Odds of cuts being cut!
It’s feeling a lot like the final push to the holidays, with trading desks far and wide lining themselves up for year end, hoping to avoid the hangovers of years gone by. Despite the annual housekeeping and window dressing, there is plenty going on worth taking note of as we sprint to the end of 2025.
Macro
De-escalation seems to have continued in various pockets out there. There appears to be a path forward between the two largest trading nations with the latest Trump / Jinping rhetoric pointing to reduced tariffs and generally friendlier terms.
Less favourable though has been the relationship between the newly elected, and first female, Prime Minister of Japan, Sanae Takaichi, who has a mandate to actively reduce the cost of living which has risen in particular since the imposition of US tariffs and is due to release fresh stimulus to ease the pain, extending support to companies also impacted by the renegotiation. Her comments directed at China regarding the sovereignty of Taiwan have caused considerable upset and led the Communist Party to advise its citizens not to travel to Japan. Doesn’t sound great, although in prior spats typically the main impact has been reduced Japanese imports and can look a little like shooting yourself in the foot. Not ideal timing given the need to already inject fresh life into the Japanese economy.
Zooming back out again, global GDP growth has been revised down marginally with the IMF projecting a slowdown from 3.3% in 2024 to 3.2% in 2025, and then to 3.1% in 2026 (Oct 2025).
Risk
Is it a bubble or are we in a new era where AI is everything? As valuations continue to rise so does the speculation around whether we are (over-) due a correction. Some of the bigger names in the market have been public about the peak having been reached. Michael Burry, of “The Big Short” fame for correctly calling the financial crisis, is now actively positioned to win should stocks come tumbling back down. Peter Theils’ (originally Paypal) hedge fund, known for being pro-tech, has also this week sold out of Nvidia, prior to earnings underwhelming investors far and wide. A $10,000 investment a decade ago in today’s money? $3.2 million (Bloomberg data). There is a time to hold and a time to crystalise!
AI jitters have spilled over into the broader equity market, with the latest IMFs Global Stability Report (Oct 2025) stating “risk-asset valuations are now well above fundamentals", increasing the probability of a sharper correction should sentiment continue to erode.
As it stands it hasn’t been a bad year with the NASDAQ up 16%, and most indices globally being in the green and often in the double-digits. If I had to pick three outperformers, would it be these? Spain (+36%) and Italy (+26%), along with Hong Kong (+30%), are on a stellar run, in my opinion. Part recovery, part outperformance. Perhaps surprising given the growth woes in much of Europe and a China slowdown.
Credit
November has been busy in Europe, notably from corporate issuers, and within that US firms borrowing in Euros and across a range of maturities, taking advantage of low nominal rates and ample liquidity. In fact it has been the busiest week for corporate issuance since 2020 (source: Bloomberg). A positive sign that markets are functioning well. On the flipside though, over in the States we saw the first deal of the year pulled due to lack of investor appetite to lend DXC Technologies in what was also described as volatile conditions (Reuters), despite proceeds being conservatively earmarked to refresh their upcoming bond maturity.
Private credit continues to hit the headlines. Whilst autopsies are being performed on a growing list of names, we are far from any kind of contagion or widespread fallout. It is notable that Meta has gone down the private financing route to raise a whopping $29 billion for the purposes of building additional data centres to support AI ambitions. Public markets, with historically the deepest pool of investors, have on this occasion lost out to a consortium of some of the biggest names in private equity. But why? With a price tag of $270 million a year, and well above public market pricing, none of those involved are known for their charitable work. Reasons cited publicly included flexibility and diversification. There is likely more to it, including favourable balance sheet treatment and less scrutiny. No matter the motivation, it is clear to see that what was once a niche loan market serving smaller private firms behind closed doors has gone mainstream, and big. (Source).
EUR
CPI data across multiple Eurozone members including France, Germany, and Spain all came in largely as expected thus causing not even the raising of an eyebrow. Odds for the next two ECB meetings remain in line with no change expected both in December and February. Looking at other market indicators, such as ESTR, across the next twelve months, we do seem to have reached terminal rates (aka the bottom of the cutting cycle, data from Bloomberg). The political instability of France, driven by stalemate with change being necessary but unpalatable, is one spot to keep an eye on. Cost of financing continues to be elevated when compared to that of other, similarly rated Europeans. Along with TreasurySpring, the ECB also announced it will be joining Eurex, one of the main central clearers of EUR.
GBP
The Bank of England voted and the sentiment, along with accompanying statement, was clear (Source, BoE). Despite inflation last reported at 3.8%, December, bar any exogenous shock or consistently strong data, will see a cut before Christmas. Voting was tight with a 5-4 split to hold at 4.00%. As is tradition, the Governor held the final and swing vote. Market pricing indicates that should Christmas be missed there is a very decent chance February delivers what December could not, with just one final cut in 2026 thereafter, contradicting what the Bank seems to perceive as a terminal rate of between 3.00% to 3.25%. Growth…hmmm…GDP contracted by 0.1% in September from the previous month, undershooting analyst predictions of no growth at all, but at least not contractionary territory.
It was also down from a 0.1% rise in August. Employment? On November 11th, the UK unemployment rate unexpectedly rose to 5% (4.9% expected) and wage growth slowed in the three months to September, sparking a rally in gilts as traders raised bets that the Bank of England will cut interest rates next month to boost a lacklustre economy. (Source: FT article).
Away from all of this there is real concern as to how the Autumn budget will tackle high debt and low growth, with persistent inflation. Much has been said in the press with various potential policies tested, some with rather dramatic market movements on the follow. One thing appears to be clear, manifesto promises have to be broken to get back to a fiscally responsible place. The only question remaining being which particular flavours of tax rise and spend cut are to be implemented.
USD
The longest shutdown in history is now over, the hangover from a lack of data though remains very much intact. Some key statistics are due to be released in the coming days and weeks, certainly before the next Federal Reserve meeting. To what extent growth in the fourth quarter will have been impacted only time will tell. Hard to believe though that we got away unscathed. As per our commentary in “Follow The Fed”, November edition, what was almost certainly a 25 basis point cut now has a less than 50% chance of happening before Christmas as things currently stand (Bloomberg).
Several voting members including Governor Waller point to a weak Labour market and increasing household costs from Mortgages and auto-loans which could end up materially impacting growth over the coming months. Trump's recent appointee Stephan Miran even more aggressive in his calls for cuts to support jobs, and generally make money cheaper to further stimulate the economy, in line with the President’s ambitions which could well be scuppered.
Another faction in the Fed believes that progress in reducing inflation could stall, as the jobs data may not be showing a slowing demand for workers rather changes in its make-up particularly from immigration.Street cred is also important here…the Fed has been above that mythical 2% target for some years now. Cutting in the face of price rises continuing to trend 50% above target is not a great look. (Source)
So what?
With the final push to the end of the year, despite inflation remaining elevated in both the UK and the US, there remains a decent chance we see rates coming down further. In the short term this may well provide some relief and boost the economy, but history does inform us that this must be handled with care. Too much stimulus and we will be back to square one, or worse, with inflation back out of the bottle whilst other important factors such as employment and affordability and household savings have declined in the meantime.
The good news? There is still plenty of time for those in treasury to position themselves well for the inevitable volatility and annual window-dressing in capital markets, to ensure there is much to celebrate following a job well done.
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.