- US: bond market bracing for Trump’s inauguration. US 10y yields climbed up to 60bps since their December lows (20bps ytd) before retreating after a weaker-than-expected inflation print this week. The previous sell-off was driven by a hawkish Fed stance, oil prices, bullish economic data and technical factors. We think markets are currently pricing in an overly high terminal rate for the Fed (around 4.0%) from a fundamental point of view and potentially underestimating the looming political pressure on the Fed to lower rates. We maintain our view that the Fed will deliver one more rate cut this year and two more in 2026, bringing the terminal rate to 3.5%. This should guide long-term yields down toward 4% over the year. However, volatility will persist with the news flow as the Trump administration is likely to quickly implement several of its campaign pledges soon after the inauguration next week.
- UK: not a repeat of the Truss moment. The UK’s 10y government bond yield rose by up to 30bps this year to cross 4.9%, the highest level since 2008, before retreating on lower inflation numbers. Yet, the recent sell-off should not be confused with 2022's "Truss moment" as the magnitude is significantly smaller this time around and market functioning is not at stake. Instead, markets priced in a period of reflation and consequently only two more cuts by the Bank of England (BoE), compared to expectations of at least four just a month ago. We expect stagflationary forces to fade over the course of the year because of tighter financial conditions and more restrictive fiscal policy (at least GBP5bn additional savings). The BoE is likely to cut the bank rate by 25bps next month, and to cut in one of every two meetings until Q3 2025. With that, UK 10y yields should stabilize and even decline back towards 4% during 2025.
- China: trade in, trade out. Economic activity improved in Q4 and GDP growth in 2024 should meet the “around 5%” target. Frontloading ahead of a renewed trade war is boosting exports and should remain a tailwind until tariffs are hiked. With still low private confidence, the few positive signs in domestic demand are entirely the result of policy easing since September, which needs to continue this year to lift sentiment. Meanwhile, equity markets have had their worst start to the year in nine years. We expect more from the “very proactive” fiscal policy, with a further focus on consumers through expanding the trade-in scheme, supporting household income and strengthening the social safety net. But ultimately, the intensity and scale will be a response function to how much trade falls due to higher tariffs. The details will only be unveiled in early March. On the monetary side, in the very short term, the PBOC will likely focus more on smoothing the path of the USDCNY rate and sovereign yields. We expect the next policy rate cut only in Q2. Overall, we expect GDP growth at +4.6% in 2025.
What to watch