As 2024 comes to a close, it feels as though the year has passed faster than usual, bringing with it not only impressive market returns that I certainly welcomed but also a rich variety of narratives and themes that dominated the markets over the past twelve months. Yet, the guiding principle throughout it all was often strikingly simple: just focus on what the Fed has been telling us—a simplicity so evident that it’s frequently overlooked.
On a personal level, this year has marked significant milestones in my career; while 2023 was defined by my shift from equities to a more macro-oriented focus, 2024 saw me transition from traditional finance into the realm of OTC markets. Over the past few months, I’ve found myself trading far less in FX or rates and much more in physical commodity markets, a shift that feels not only more engaging but also refreshingly tangible, as I no longer feel like I’m merely betting on numbers on a screen. Perhaps in the future, I’ll delve deeper into what I’ve been working on, as it has been both a fascinating and rewarding journey. In the meantime, you can check out this website for a preview.
Reflecting on last year’s December update, it was heavily forward-looking, as I attempted to forecast economic data trends and the potential rate path for the year ahead. While those estimates turned out to be reasonably accurate, I would be remiss to claim they held much value; they were, after all, simply extrapolations based on what I thought might unfold. The reality is that I do not know the future, and neither does anyone else, a fact that becomes glaringly apparent when reading the sell-side’s year-ahead outlooks. Indeed, whatever your personal bias, you’re bound to find it confirmed in at least one of these reports, and, unsurprisingly, the consensus for 2025 is once again that it will be “a market for stock pickers”. Why this is the case, I couldn’t say without delving into the reports themselves—something I have no intention of doing—though I suspect the rationale involves the usual suspects: thematic trends (read: AI), U.S. exceptionalism (read: tax cuts), and pockets of secular earnings growth (again, AI and tax cuts). The prevailing sentiment appears to be bullish on the dollar and bearish on oil, not necessarily because these are the most accurate forecasts, but rather because they’re the simplest responses to the ever-complicated question of “what will be the consequences of tariffs?”
That being said, this update will include some forward-looking material, though, like all my Portfolio Updates, it is a reflection of my thoughts and beliefs at the time of writing. By the time January’s update is published, my views may well have shifted, and the easiest way to stay aligned with my current thinking is by following me on Twitter—if you already do, a recommendation would certainly be appreciated.
Before we begin, I’d appreciate it if you could take a moment to fill out this short form with feedback on the newsletter: it would be extremely helpful in refining both the content and delivery of the Portfolio Updates.
Last December, I recommended opening a long yen position as soon as the BoJ hiked in April. However, the bank surprised us by hiking for the first time in years in March instead of April. Ultimately, it doesn’t really matter—the trade was disappointing. In fact, if we had entered the long yen position as suggested in the December 2023 update (55% against EUR, 30% against GBP, and 15% against USD) on March 18th, 2024, when the BoJ first hiked, we would have ended the year with a loss of 3.06%. For those interested, I’ve shared the performance of the trade throughout the year here: it ranged from a low of -7.86% this summer to a high of +3.74% in late September.
Looking at the other currencies, we expected the EUR to remain stable, as both the ECB and the Fed were cutting rates at the same time—and that’s exactly what happened. Similarly, the USD appreciated as growth began slowing down in other regions, and more recently, in anticipation of the policies that will take effect next year under the new red presidency.
The chart above represents what I call the “crisis index”, a forward-looking measure I developed that rises when volatility increases due to factors linked to social instability. While the exact computation is a bit complex, what’s important to know is that when the index crosses the red line, it signals the occurrence of events with significant global implications.
Ironically, despite the dramatic headlines this December, the index didn’t rise as much as one might expect. Indeed, for those in the “nothing ever happens” camp his month has been a resounding defeat as over the course of just 30 days, we’ve seen:
- An attempted coup in South Korea, with Martial Law enforced for nearly 48 hours
- The cancellation of Romania’s election
- The collapse of the Assad regime in Syria
- The toppling of the French government
- The daylight assassination of a prominent U.S. CEO
- Switzerland voting to dissolve itself
It seems that, for once, something actually happened.
United States
Before diving into the monetary policy landscape, let’s briefly touch on the US equity market. Despite concerns voiced by many, the market remains near its highest level of concentration in a century, driven primarily by the outsized influence of major US tech companies. While some interpret this as a harbinger of an impending crash, there are valid reasons these firms have become dominant: for over a decade, their earnings have consistently outpaced the global market, and the recent AI boom has only amplified their trajectory. Fundamentally, many of these companies remain solid, though it’s fair to acknowledge that this degree of market concentration is unsustainable.
What the doomers often overlook, however, is that the US equity market continues to stand out globally. Resilient economic growth, robust corporate earnings, and a culture deeply rooted in fostering innovation provide a foundation that few other regions can match. Add to this a new administration focused on reducing corporate tax rates and implementing lighter regulation, and it becomes increasingly difficult to envision a significant reversal in this dynamic anytime soon.
That said, it would be naive to assume the market leaders of 2023 and 2024 will automatically carry the torch in 2025. However, given the shifting policy environment, evolving rate expectations, and resurgence in M&A activity, my trade idea for 2025 in the US is to go long on private credit (e.g., Blue Owl) and private equity (e.g., Blackstone, Apollo, KKR). As always, this isn’t financial advice, and you should assume I already hold positions in these names.
Federal Reserve
I may be a bit contrarian here, but contrary to many, I believe the Fed won’t be cutting rates next year. I’m not saying they’ll hike either—doing so would be misguided—but at the same time, I don’t expect them to cut. The reason is that, between the tariffs and the tax cuts, the fiscal side of the equation will be quite expansive, and to maintain equilibrium, the monetary side will likely need to be more contractive to counterbalance the effects.
In fact, I’ve been saying this for a while now (see the October and November updates), and I was among the few surprised by the SEP in the last FOMC meeting (tweet).
Speaking of the last FOMC meeting, the Federal Reserve reduced rates by 25bps to a range of 4.25-4.5%. The statement from the meeting remained largely unchanged from November, with the only notable difference being the language. The Fed now mentions considering the “extent and timing” of further rate adjustments, as opposed to simply “considering additional adjustments” previously. In other words, as we’ve been saying for some time, the Fed is set to slow down the pace of rate cuts.
“The ECB needs to cut faster, the Fed needs to cut slower.” (tweet)
The updated Summary of Economic Projections (SEPs) presented a more hawkish outlook, with the median dot plots for the Federal Funds Rate (FFR) in 2025 and 2026 coming in higher than expected: the median dot for 2025 rose to 3.9% (up from 3.4%, with expectations of 3.6%), while the median dot for 2026 climbed to 3.4% (up from 3.1%, with expectations of 3.1%). The median dots for 2027 and the longer-term forecast also increased to 3.1% (from 2.9%) and 3.0% (from 2.9%), respectively, as anticipated. Basically, the Fed expects to cut twice in 2025. Surprisingly, the FOMC members were more aligned this time, with four members projecting rates above the median, five below, and then ten in line with the median.
Core PCE inflation projections were also updated, with estimates for 2025 set at 2.5% and for 2026 at 2.2%. Meanwhile, the unemployment rate forecasts remained largely unchanged, with all time horizons steady at 4.3%.
Then came the press conference. In his opening remarks, Powell reiterated that the Fed is focused on two key goals: fostering economic growth and bringing inflation back to the 2% target. He noted that the economy remains strong, the labor market is solid, and inflation is moving closer to the 2% target. However, let’s be honest: given the choice, the Fed will prioritize growth over inflation. After nearly three years of inflation remaining above target and no expectation of returning to target for at least another two, this much is clear.
Powell also emphasized multiple times that the current policy stance is significantly less restrictive, allowing the Fed to take a more cautious approach moving forward. He added that any rate cuts in 2025 will be data-dependent, with the Fed in a position to proceed cautiously as long as the labor market and economy remain strong.
The key takeaway here is that the Fed will be waiting for further progress on inflation before making additional cuts. This signals that the central bank is entering a new phase, one in which it will be more cautious about further rate reductions.
Europe
The European continent remains in disarray, and 2024 did little to change that trajectory. Beyond the economic challenges and the complications of monetary policy,the most pressing issue for Europe is its steady decline in global relevance: the continent is losing its competitive edge, risking a future where it becomes largely sidelined on the world stage. This situation is even more precarious now, with the United States under a president determined to bolster his nation’s power and prosperity, even if it comes at the expense of allies’ growth and momentum. While the U.S. and other global players aggressively pursue strategies to secure dominance in technology, energy, and innovation, Europe risks being left behind, and that is becoming clearer by the day. As discussed in prior updates, the continent must urgently reinvent itself. Without a fundamental shift in priorities, Europe could soon find itself watching as China, the United States, and the Gulf States siphon away not just growth and innovation but, most alarmingly, its most talented individuals.
Europe seems more focused on regulatory achievements and minor victories—like ensuring bottle caps stay attached to bottles—than on tackling the transformative challenges that truly matter. While these accomplishments might resonate symbolically, they pale in comparison to the global “gold rush” for advancements in AI, renewable energy, biotechnology, and other critical areas. Without a serious course correction, Europe risks becoming a bystander in the world’s most important races.
It’s not too late for change, but time is running out. If Europe wants to remain relevant, it must focus on fostering innovation, attracting talent, and creating an environment where progress can flourish. The glass castle of regulation and tradition might feel secure for now, but without bold action, its significance on the global stage will continue to fade.
That said, I remain optimistic that the message has resonated with the right people in the European Commission and the European Parliament. If so, we might be on the brink of not only a wave of innovation but also strong market returns from European equities. While it’s almost become an evergreen joke at this point, I’ll reiterate my belief that gaining exposure to European value companies is a prudent move. As many of you already know, I’m not just talking for the sake of it—my money is where my mouth is. For those interested, you can check the positions I held at the close of 2024 here.
European Central Bank
At its December meeting, the ECB, as widely anticipated, cut rates by 25bps to 3.0%. The bank reiterated its commitment to a data-dependent, meeting-by-meeting approach but notably removed the reference to “keeping policy rates sufficiently restrictive for as long as necessary” from its statement. On the forecasting front, inflation projections for 2024 and 2025 were revised downward, while the 2026 forecast remained just below target at 1.9%. Growth forecasts were also downgraded across the board.
During the press conference, Lagarde stressed that it is still too early to declare victory on inflation, cautioning that risks to inflation remain two-sided. She disclosed that while the Governing Council unanimously agreed on the 25bps cut, a 50bps reduction was also discussed but failed to gain traction. Lagarde reaffirmed that the ECB is not pre-committing to any specific policy path and refrained from addressing the concept of a neutral rate or its estimated level.
Overall, this approach strikes a reasonable balance between concerns over growth and inflation. I remain confident in my view that the ECB will accelerate the pace of rate cuts in 2025. This expectation appears to be partially reflected in market pricing, as following the decision, markets began pricing in 120bps of cuts.
United Kingdom
In the December meeting, the Monetary Policy Committee decided to keep rates unchanged, which was widely expected. What caught analysts off guard, however, was the vote split: consensus had anticipated just one dissenter, but there were actually three. The dissenters argued that recent data points to sluggish demand and a weakening labor market, both now and in the year ahead, which they believe would continue to exert downward pressure on demand, wages, and prices. Despite this, the majority opted to keep policy unchanged, citing the uptick in CPI inflation, wage growth, and some inflation expectations, which raised concerns about the persistence of inflation.
On the economic outlook, the bank now expects zero GDP growth in Q4 2024, a downgrade from the 0.3% growth forecast in the November report. Meanwhile, CPI inflation is expected to rise slightly. In a subsequent media round, Governor Bailey stated that market pricing for February is in a “reasonable place” and cautioned investors not to “overinterpret” the latest wage data.
Overall, it’s clear that while some members are concerned about slowing activity data, the rest of the board remains focused on the ongoing challenges of stubborn services inflation and persistent wage growth.
Japan
In its December meeting, the BoJ decided to keep the rate unchanged at 0.25%, as expected, with just one dissenter calling for a 25bps hike. The statement noted that Japan’s economy is recovering moderately, though with some underlying weaknesses, and reiterated the high level of uncertainty surrounding both the economic and price outlook. The decision aligned with market expectations, with the majority anticipating the BoJ would hold rates steady, leaving those hoping for a hike somewhat disappointed. Given the broader market sell-off following the FOMC decision just hours earlier, it was, in hindsight, a welcome surprise that no hike was implemented.
As for the statement itself, it was fairly noncommittal, and the press conference offered little clarity beyond that. However, a dovish and cautious tone emerged when Governor Ueda mentioned the need for “one more notch” before deciding whether further tightening is warranted. While he didn’t specify exactly what “one more notch” referred to, he suggested that the January outlook report might not provide enough information. Ueda elaborated that the key to understanding the potential for tightening lies in the momentum of wage negotiations next year, with a particular focus on the Spring Shunto wage talks. While the negotiations peak in March, he indicated that an outlook might be formed earlier, with a clearer picture of wage trends expected to emerge by March and April.
In essence, we find ourselves in a situation similar to last December, waiting for the key indicators to guide the next move.
After the press conference, it’s fair to assume that no hike will take place at the January 24th meeting. Instead, the focus will likely shift to the March 19th meeting, when insights from the Spring wage negotiations should begin to trickle in.
For what it’s worth, analysts at ING, who have been fairly accurate in recent forecasts, predict 75bps of rate hikes by the end of 2025, bringing the rate to 1.0%. More specifically, they expect hikes in January, May, and October.
Switzerland
In its meeting this month, the SNB surprised the market with a larger-than-expected 50bps rate cut, lowering the policy rate to 0.50% from the previous 1.0%, against the consensus forecast of just a 25bps cut. Assuming the neutral rate falls somewhere between 0.00% and 0.50%, this move brings the SNB into what is considered a neutral stance. The justification for the more aggressive cut stems from inflation printing lower than anticipated and a continued decrease in underlying inflationary pressures over the quarter. As a result, the SNB has revised its 2024 CPI forecast down to 1.1% (previously 1.2%) and made a sharper reduction in its 2025 projection, which now stands at 0.3% (previously 0.6%). However, inflation is expected to rebound slightly in 2026, with a projection of 0.8% (previously 0.7%).
Overall, these projections keep inflation comfortably within the SNB’s target band of 0-2%. Assuming CPI doesn’t continue to surprise to the downside, this rate cut could represent the low point for interest rates in this cycle. However, recent substantial deviations below forecast create a headwind for this view. Market pricing has been volatile, torn between a 25bps and 50bps cut in March 2025, with the rate expected to reach 0.0% by June 2025. After the initial rate cut announcement, markets even priced in a return to negative rates in the near term, but that sentiment was reversed following remarks by Schelgel, who stressed that the SNB is averse to negative rates, diminishing the likelihood of a return to NIRP.
The SNB’s decision to implement a larger-than-expected cut was aimed at curbing inflation from undershooting its forecasts. Time will tell if this adjustment proves sufficient, or if further easing, potentially pushing rates back towards or below the zero lower bound, will be necessary.
Canada
In its December meeting, the Bank of Canada cut rates by 50bps, bringing the policy rate to 3.25%, in line with expectations. This move now aligns with the top end of the Bank’s neutral rate estimate. Importantly, the Bank also adjusted its language in the statement, removing the previous reference to it being “reasonable to expect further rate cuts if the economy evolves in line with the forecast.” Instead, the Bank emphasized a more flexible approach, stating that it will assess the need for additional rate cuts on a decision-by-decision basis, guided by incoming data and the impact on the inflation outlook.
The justification for the 50bps rate cut was to support economic growth and keep inflation close to the middle of the 1-3% target range. The Bank highlighted that Q4 growth had come in weaker than expected, and a reduction in immigration levels pointed to softer GDP growth for 2025 than initially forecasted, with a muted impact on inflation. During the press conference, Governor Macklem mentioned that both a 25bps and a 50bps rate cut had been discussed during the meeting, but going forward, the Bank plans to take a more gradual approach, considering further cuts but with caution.
Macklem also underscored the ongoing focus on keeping inflation near the target and noted that the Canadian economy remains in excess supply, with a growth outlook that has softened since their October forecast. While unemployment has risen, the Bank does not foresee widespread job losses typical of a recession.
A key point in Macklem’s remarks was his acknowledgment of the Canadian dollar. While the CAD had been stable overall, much of its recent depreciation could be attributed to the strength of the USD. When comparing the CAD to other major currencies, there had been very little movement, suggesting that the weakness in the CAD is primarily a result of broader USD strength rather than any specific weakness in the Canadian economy.
Australia
In its December meeting, the RBA opted to keep the Cash Rate steady at 4.35%, issuing a more dovish statement that reflects growing confidence inflation is moving sustainably toward its target. While inflation is still expected to remain above the RBA’s 2–3% target for some time, the tone softened, with the bank stepping back from its previous position of “ruling anything in or out” on future policy adjustments.
During the post-meeting presser, Bullock clarified that neither a rate hike nor a cut had been actively discussed. This shift in language suggests the RBA is getting closer to the point where some of the current policy restrictiveness could be unwound. While Bullock acknowledged the possibility of a rate cut in February, he chose not to expand on the scenario, underscoring the data-dependent and cautious approach the RBA intends to maintain moving forward.
Arguably, one of the key concerns for 2025 will be the value of the AUD, which ended the year at a multi-year low of 61.88 against the dollar. To put this into perspective, this level hasn’t been seen since October 2022. While much of the decline can be attributed to fluctuations in the CNY and USD, a weakening AUD can have detrimental effects on both households and businesses, while also exerting upward pressure on inflation.