Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 13/01/25

Government-bond yields have surged since early December, with curves bear-steepening
 
Borrowing costs continue to edge higher in 2025, following a hawkish shift from the Federal Reserve at its December 18th meeting and elevated fiscal, inflation and trade uncertainty across the globe.

In 2024, long-term government bond yields rose meaningfully, especially in the US and the UK. In the US, solid real GDP growth of circa 3% contributed to a +70 bps increase in the 10-year tenor, while UK Gilts underperformed (+100 bps) due to a relatively hawkish BoE and fiscal woes.
 
Strong US labor market data on Friday, with job creation beating consensus expectations by a wide margin (256k vs 150k) and sticky core inflation readings (December’s data due on January 15th with core CPI expected at +3.3% yoy) have sent 10-Year USTs higher by 21 bps to 4.78% in 2025, so far. The 10/2s curve has bear steepened significantly (+40 bps).
 
Fiscal concerns also have exerted upside pressure for long-term yields, particularly in the UK. Recall that the UK government put forth in late-October 2024, a budget plan which entails increased public borrowing to support sluggish growth.
 
According to the UK Office for Budget Responsibility, a substantial rise in public spending is envisaged, partly funded by higher taxes and in part by net borrowing. That factor, inter alia, led to an upward revision (compared with respective estimates in March 2024) of the anticipated public deficit, by +0.9% of GDP on average in the next 5 years (-4.5% of GDP in 2025, before easing to -2.1% in 2030), with the public debt at 98% of GDP in 2025 and 97% in 2030.
 
10-year UK Gilt yields have increased by +32 bps to 4.89% in 2025, so far, the highest since July 2008. In addition, 30-year UK Gilts have surpassed their peak 2023 levels. The GBP has depreciated against the USD by circa 7% to GBP/USD 1.22 since early October 2024. The focus will shift on the December inflation data released on January 15th (November Core CPI: +3.5% yoy).
 
Global equity markets are treading water in the start of 2025, following back-to-back double digit annual gains (MSCI All Country World Index: +16% in 2024 following a +20% in 2023), led by US bourses. Indeed, the S&P500 rose by +23% from +24% in 2023, in view of solid economic activity and corporate profitability, as well as of strong expectations for positive economic ramifications from technological advancements in the field of Artificial Intelligence (AI).  
 
The sharp gains in the course of 2024, came on the back of robust corporate earnings expectations (+14% yoy for Earning-per-Share in 2025 regarding the S&P500 and +8% for EuroStoxx), as well as increasing valuations, especially in the US, which currently stand at relatively stretched levels.
 
The S&P500 12-month forward P/E stands at 21x, versus a 20-year average of 16x, rendering stocks susceptible to downside risks if risk appetite deteriorates significantly due to adverse global trade and geopolitical developments.
 
At the same time, a possible persistence of US consumer inflation pressures, could delay the Federal Reserve’s monetary policy easing process. Note though that if such a persistence is the result of strong domestic demand, higher than currently expected risk-free rates are not set to derail equity markets.