2025 Global Outlook: Dodge, Duck, Dip, Dive and DOGE

Overview:

• Global Macro: The next year will bring heightened geopolitical uncertainty and trade wars with important consequences for the global economy.
• Global Rates: It will be a bumpy ride, but the fate of the rates market will ultimately hinge on the Fed.
• Global FX: Political economy will reshape the FX market with relative equities, growth and carry factors providing early tailwinds for the USD.
• Commodities: Supercycles are interrupted as pandemic-era supply shortages ease and demand disappoints.

It's all about policy implementation now for handicapping markets. It's fairly straightforward to model the impact of tariffs, more complex to model immigration reform, and government efficiency and broader fiscal or regulatory reforms are anyone's guess. We laid out what the options could look like, but without the final policy, timing and implementation, we don't have the details we need.

This leaves us with more premises than convictions:

• U.S. policies will drive U.S. inflation higher and global growth lower than would have otherwise been the case.
• There will be attempts to offset the drag on U.S. growth.
• Tax cut plans will be constrained by need to raise revenue.
• U.S. implementation is not guaranteed, with only the slimmest GOP advantage in the House.
• Markets continue to give a pass on fiscal risks.

However, the U.S. is only half of the puzzle; policy risk works both ways. While the focus is on the initial salvo from the U.S., we expect there are lines in the sand outside the U.S. too.

Initial Timeline for Event Risk for 2025

Global Macro Outlook

Sizeable shocks to global economy, and politics will be less predictable

As we look into 2025, we see a world of heightened uncertainty and greater regional divergence.

A Trump presidency means higher U.S. inflation and weaker global growth. We expect more bark than bite for the most part, so while we work in higher inflation from tariffs and a (limited) labour shock from migration policies in the U.S., we factor in only mildly weaker growth in key trading partners.

In the U.S., tariffs and immigration policies will boost inflation by nearly 1ppt by early 2026, eventually weighing on growth and have an important impact on monetary policy. As the labour market softens and wage growth slows, we expect aggregate income growth to cool; we expect the unemployment rate to peak at 4.4% in 2025.

For the Fed, we see a 25bps cut in Dec-24, and a six-month pause thereafter. Only in the second half of 2025 – once the growth impact of tariffs and immigration policy starts to bite – does the FOMC resume its rate cut path, taking the fed funds rate to its neutral rate of 3.00% by spring 2026.

Global growth outlook focused on U.S. tariff policies

China: The Politburo has pledged more economic support. China will be hit hard with 40% U.S. tariffs imposed across the board. We expect policymakers to do everything in their power to replace lost export demand with domestic demand.

Canada: Our base case is that Canada receives an exemption from any new U.S. tariffs, though United States-Mexico-Canada Agreement (USMCA) renegotiations in 2026 do pose some risk. Assuming a 50bps cut in December 2024, we look for four more 25bp cuts over the first half of 2025 bringing the overnight rate to 2.25% by June.

Europe: The region faces perhaps some of the biggest challenges in 2025, with geopolitics almost certain to have a negative impact on growth. Europe will be hit by U.S. tariffs and China dumping its goods in response to U.S. tariffs. The European Central Bank (ECB) will cut below neutral to 2.00% by June, while stickier inflation will see the U.K. cut more cautiously, pausing at 3.50% from August.

Real Policy Rates

Global Rates Outlook

Too much recency bias

The path for global rates markets will hinge on the evolution of longer-term Fed pricing. Looking across the globe, we see a few markets where the balance of risks looks mispriced.

In terms of forecast impacts, the most significant mispricing is in the U.S. with markets pricing just three more 25bp cuts by the end of 2025. This partly reflects markets putting too much weight on recent above-trend U.S. data, but it also implies perhaps too much certainty around the Fed's response to inflationary impacts from the incoming Trump administration.

Markets may be overestimating the case for easing in Europe, while there is scope for the Bank of Canada (BoC) to move more firmly into accommodative territory.

Cheap U.K. valuations should allow Gilts to keep pace with United States Treasury (USTs) during 2025's rally, and looking at relative fiscal trajectories, we would argue that Gilts ought to be trading through Treasuries.

Australian 10-year bonds look fairly valued relative to longer-term anchors, and with the Reserve Bank of Australia (RBA) on hold until 2025H2, we see Australian Commonwealth Government Bonds (ACGBs) as the strongest candidate to effectively detach from the Treasury market. We could see a slight upward drift in 30-year ACGB yields.

Global supply bends but does not break

Fiscal policy remains very loose relative to the pre-pandemic norms, which implies another significant wave of supply for 2025.

We look for US$1.89 trillion in net Treasury supply in FY2025, up slightly in both notional and duration terms from the previous fiscal year. Inevitably, the size of the U.S. deficit generates questions around sustainability. We do not see that as a conversation for 2025.

We look for Europe government bond supply of EUR1.3 trillion next year — slightly less than 2024, but still substantial. The story is similar in the U.K., Canada, and New Zealand, where issuance levels will be little changed from 2024. Australia does stand out as a market to watch however, as we look for an increase in gross issuance of more than 50% for the upcoming fiscal year.

The U.S. curve is pricing a steady state Fed rate near 3.75%

Global FX Outlook

Political economy reshapes FX market

We see an evolution of themes and drivers in the coming year, which underscores a potential shift in the global trade and market backdrop. Many market participants feel that geopolitics and political economy are just tail-risk considerations to the fundamental market environment. We disagree, highlighting that the past decade has seen political economy reshape global market drivers, reversing that logic.

The key takeaway – and handover – from 2024 to 2025 is that mean reversion is king. The best performing FX strategies, for instance, weren't fundamental or macro like much of the post-pandemic environment. Instead, they were mean-reverting with a focus on positioning and valuations.

The long and winding road

The start of 2025 remains bullish for the USD, especially as it scores highly on all the key themes that we think will shape markets at the start of the year. High-frequency data indicators show that the U.S. has an edge on both China and the Eurozone. Our global growth regime indicator has narrowly passed into bullish USD territory, and our backtests show that the USD tends to rally in this kind of environment.

The first phase of the new Trump presidency is to introduce global trade uncertainty with the aim of reshaping policy. The first order effect is bullish the USD, reflecting the impact global trade tensions and associated tariff jawboning. Even if Trump doesn't deliver on the specific levels floated on the campaign trail, the prospects of a disruption to the status quo will likely lead to weaker currencies in both Europe and Asia, with the JPY a probable outlier.

Much of the early focus will fall to trade relations with China. We think a second-order effect of this disruption, and the associated USD strength, could lead to a US/China deal over time. But first, the temperature will be dialled all the way up and trade tensions will simmer. The knee-jerk may see USDCNH rise to offset the looming growth shock.

Last year brought a pivot in the major thematic FX drivers
MRSI risk adjusted factor performance, sorted by 5y performance

Commodities Outlook

China, ample supply and less rate optimism tilt commodities lower

Gold has been propelled to record highs recently as markets reacted to expectations of a rapid decline in the Fed funds target rate, U.S. political uncertainty, geopolitical risks and strong buying by central banks and investors. But the impact of these supportive factors on gold has likely peaked. Given the change in the interest rate trajectory, a firm USD and a slower uptake of physical metal by central banks and coin and bar investors, the market may very well be ready to consolidate the recent gains.

Silver is set to outperform. Improving demand amid firming Chinese and U.S. economies later in 2025 should tighten the chronically undersupplied silver market as excess inventories looking for a home are absorbed. The white metal may get squeezed as recovering Asian demand absorbs recent inventory builds in the aftermath of the China slowdown and the base metal concentrate processing capacity increases. How the new Trump administration manages the Inflation Reduction Act commitments, climate issues and tariffs on Chinese products containing silver will be key to how the metal performs.

China key commodity demand driver of last 20 years – Hard to see new rallies amid middle kingdom underperformance