Leyen’s share

• UK and US equities advanced +1% and +0.8% respectively in sterling terms
• Brent Crude climbed +3.2% in dollar terms

• European government debt fell -1.5% in euro terms

The US Federal Reserve (Fed) decided to cut its benchmark interest rate by 0.25% to a range of 4.25%-4.5% at its last meeting of 2024, as widely expected. It also tweaked its forward guidance for 2025, projecting only 0.5% of interest rate cuts in total. This revision is half the 1% reduction the Fed guided for just last September. Since then, the Trump administration’s potential fiscal, trade and immigration policies have pushed inflation forecasts higher. Despite US stocks pulling-back on the Fed’s announcement and showing weakness during the final trading days of December, 2024 was outstanding, with the S&P 500 returning over +23%, driven by continued enthusiasm for artificial intelligence and US exceptionalism.

Despite the Fed cutting interest rates by 1% since September, US mortgage costs have not tracked a commensurate decline, with the rate on a 30-year fix averaging 6.85% (as at 26 December) now about 0.3% higher than it was in January 2024. US mortgage rates take their cue from the bond market where yields are rising. Elevated mortgage rates may slow market activity, dissuade homeowners from selling and ultimately crimp discretionary consumer spending, should they persist.

Elsewhere, the dollar remains at its strongest level in more than two years. Its recent strength has been driven by a more cautious Fed and lower interest rate expectations in other major economies, notably the euro-zone. This trend may continue if the US economy and stock market continue to outperform and if Trump’s trade tariffs are implemented.

The Bank of England’s Monetary Policy Committee (MPC) decided to hold interest rates at 4.75% at its final meeting in 2024. Although widely expected, markets were surprised by the split vote with three of the nine members preferring to cut by 0.25% rather than hold. This lack of consensus sets up an interesting prospect for 2025. Currently, futures markets are pricing in two more interest rate cuts totaling 0.5% by the end of this year. Given the BoE wants to sustain UK growth and employment, UK Gross Domestic Product (GDP) data will be key. Growth flatlined in the third quarter of 2024 with the UK’s 0% being the worst out-turn among G7 nations.

The European Union and four of South America’s largest economies have in principle agreed a decades-in-the-making trade deal. The so-called EU-Mercosur agreement could eventually reduce trade barriers between the EU and a bloc headed by Argentina, Brazil, Paraguay and Uruguay.

Although the pact contrasts sharply with the protectionist mantra espoused by US President-elect Trump, it may never come into force. Despite European Commission President Ursula von der Leyen commenting that the deal is a “truly historic milestone in an increasingly confrontational world”, it still needs to be ratified by all 27 EU member states, and if EU countries comprising at least 35% of the total population refuse, it won’t pass.

France, Poland, Austria, Ireland and Italy have all expressed concerns, predominantly about the impact on domestic agricultural producers competing with more South American produce becoming available in EU markets at lower prices. However, Germany welcomed the possibility of boosting foreign trade given the travails experienced by its exporters amid an economic slowdown. Proponents of the deal will be hoping that France can be convinced of its wider merits and that the impact on its agricultural sector will be limited.