This is a marketing communication.

What does the data over the last month tell us about the outlook for the year ahead? It is becoming very clear that while it was a very much synchronised upswing in rates from 2022, and the move to lower rates began in an equally synchronised fashion, it is unlikely to continue to do so. US inflation appears stuck for now around 3%, tariffs are likely to add to that at least temporarily, and a very strong growth outlook means future Fed rate cuts are by no means a foregone conclusion (albeit a December cut is very much expected). Europe however faces many problems, few of which can be solved quickly, but one clear policy move that would help is lower rates. That the ECB seems reluctant to move faster is a concern. particularly as uncertainty about global trade should be driving a more dovish view. China is also easing policy, and probably should do so even more aggressively. Meanwhile, Japan remains the outlier, still on a (very) gradual rate hike cycle.

US

The payroll report at the beginning of the month was strong, bouncing back after November’s hurricane and strike related weakness. Job openings also rose, as did the quits rate (indicating increased confidence amongst employees of the availability of work). Manufacturing ISM, durable goods orders, consumer sentiment, small business sentiment all suggested an acceleration from here, the only weak spot being the services ISM, which slipped a little driven by tariff concerns.

Inflation data however pointed to a level of stickiness, core inflation remaining at 3.3% y/y for the fourth month in a row, and three- and six-month annualised rates rising – and many inflation indicators suggest inflation may well begin drifting higher from here, not lower. Whilst markets continue to price continued further gradual rate cuts, the Fed may need a long pause after December’s expected cut.

Despite such strong growth, the US continues to run large fiscal deficits (more than 6% of GDP). The pro-growth policies of the incoming administration are likely to see deficits increase at least in the short term, adding to funding requirements of a US Treasury that needs to refinance almost $10tln (more than 1/3 of US GDP) over the next twelve months before any federal deficit is considered.

The next year could be an exciting time in US government bond markets.

Europe

It is a challenging mix for Europe. There are significant headwinds to growth stemming from weakness in China, still too-tight monetary policy, political uncertainty, trade uncertainty, declining productivity and rising gas prices. Add to that list the fact that governments are facing pressure to reduce still-large fiscal deficits, and it is difficult to create a positive narrative for the European economy, outside of Spain and Ireland.

Elections in Germany in February are unlikely to lead immediately to a stable government – protracted negotiations are likely. France remains gridlocked. Europe therefore enters the New Year in a position of political gridlock, facing a solid Trump administration.

More rate cuts will come from the ECB, though they need to be faster, and the end of PEPP reinvestments will see the ECB balance sheet continue to shrink.

China

The last month has seen more policy announcements from China – as we have said before, we think these announcements add up to a significant change and should draw a line under the weakness of the last few years, but the outlook is certainly murky in the short term until we get clarity on the intentions of the incoming US administration. Chinese bond yields are falling, the gap between them and their US counterparts at the widest in two decades. This could lead to capital outflows and a weaker currency, which would grab significant attention in Washington’s new administration.