• Central banks, especially the Fed, have toned down expectations of rate cuts, it seems at least partly reflecting concerns that the Trump administration will pursue more inflationary policies.
• Economic surprises have generally been to the positive side in the US and the negative side in the euro area, with concerns remaining elevated over the German economy and public finances in several countries, not least France.
• There are indications that consumer spending in Denmark might finally be increasing somewhat, and we also see more rays of light in other Nordic economies.

For anyone hoping for steep interest rate cuts, December’s central bank meetings were a disappointment. First, the ECB cut its policy rates by 25bp as largely expected, although some market participants had bet on a 50bp cut. A week later, the Federal Reserve cut the policy target range by 25bp accompanied by a clearly hawkish message. Apparently, policymakers put a lot of emphasis on the upside inflation risks stemming from the incoming US administration and their planned economic policies. Moreover, as market-based short-term inflation expectations have increased since the US election both in the US and in the euro area, it is clear investors consider the risks global, not only local.

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The change in monetary policy outlook led to a repricing in the rate markets. Before the FOMC meeting, markets were pricing in almost three rate cuts by the Fed for 2025. Currently, it expects less than two. Similarly, before the ECB meeting, the central bank was priced to cut rates at least five times in 2025. Now, markets lean towards four cuts only. We think markets overestimate inflation risks, and underestimate risks to growth. The renewed market focus on inflationary risks largely builds on investor speculations around Trump’s future economic policies. But even if campaign promises are held, implementation of e.g. tariffs may not be as easy nor as fast as many expect, or their inflationary impact may not be significant.

Hence, we are still less concerned of a prolonged period of elevated inflation, and more concerned about growth continuing to surprise to the downside. The German economy remains in dire straits, a persistent headwind for euro area. European recovery would also benefit from a pickup in Chinese demand, but that in turn hinges on further fiscal stimulus by local authorities. The US economy remains relatively robust, and surprises have been on the positive side lately, but growth is likely to slow. For one thing, slowing immigration flow is one more negative risk to growth. We keep our call that the ECB will cut rates in every meeting until September, bringing the deposit rate to 1.5%. We revised our Fed call to reflect the hawkish views of the Committee members, and now expect quarterly cuts instead of cuts in every meeting, but we still expect them to land at 3.00% by March 2026.

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The reduction in rate cut expectations has eroded stock market optimism lately. In Denmark, Novo Nordisk share price fell sharply as it occurred that its weight-loss pill may not be as effective as previously thought. The US dollar has remained bid and EUR/USD has declined to a two year-low below 1.03 level. While the weaker euro versus the dollar is a reflection of the diverging growth stories, it also compensates the European exporters for a large part for the negative impact from the potential US import tariffs.

As we enter 2025, we expect another eventful and potentially turbulent year. Economies continue to normalise, but growth might disappoint, and geopolitical risks remain. The incoming US administration has signalled they would continue to arm Ukraine, which is positive from Europe’s perspective, but momentum for ceasefire is also building both in Ukraine, and in Middle East. Alternative scenarios could be more upsetting for markets, for example if Israel is allowed to go “all in” after Iranian regime, all while the US support for Ukraine falters.

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