Last week in a nutshell
- The US December jobs report showed the addition of 256K non-farm payrolls while unemployment remained at 4.1%. The US dollar and the 10-year yield rose.
- The December FOMC minutes already flagged inflation concerns, citing Trump's tariff policies as a potential driver of higher import costs.
- Separately, US household consumers’ long-term inflation expectations jumped to the highest since 2008 on similar concerns regarding the incoming Trump administration.
- In the euro zone, headline inflation rebounded, driven by higher energy prices due to a weaker euro, rising fuel costs, and faster-than-usual gas inventory drawdowns. Meanwhile, goods inflation remained near zero, and food inflation stayed stable at 2.7%.
- China continued to experience deflationary pressures despite efforts to boost consumption, as the central bank's bold moves face limits highlighted by its halt on bond purchases.
What’s next?
- Markets will focus on inflation as the US PPI, CPI and retail sales will provide crucial insights into inflation trends and consumer spending. Both are pivotal in consolidating the expected skip from the FOMC in January, while upside strength would further lower the probability of a March cut.
- Q4 GDP figures will reveal the effects of China’s recent policy measures aimed at stabilizing growth.
- In the euro zone, the European Central Bank will release its December meeting minutes while France's new Prime Minister François Bayrou will deliver the General Policy Statement, including the 2025 budget outlook.
- Earnings season kicks off in the US with reports from US financials, including JPMorgan, Goldman Sachs, and Blackrock. Also TSMC's report will be closely watched, reflecting semiconductor sector dynamics.
Investment convictions
Core scenario
Global growth aligns with expectations, but regional disparities persist.
- In the United States, strong economic activity continues to be bolstered by resilient corporate profits and an optimistic outlook fuelled by supportive domestic policies.
- Europe faces challenges with sluggish growth and limited earnings prospects, hindered by structural issues and ongoing political uncertainty in key economies.
- In Emerging Markets, weak consumption and deflationary pressures in China undercuts efforts to reach a 5% growth target, while the broader region struggles with the dual pressures of US tariffs and a strong dollar.
Risks
- Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability.
- The uncertainty surrounding Donald Trump’s presidency, particularly regarding tariffs, taxation, and deregulation, creates a complex and volatile policy landscape for investors.
- Diverging central bank policies worldwide could exacerbate asset price volatility, driven by differing inflation trajectories and monetary strategies.
Cross asset strategy
- Our outlook for equities is broadly positive
- Especially in the US, driven by robust economic growth and resilient corporate earnings.
- We have a particular focus on the cyclical sectors that are expected to benefit from domestic policies.
- In contrast, European equities remain underweighted due to limited earnings growth potential, structural challenges, and political uncertainty.
- The stance on Japan is neutral.
- Emerging markets offer selective opportunities, particularly where valuations are attractive, but these regions face headwinds from US tariffs and a strong dollar, which could temper gains.
- In fixed income:
- We hold a short US duration, reflecting concerns about potential inflationary pressures tied to policy uncertainty under the new US administration.
- We prefer a long German duration and European credit, supported by a favourable interest rate and growth environment. European bonds also serve as a hedge, given their negative correlation to equities in a disinflationary environment.
- Alternatives play a crucial role in portfolio diversification:
- Gold is favoured for its protective qualities against market volatility and geopolitical risks, despite recent pressure from a stronger dollar and rising US real interest rates.
- In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
- The outlook for the US dollar remains complex, as domestic policy dynamics may both support and limit its appreciation. For now, we hold a long USD position.
- The Japanese Yen may appreciate in response to global economic stabilization and its safe-haven status.
Our Positioning
Our asset allocation is based on a soft-landing scenario for global growth while the main central banks have entered a new cycle of monetary easing and will do what is necessary to support economic activity. China, for its part, is piling on measures and has sent a strong signal: authorities want to get closer to their 5% growth target. The main risk to this scenario is Donald Trump's arrival at the White House next week, as it is still unclear which of his numerous campaign promises — tariffs, immigration, tax cuts, and deregulation — will actually be implemented. A hard stance on immigration and tariffs could derail these favourable prospects and would imply weaker global growth and higher inflation. Conversely, a softer version of his policies would not significantly undermine our overall growth and inflation forecasts.