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YEAR AHEAD 2025 | POLICY PENDULUM




Year Ahead
25 Nov 2024
Cross Asset   

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Year Ahead 2025: Policy Pendulum 

The swing towards fiscal activism, terminal rates and global protectionism


  


   Please see the attached pdf (linked above) for the full report, and 'Your
guide to 2025 in 25 pages' for the high level summary report.


  


Dear reader,

2025 will be characterised by the policy pendulum swinging towards further
fiscal activism, the path to terminal rates and global protectionism. It follows
the ‘year of the ballot box’. More than half the world’s population headed to
the polls in 2024, and many incumbent governments fared badly as still-high
prices and interest rates weighed on living standards. 

We wrote in our Year Ahead 2024 that ‘fiscal forever’ was on the ballot. As we
enter 2025, it is no longer just a campaign promise but the newly-elected
reality. Government deficits have ballooned in recent years and any fiscal
consolidation now seems even more distant. Fiscal, not monetary, policy is now
in the driving seat for rates markets. Yields across developed economies are on
pace to end the year significantly higher than where they started (for the third
time in the past four years), despite the fact that 2024 was also the year of
the monetary policy pivot. For rates, we expect more of the same in 2025;
fiscal’s long-Covid will weigh on the outright level of yields, and on curves.

But the impact of those election outcomes stretches well beyond the yield curve.
Geopolitical risk and protectionism appear resurgent, challenging the resilience
of supply chains, threatening escalation of global conflict, and raising the
risk that inflation stays higher-for-longer. This is likely to weigh on central
bank reaction functions in 2025. Whilst we expect G3 central banks to reach
terminal rates before the end of H1, these rates will be much higher than the
levels settled at in previous cutting cycles, and the destination could differ
significantly across regions. It is these different destinations that we expect
be a key driver for FX in 2025, not just the speed at which central banks are
cutting.

Whilst there will be fewer elections to contend with in 2025, we expect markets
to be no less volatile as they navigate the swing towards fiscal activism,
terminal rates and global protectionism in a post-election world. 

With that in mind, we focus on four key themes that are driving the policy
pendulum, and by extension, markets in our Year Ahead 2025:

1. The path to terminal rates

2. Fiscal long-Covid: debt, deficits and funding costs in a post-crisis world

3. The changing shape of global ‘free’ trade

4. Trump’s first 100 days

In addition, we see several key market themes and trades for 2025:   




We hope that you find our views, analysis, and forecasts within this report
useful in helping you to navigate the challenges and opportunities that the year
ahead will no doubt present. We hope you enjoy reading.

  


  


Imogen Bachra

Global Head of Economics and Markets Strategy  




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All of NatWest Markets’ Strategy and Sales commentary/ideas can now be accessed
via our new Market Insights website. 




You can also find out more about our electronic offering and credentials for
Rates here and for FX here.

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This is Non-Independent Research, as defined by the Financial Conduct Authority.
Not intended for Retail Client distribution. This material should be regarded as
a marketing communication and may have been produced in conjunction with the
NatWest Markets Plc trading desks that trade as principal in the instruments
mentioned herein. All data is accurate as of the report date, unless otherwise
specified.  


This communication has been prepared by NatWest Markets Plc, and should be
regarded as a Marketing Communication, for which the relevant competent
authority is the UK Financial Conduct Authority.  


Please follow the link for the following
information https://www.natwest.com/corporates/support/regulatory-information/market-abuse-regulation-mar-disclosures.html:

 * MAR Disclaimer
 * Conflicts of Interest statement
 * Glossary of definitions
 * Historic Trade ideas log
   

Note the text above is subject to the following disclaimer(s)  Show disclaimer  

Year Ahead

25 Nov 2024
Cross Asset







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Year Ahead

25 Nov 2024
Cross Asset


Note the text above is subject to the following disclaimer(s)  Show disclaimer  


SEE FULL NOTE HERE

Year Ahead 2025 - Policy Pendulum.pdf

Your essential guide to 2025 in 25 pages.pdf

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If you wish to discuss the content of this article further, please contact your
usual sales person. Remember, clients of Natwest Markets NV should reach out to
their relevant NV sales person.


RELATED ARTICLES

Global Macro Daily (02 Dec 2024)Bondcast: The Year Ahead 2025 – Rates markets
and the fiscal cliffhanger (29 Nov 2024)Global Macro Daily (29 Nov 2024)Global
Macro Daily (28 Nov 2024)US Markets Closing Notes, 27 November 2024 (27 Nov
2024)Year Ahead 2025 Podcasts (26 Nov 2024)

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