A new year is upon us and for sure it shapes up to be another interesting year. A key question from the start is how much of his policies US President-elect Donald Trump will actually pursue on issues such as tariffs, immigration, fiscal policy and Ukraine peace talks? We are yet to find out how much is rhetoric and what he will actually go for. And there is also a question of what he will be able to implement. On trade and foreign policy issues he has a lot of power, though. This week we introduced a revamp of our Geopolitical Radar, 9 January, where we take stock of geopolitical developments and outline scenarios. As we wrote in Nordic Outlook in December 2024, despite the uncertainties our baseline is still that it will be a year of normalisation in growth and inflation – and a further removal of tightness in monetary policy in most countries. Our baseline is a soft landing in the US, moderate growth improvement in the eurozone and continued muddling through in China. Often, we tend to overestimate the impact of politics on growth compared to other key drivers of the economies, such as the development in labour markets.

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Speaking of labour markets, we see signs of cooling in the euro area after a long period of resilience: Consumers’ unemployment expectations have shot higher lately and now point to rising unemployment and the PMI employment index has fallen below 50 indicating a decline in employment. At the same time, though, unemployment data this week showed another low reading at 6.3% so we have yet to see the cooling in the hard data. Focus in the euro area is predominantly on growth risks with clear structural concerns over too much regulation, high energy costs and rising competition from China coming on top of the weak cyclical indicators. We look for ECB to cut rates all the way to 1.5% by late summer (from 3% currently), which is around 50bp more than what markets price. Inflation data this week for December was in line with expectations showing an unchanged reading of 2.7% y/y for core inflation with a continued disinflationary trend in underlying momentum.

In the US, focus has instead shifted back on inflation risks, as the labour market has stopped cooling and consumer demand continues to look robust. This week JOLTS data showed an increase in job openings and a further decline in initial jobless claims (non-farm payrolls was released after deadline). Bond yields have shot higher lately due to the change in focus back on inflation as well as higher term premia related to debt concerns. We believe the optimism about the US economy is a bit overdone as we still look for moderation, not least due to much slower growth in the labour force. We believe the Fed has room to continue to cut rates on a quarterly basis in 2025 vs. market pricing of less than two cuts.

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China has shown some rays of light in the housing market lately and policy makers have sharply increased focus on lifting home sales and private consumption (see China Headlines, 8 January). However, a trade war with the US is looming later this year and China is likely to face another bumpy year when it comes to growth.

Focus in the coming week will be on US CPI where consensus looks for 0.2% m/m in core CPI. An upward surprise could be challenging for bonds that are under pressure at the moment. Other market movers will be US retail sales, UK CPI, Chinese data for GDP, housing and retail sales.

Full report in PDF.