By
Derek Hamilton
08 January 2025
Our latest edition of “Inside the markets” will be published soon. This chart-powered guide provides a detailed assessment of the current state of the economy and markets. Here are our key takeaways at the end of 4Q24:
- The US economy continued to grow at a healthy pace, though GDP growth is expected to slow somewhat in 2025. The incoming Trump administration could create uncertainty given the large number of policies it hopes to enact.
- Inflation recently moved higher, with core Consumer Price Index (CPI) inflation rising to a six-month high. Goods price deflation has become less intense, while services remained elevated but should move lower in the near term due to housing.
- The US Federal Reserve (Fed) continued to lower interest rates but signaled a less aggressive path of rate cuts, due to uncertainty around inflation and future government policy. Despite lower interest rates, the Fed balance sheet continued to shrink.
- Europe continued to see modest growth, with Germany continuing to underperform. Lower inflation continued to permit the European Central Bank and the Bank of England to lower interest rates.
- The Chinese economy continued to underperform, though housing market weakness may be moderating. Fiscal and monetary easing continued, with senior policymakers indicating the pace of easing is set to accelerate in 2025.
- Japan’s economy has been soft, but businesses have seen improvement. Higher inflation and wages have led to higher interest rates.
- US equity markets continued to perform well, with the S&P 500® Index getting a boost from the largest companies, pushing valuations higher. International equity returns, including Japan were positive in 2024 though returns for US investors were diluted by US dollar strength. The most recent dollar strength seemed to be responding to potential policy proposals by President-elect Trump, including tariffs.
- Bond markets have seen better returns as the reality of Fed rate cuts pushed prices higher. US investment grade and high yield spreads were still historically very tight.
Looking ahead, we continue to believe a near-term recession is unlikely, though the large-scale changes proposed by Trump are a risk, including tariffs (chart below), immigration, and spending cuts. We continue to believe Fed rate cuts will be limited based on our views that inflation may start to pick up later in 2025. International economies have been weak, though we will be watching for economic stimulus in China as policymakers have indicated a more forceful response in 2025.
Weighted-average US import tariffs
(2025 estimate assumes Trump proposal*)
Sources: Macquarie, Macrobond, US International Trade Commission.
* 60% tariff on imports from China and 10% across-the-board tariff on all other goods.
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