Global markets enter 2025 facing complex challenges as Trump's imminent presidency and the Fed's monetary policy decisions create uncertainty. While the Fed signals modest rate cuts, concerns over Trump's proposed policies, including tariffs and immigration reforms, could impact inflation and labor markets. Meanwhile, Asia sees mixed signals with Japan's inflation rise and China's commitment to stimulus measures.
Economic Crossroads: Trump's Presidency and the Challenges Facing the Federal Reserve in 2025
During the calm final week of the year, marked by the Christmas holiday, traders have shifted their focus to expectations for the coming year. Discussions around the Federal Reserve's recent decision, its potential policy path for next year, and the likely impacts of Donald Trump's policies, with less than a month until his inauguration, remain ongoing.
Last week, the Fed reduced its benchmark policy rate by a quarter basis point but signaled only a modest half-point cut for 2025, which is less than previously anticipated. Additionally, Chair Jerome Powell emphasized that the Fed needs to see progress in inflation before proceeding with further easing.
Swap traders are currently pricing in about a 33-basis-point rate cut, which is less than the Fed's signaled half-point reduction. This situation is providing tailwinds for the U.S. dollar.
Among market observers, there is a consensus that the Fed will ease at a slower pace. However, significant uncertainty surrounds the policies expected to be implemented under a Trump administration and their potential effects on the economy, complicating market expectations.
Some economists predict that if Trump's proposed high tariffs, tax cuts, and mass deportation of millions of immigrants are enacted, U.S. inflation could rise, and the labor market could weaken. Economists at Deutsche Bank suggest that if inflation increases sharply, the Fed might pause rate cuts in 2025, while Curvature Securities economists do not rule out the possibility of a rate hike.
On the other hand, Morgan Stanley economists foresee downside risks to growth and anticipate a faster pace of rate cuts compared to other projections.
In conclusion, market expectations are mixed, but it is clear that the Fed faces a more challenging decision-making process in the year ahead. Should policies be implemented that have the potential to boost inflation and weaken the labor market, the Fed will need to carefully balance its dual mandate.
Meanwhile, Trump's tariff policy threats are keeping countries and businesses on edge, as well as American consumers are increasingly worried about the economic outlook. The Conference Board's consumer confidence index unexpectedly dropped to 104.7 in December, compared to economists' forecast of 112.9 in a Bloomberg survey.
A notable trend in the survey was the growing mention of politics and tariffs by respondents. Approximately 46% of participants expected tariffs to raise their cost of living. The results also indicated a rise in the proportion of consumers who believe they should purchase durable goods now to avoid higher prices in the future, reinforcing projections of further inflation in the months ahead.
Separately, a report released on Thursday showed that initial jobless claims fell last week, but the number of individuals continuing to receive unemployment benefits climbed to its highest level in over three years.
Initial jobless claims dropped to 219,000 in the week ending December 20. However, the measure of continuing claims for the prior week rose to 1.91 million, signaling that it is taking longer for American workers to find new jobs. While this indicates a slowing labor market, the stability in layoffs suggests no immediate cause for alarm.
Markets will closely watch the Challenger Job Cuts data next week for more insights into the U.S. labor market. Nonfarm payroll and unemployment rate figures, delayed by the New Year's holiday, will be released the following Friday.
Gold's Path Forward: Slower Rate Cuts, Strong Dollar, and Trump-Era Uncertainty
Gold is trading within a narrow range amid uncertainties about the year ahead. Gold traders are pricing in the possibility of the Federal Reserve implementing rate cuts at a slower pace while also assessing the potential impacts of the Trump administration.
This year has been a record-breaking one for gold, with prices climbing approximately 28% since the start of the year. This surge has been driven by rate cuts, safe-haven demand, and robust purchases by central banks. However, following the U.S. elections on November 5, the dollar soared to its highest levels in two years, pulling gold prices down from their record highs.
While some of the post-election losses have been recovered, economists suggest that the strong dollar and the expectation of fewer rate cuts from the Fed may continue to weigh on the gold market.
From Tokyo to Beijing: Inflation, Rate Decisions, and Economic Stimulus on the Horizon
In the early hours of the day, inflation data from Japan showed acceleration for the second consecutive month in December, while the labor market remained tight. Tokyo's consumer price index rose to 3% from the previous 2.6%, while the so-called core index, excluding volatile food and energy costs, came in at 2.4%. The unemployment rate held steady at 2.5%.
The trajectory of these figures suggests that the Bank of Japan (BoJ) may move to raise interest rates next year, but they do not indicate any urgency for a hike in the immediate future. Indeed, BoJ Governor Kazuo Ueda refrained from signaling any decisions for next month in his Wednesday remarks, reiterating that such actions would be data-dependent. This statement followed Ueda's comments last week suggesting the BoJ might wait longer before raising rates.
A dovish BoJ, in contrast to a hawkish Fed, is dampening market optimism for the yen. This sentiment has prompted hedge funds to increase purchases of dollar-yen call options, with market participants forecasting the currency pair to rise into the 160-165 range.
Turning to China, on Tuesday, the Ministry of Finance reaffirmed its commitment to boosting public spending next year to support the economy and stimulate domestic consumption. Since September, Beijing has announced successive stimulus measures but has avoided taking concrete actions.
However, earlier this month, China's top policymakers signaled a more growth-oriented policy stance for the coming year, including the use of more proactive fiscal tools. Additionally, the People's Bank of China is expected to implement significant rate cuts next year.
While some economists doubt whether these measures will be sufficient to escape the deflationary spiral and resolve the property crisis, others are more optimistic. Goldman Sachs, for instance, predicts that despite the risks posed by Trump's tariff policies, domestic stimulus measures would help mitigate pressure on Chinese equities. The MSCI China Index is projected to see 7% earnings growth in 2025.
In conclusion, the outlook for China's economy in the coming period will hinge critically on Trump's tariff policies and the actions taken by the Chinese government.
Trade with Confidence at Duhani Capital
As global markets navigate these complex waters, having a reliable trading partner becomes crucial. At Duhani Capital, we understand the importance of agile trading in volatile markets. Our platform offers you the competitive edge needed to capitalize on these market movements, whether you're trading forex, commodities, or equities.