian oil (new sanctions against Iran oil are also in the pipeline)
- The markets participants are waiting for the first US Q4 earnings kick-off, with US banks opening the season (JP Morgan, Wells Fargo, Goldman Sachs, BlackRock, Citigroup, Bank of New York on Wednesday) and for the US inflation data (Dec CPI) to be released on Wednesday too

MARKETS
Equities
US: Tech and SMEs stocks impacted the most by fears of renewed inflation
EU: Luxury stocks held well (LVMH +5.5% Hermès +6%) due to expected new US tariffs exemption
M&A: GSK is closing in on a $1bn deal to buy US biotech IDRx (cancer drug)
Analysts: Elmos semiconductor (+14%) boosted by Warburg and Hauck ’buy’; Sartorius (+11%) boosted by JP Morgan ’buy’
Rates
US curve (2-10 years) steepening increased by 5bps to 40bps. Bond yields increased across the board, HY corporate spread remained stable
Commodities
Oil price up (+3%) due to new US / UK sanctions imposed on Russian Oil counterparts and also due to the cold wave in the US
Gold price up (on renewed inflation fears)
US
Non Farm Payrolls (jobs creation) +256k in Dec vs +165k expected
UK
30yr Gilt yield near 1998 level (5.4% vs 6%) while 2yr remains at 4.5%
Under the watch
PE (Private Equity) and RE (Real Estate) have a bad start of the year (showing -3% and -4%) Take Profits or Trend, remains to be seen
Nota Bene
Q4 earnings, SP500 companies are expected to report a 12% YoY earnings growth vs +14% last Sep. estimates
Forward PE, US at 22x versus Europe at 13x
CALENDAR
EU : ADP, Experian, Currys (15 Jan), Richemont, Vinci, Wise (16 Jan)
WHAT ANALYSTS SAY
M&G Investment Perspectives 2025 Outlook, 9 Dec 2024
Author: Mason Woodworth, Head of Investment Solutions
Key takeaways
· Record-high government debt and rising borrowing costs are sparking concerns about the sustainability of government finances.
· Policymakers are prioritising economic growth as a solution to this challenge but there are concerns that growth may not return to ‘normal’ levels.
· In this uncertain context, an active approach may help investors identify opportunities and mitigate potential disappointments.
In a world of high government debt and lacklustre growth, it is tempting to assume economic activity will return to more ‘normalised’ levels, allowing governments to reduce national debts toward more sustainable levels. But might this be an overly optimistic assumption? Do we have the conditions to generate sufficient growth and, if growth proves weaker than expected, what might this mean for investors?
Government debt levels, most notably in the US but in other countries too, have risen dramatically in recent years. In 2024, the US debt to GDP ratio hit 123%. This increase can be traced back to the COVID-19 pandemic and the global financial crisis of 2008/9. These exceptional events saw governments and central banks, predominantly in developed markets, provide vast amounts of fiscal and monetary stimulus to bolster their economies.
This situation might have been sustainable when interest rates were at zero but now that borrowing costs have risen sharply and the cost of meeting debt payments has increased, there are growing concerns about the sustainability of government finances.
Given governments’ fiscal positions are constrained and financial conditions for corporates and consumers are also restricted, central bank policy has taken on an ever-greater importance. If borrowing costs come down for consumers and governments, that could help support the growth outlook.
Where they go from here is critical. Interest rates are expected to continue to come down in the next 12 months which could provide a tailwind for GDP growth. But given that we are unlikely to see interest rates return to the low or even negative levels of the post-COVID era, conditions might not become as favourable as they were three years ago.
If we consider the growth expectations implied by asset prices, we can see that in some areas of the market, principally US technology stocks, there is considerable optimism about future growth. Beyond this narrow category, however, equity markets have been rather muted.
Having examined a scenario where economic growth fails to revert to ‘normal’ levels, the critical question is what does this mean for investors? One observation is that only investing in broad markets presents a potential risk.
Meanwhile, the government bond yield curve is pricing in some level of below-trend growth, or even recession in pockets. Does this mean that credit spreads might be vulnerable to a more challenging economic environment?
Within the equity market, there is plenty of excitement about tech, but little else.
This is not to say a recession is going to happen; that is not our prediction. But, in our view, there is still a great deal of normalisation that needs to happen to return to an equilibrium where relative values make sense.
Author: Fabiana Fedelli, CIO Equities, Multi Asset and Sustainability
Key takeaways
· In 2025, taking advantage of short-term sentiment-driven dislocations, while sticking to fundamentals, will be a more successful strategy than trying to time the market.
· When it comes to equity investing in 2025, we believe in a strategy based on stock selection rather than one driven by top-down exposure to countries or sectors.
· Supported by expectations on deregulation and tax cuts, Wall Street still has room to run but not all stocks have the ability to perform equally well. We expect further broadening of returns across the market in areas that, until now, have remained in the shadows.
· While the US market is likely to continue to outperform in 2025, we still see compelling stock-specific opportunities in other markets, including Europe and Asia. Selection, as ever, remains essential.
Low and behold, since then, markets have taken us on an emotional roller coaster ride. In the three weeks between 15 July 2024 and 5 August 2024, worries started to mount that the world, driven by the US, would enter a full-fledged recession. The obvious script followed with equity markets dropping and bond prices rising. By the end of August 2024, recession had been forgotten.
We are simply at a juncture where market participants appear to be extrapolating long-term forecasts from individual datapoints. As these datapoints change direction, so do the forecasts. This is likely to continue as we move into 2025.
Heading into 2025, the Trump trade is likely to remain the focus of many investors. Expectations of less regulation and lower taxes are positive for the immediate US macroeconomic picture, although the latter is not for the longer-term fiscal picture.
Import tariffs, however, represent a question mark. High import tariffs would have a negative effect on the US economy and, in particular, on inflation. Any inflationary impact from Trump’s policies could change the trajectory of US Federal Reserve (Fed) decision making in the coming year.
But there is a timing issue. Any potential impact on inflation will not take immediate effect and, until now, the Fed has looked at historic data to inform decision-making on interest rates.
Within Europe, for example, we are finding opportunities within more cyclical areas, such as chemicals and materials, given the depressed valuations reflecting a bottoming of end markets’ demand. We are also finding opportunities among well-capitalised, less rate-sensitive Northern European and UK banks.
Within Asia, the risk of higher US tariffs has increased investor caution, particularly towards Chinese equities, at a time when there is heightened uncertainty around China’s domestic economic stimulus and recovery. We believe this is creating interesting stock-picking opportunities for bottom-up investors to exploit in 2025.
Authors: David Knee, Deputy CIO, Fixed Income ; Carlo Putti, Investment Director, Fixed Income
Key takeaways
· Uncertainty and unpredictability have been the watchwords of the past few years and that is set to continue into 2025, with questions lingering over the impact of Donald Trump’s policies, as well as the trajectory of global growth.
· Moderation in inflation will allow interest rates to fall, counteracting rising protectionism and other anti-growth policies, while absolute yields in very short and longer maturities may offer some inflationary protection in the new year.
· Against a backdrop of tight spreads, rising deficits, as yet unknown fiscal policy and moderating GDP growth, portfolios could benefit from defensive positioning.
In markets, the predictable response to a more unpredictable environment is increased volatility. The election of Donald Trump only serves to amplify this with markets waiting to see how his second administration might pan out. Trump campaigned on some broad-brush policy statements. However, only time will tell whether these become reality. The first Trump presidency showed what Trump said he would do and what he actually did were very different. Bond markets will be watching for key policies such as tariffs, tax and immigration. These policies could potentially reignite inflation and limit the ability of the Fed to act, as well as add to already growing deficits.
Despite the uncertainties, economic facts don’t change: deficits are rising. The upward sloping nature of the long end of developed market yield curves suggest bond investors are cognisant of this. After more than a decade of real interest rates sitting below real growth rates and the subsequent belief there was no limit to the ability to borrow (remember Modern Monetary Theory), the environment has pivoted. Debt interest for the fiscal year 2024 stood at $1.1 trillion, exceeding the cost of the Medicare healthcare program ($1.05 trillion) and military defence spending ($830 billion). Going forward, Trump’s potentially expansionary fiscal policy may even accelerate the deficit, leaving the Treasury market to bear the burden.
For global bond investors, as we enter 2025, absolute yields are still attractive at both the very short and the longer maturities, in our opinion. These offer some protection against prospective inflation, with real yields on government bonds close to 2% – a level not seen since before the Global Financial Crisis (GFC). Longer maturity bonds also offer a decent hedge for equity exposure if the macroeconomic story weakens. Given that expectations for rate cuts are embedded in mid-maturity bonds, this makes them a more difficult call, as what happens from here will continue to be very data dependent.
The case for corporate bonds is nuanced. The credit spread across almost every category of the fixed income market is below its long-term averages. Investors are not being well compensated for longer term corporate risks, either in investment grade (IG) or high yield.
Unlike rates, which have increased significantly over the last few years, spreads have tightened and are now historically low, reflecting an environment of positive growth and limited default risk. This means most of the bad news is arguably already in the price. We believe this leaves investors with an unfavourable risk-reward, particularly considering where we are in the economic cycle, with generally tighter fiscal and monetary policies, which could lead to a further slowdown and therefore higher default rates.
In conclusion, the macroeconomic environment appears to be gradually worsening. Shrinking money supply and a deteriorating labour market are putting downward pressure on both growth and inflation. In this context, we believe bonds present a favourable investment option, further supported by the risk-reward profile currently offered by the asset class.
Equities
US: Tech and SMEs stocks impacted the most by fears of renewed inflation
EU: Luxury stocks held well (LVMH +5.5% Hermès +6%) due to expected new US tariffs exemption
M&A: GSK is closing in on a $1bn deal to buy US biotech IDRx (cancer drug)
Analysts: Elmos semiconductor (+14%) boosted by Warburg and Hauck ’buy’; Sartorius (+11%) boosted by JP Morgan ’buy’
Rates
US curve (2-10 years) steepening increased by 5bps to 40bps. Bond yields increased across the board, HY corporate spread remained stable
Commodities
Oil price up (+3%) due to new US / UK sanctions imposed on Russian Oil counterparts and also due to the cold wave in the US
Gold price up (on renewed inflation fears)
US
Non Farm Payrolls (jobs creation) +256k in Dec vs +165k expected
UK
30yr Gilt yield near 1998 level (5.4% vs 6%) while 2yr remains at 4.5%
Under the watch
PE (Private Equity) and RE (Real Estate) have a bad start of the year (showing -3% and -4%) Take Profits or Trend, remains to be seen
Nota Bene
Q4 earnings, SP500 companies are expected to report a 12% YoY earnings growth vs +14% last Sep. estimates
Forward PE, US at 22x versus Europe at 13x
CALENDAR
- Macro data releases : US CPI for Dec (15 Jan)
- Q4 Corporate earnings:
EU : ADP, Experian, Currys (15 Jan), Richemont, Vinci, Wise (16 Jan)
WHAT ANALYSTS SAY
- M&G investment perspectives 2025 outlook - No time for complacency
M&G Investment Perspectives 2025 Outlook, 9 Dec 2024
Author: Mason Woodworth, Head of Investment Solutions
Key takeaways
· Record-high government debt and rising borrowing costs are sparking concerns about the sustainability of government finances.
· Policymakers are prioritising economic growth as a solution to this challenge but there are concerns that growth may not return to ‘normal’ levels.
· In this uncertain context, an active approach may help investors identify opportunities and mitigate potential disappointments.
In a world of high government debt and lacklustre growth, it is tempting to assume economic activity will return to more ‘normalised’ levels, allowing governments to reduce national debts toward more sustainable levels. But might this be an overly optimistic assumption? Do we have the conditions to generate sufficient growth and, if growth proves weaker than expected, what might this mean for investors?
Government debt levels, most notably in the US but in other countries too, have risen dramatically in recent years. In 2024, the US debt to GDP ratio hit 123%. This increase can be traced back to the COVID-19 pandemic and the global financial crisis of 2008/9. These exceptional events saw governments and central banks, predominantly in developed markets, provide vast amounts of fiscal and monetary stimulus to bolster their economies.
This situation might have been sustainable when interest rates were at zero but now that borrowing costs have risen sharply and the cost of meeting debt payments has increased, there are growing concerns about the sustainability of government finances.
Given governments’ fiscal positions are constrained and financial conditions for corporates and consumers are also restricted, central bank policy has taken on an ever-greater importance. If borrowing costs come down for consumers and governments, that could help support the growth outlook.
Where they go from here is critical. Interest rates are expected to continue to come down in the next 12 months which could provide a tailwind for GDP growth. But given that we are unlikely to see interest rates return to the low or even negative levels of the post-COVID era, conditions might not become as favourable as they were three years ago.
If we consider the growth expectations implied by asset prices, we can see that in some areas of the market, principally US technology stocks, there is considerable optimism about future growth. Beyond this narrow category, however, equity markets have been rather muted.
Having examined a scenario where economic growth fails to revert to ‘normal’ levels, the critical question is what does this mean for investors? One observation is that only investing in broad markets presents a potential risk.
Meanwhile, the government bond yield curve is pricing in some level of below-trend growth, or even recession in pockets. Does this mean that credit spreads might be vulnerable to a more challenging economic environment?
Within the equity market, there is plenty of excitement about tech, but little else.
This is not to say a recession is going to happen; that is not our prediction. But, in our view, there is still a great deal of normalisation that needs to happen to return to an equilibrium where relative values make sense.
Author: Fabiana Fedelli, CIO Equities, Multi Asset and Sustainability
Key takeaways
· In 2025, taking advantage of short-term sentiment-driven dislocations, while sticking to fundamentals, will be a more successful strategy than trying to time the market.
· When it comes to equity investing in 2025, we believe in a strategy based on stock selection rather than one driven by top-down exposure to countries or sectors.
· Supported by expectations on deregulation and tax cuts, Wall Street still has room to run but not all stocks have the ability to perform equally well. We expect further broadening of returns across the market in areas that, until now, have remained in the shadows.
· While the US market is likely to continue to outperform in 2025, we still see compelling stock-specific opportunities in other markets, including Europe and Asia. Selection, as ever, remains essential.
Low and behold, since then, markets have taken us on an emotional roller coaster ride. In the three weeks between 15 July 2024 and 5 August 2024, worries started to mount that the world, driven by the US, would enter a full-fledged recession. The obvious script followed with equity markets dropping and bond prices rising. By the end of August 2024, recession had been forgotten.
We are simply at a juncture where market participants appear to be extrapolating long-term forecasts from individual datapoints. As these datapoints change direction, so do the forecasts. This is likely to continue as we move into 2025.
Heading into 2025, the Trump trade is likely to remain the focus of many investors. Expectations of less regulation and lower taxes are positive for the immediate US macroeconomic picture, although the latter is not for the longer-term fiscal picture.
Import tariffs, however, represent a question mark. High import tariffs would have a negative effect on the US economy and, in particular, on inflation. Any inflationary impact from Trump’s policies could change the trajectory of US Federal Reserve (Fed) decision making in the coming year.
But there is a timing issue. Any potential impact on inflation will not take immediate effect and, until now, the Fed has looked at historic data to inform decision-making on interest rates.
Within Europe, for example, we are finding opportunities within more cyclical areas, such as chemicals and materials, given the depressed valuations reflecting a bottoming of end markets’ demand. We are also finding opportunities among well-capitalised, less rate-sensitive Northern European and UK banks.
Within Asia, the risk of higher US tariffs has increased investor caution, particularly towards Chinese equities, at a time when there is heightened uncertainty around China’s domestic economic stimulus and recovery. We believe this is creating interesting stock-picking opportunities for bottom-up investors to exploit in 2025.
Authors: David Knee, Deputy CIO, Fixed Income ; Carlo Putti, Investment Director, Fixed Income
Key takeaways
· Uncertainty and unpredictability have been the watchwords of the past few years and that is set to continue into 2025, with questions lingering over the impact of Donald Trump’s policies, as well as the trajectory of global growth.
· Moderation in inflation will allow interest rates to fall, counteracting rising protectionism and other anti-growth policies, while absolute yields in very short and longer maturities may offer some inflationary protection in the new year.
· Against a backdrop of tight spreads, rising deficits, as yet unknown fiscal policy and moderating GDP growth, portfolios could benefit from defensive positioning.
In markets, the predictable response to a more unpredictable environment is increased volatility. The election of Donald Trump only serves to amplify this with markets waiting to see how his second administration might pan out. Trump campaigned on some broad-brush policy statements. However, only time will tell whether these become reality. The first Trump presidency showed what Trump said he would do and what he actually did were very different. Bond markets will be watching for key policies such as tariffs, tax and immigration. These policies could potentially reignite inflation and limit the ability of the Fed to act, as well as add to already growing deficits.
Despite the uncertainties, economic facts don’t change: deficits are rising. The upward sloping nature of the long end of developed market yield curves suggest bond investors are cognisant of this. After more than a decade of real interest rates sitting below real growth rates and the subsequent belief there was no limit to the ability to borrow (remember Modern Monetary Theory), the environment has pivoted. Debt interest for the fiscal year 2024 stood at $1.1 trillion, exceeding the cost of the Medicare healthcare program ($1.05 trillion) and military defence spending ($830 billion). Going forward, Trump’s potentially expansionary fiscal policy may even accelerate the deficit, leaving the Treasury market to bear the burden.
For global bond investors, as we enter 2025, absolute yields are still attractive at both the very short and the longer maturities, in our opinion. These offer some protection against prospective inflation, with real yields on government bonds close to 2% – a level not seen since before the Global Financial Crisis (GFC). Longer maturity bonds also offer a decent hedge for equity exposure if the macroeconomic story weakens. Given that expectations for rate cuts are embedded in mid-maturity bonds, this makes them a more difficult call, as what happens from here will continue to be very data dependent.
The case for corporate bonds is nuanced. The credit spread across almost every category of the fixed income market is below its long-term averages. Investors are not being well compensated for longer term corporate risks, either in investment grade (IG) or high yield.
Unlike rates, which have increased significantly over the last few years, spreads have tightened and are now historically low, reflecting an environment of positive growth and limited default risk. This means most of the bad news is arguably already in the price. We believe this leaves investors with an unfavourable risk-reward, particularly considering where we are in the economic cycle, with generally tighter fiscal and monetary policies, which could lead to a further slowdown and therefore higher default rates.
In conclusion, the macroeconomic environment appears to be gradually worsening. Shrinking money supply and a deteriorating labour market are putting downward pressure on both growth and inflation. In this context, we believe bonds present a favourable investment option, further supported by the risk-reward profile currently offered by the asset class.
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