Episode 62: 10 Macro Themes for 2025 (and a Quick Fed Update)
Patricia Zobel, Head of our Macroeconomic Research and Market Strategy Group, joins Macro Markets to discuss the top 10 Macro Themes we believe will shape monetary policy and investment performance this year. She also discusses December economic data releases, the new administration, and the future path of Fed policy.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody and welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments. And I'll be hosting today. Now today we are going to discuss our annual big picture outlook for the year. Our ten macro themes for 2025, which we published last week. Listeners can find a link to the Macro Themes Chart pack in our show notes and on the Guggenheim Investments website. Now, the macro themes represent some of the trends we believe are likely to shape the investment environment in the year ahead. And it's also the work of our investment team and our macroeconomic research and market strategy group. Now, I really encourage folks to check out the charts themselves in the macro themes, because they are terrific examples of how the visual display of quantitative information can tell a real story. So joining us today to discuss the macro themes and to provide an update on our economic outlook is Patricia Zobel, who's the head of our macro economic research and market strategy team. Welcome back, Patricia, and thanks for taking the time to kick off 2025 with us today.
Patricia Zobel: It's such a pleasure to be back on Macro Markets. Thanks for having me.
Jay Diamond: Before we take a deeper dive into the ten macro themes for 2025, I'd like to ask about some of the recent data releases we've seen and what our current outlook is for Fed policy and the economy. So, to begin, we had a very hot jobs number report for December and a somewhat cooler inflation number was just released. So what do you think is driving these numbers and where exactly are we in the economic cycle?
Patricia Zobel: Well thanks for bringing that up. Certainly recent data suggested positive growth continuing for the U.S. economy but still gradually cooling inflation. The December payrolls were certainly strong, and the labor market appears to have regained its footing after the softness over the summer. The unemployment rate also fell and importantly, the job finding rate improved, which had been a little bit lagging. Still, we don't view this positive news as suggesting that the labor market is overheating in any way. The underlying wage growth was moderate, so to us it was overall just a positive read on the current labor market. In terms of the inflation data, like you said, we saw it as confirming that a bumpy disinflationary process continues while shelter inflation picked up, other core services showed improvement, and the underlying detail suggests that core PCE for December should be relatively benign. The data didn't change our outlook overall for 2025. We still expect the Fed to reduce rates cautiously in an environment of slow disinflation. And we still expect solid growth in 2025, but anticipate that gradual cooling and labor demand and targeted tariffs will moderate the pace over the course of the year.
Jay Diamond: So, with this background, what do you think this portends for what the Fed might do at its meeting at the end of January? And for the rest of the year?
Patricia Zobel: So FOMC participants signaled in the December summary of economic projections that they see upside risks to inflation, keeping them cautious about easing in the near term. And economic momentum, as indicated by the labor report, allows them to be patient in easing. Still, we think over time as the disinflationary process continues, even as it slows from the more rapid disinflation of this last year, it will pave the way for modest easing in the Fed funds rate over the course of the year. We see two cuts as our baseline, even though the market is now pricing a little bit less than that. And we see risk to the policy rate is still tilted modestly to the downside. We could see the Fed easing by less if inflation becomes sticky, but we don't see much chance of a rate hike this year. They're more likely to pause rate cuts if inflationary progress were to slow, than to reverse course. And they have significant room to ease if growth falters or disinflation is more rapid. And we could talk a little bit more about some of the risks we see to global growth this year that could emerge.
Jay Diamond: Great. Well, I'm sure we'll get to some of that in our macro themes. So let's do that. Let's dive into the ten macro themes, if you will. Which I've grouped into four broad categories. So, let's begin with themes that are related to geopolitics and fiscal policy. Now there's one on popular discontent around the world, there's one on the shifting geopolitical landscape, and then there's one on the fiscal picture here in the U.S. Tell us what's in those themes?
Patricia Zobel: Well, those are certainly important themes for us in setting the backdrop for how we're looking at the U.S. economic outlook. In terms of policy, we see disruptive forces, as you said, shaping the global environment, which will create both risks and opportunities for investors in 2025. Our first theme relates to how popular discontent will disrupt global policy. In 2024, over half the world's population went to the polls. The outcome was that voters delivered a strong mandate for change, with incumbents being voted out in record numbers. Discontent with government has been rising globally for some time—this isn't something new, but high inflation in recent years really amplified the dissatisfaction. Now, these stark election results mean that the policy environment is likely to shift markedly as new officials focus on the domestic concerns of voters, and less maybe on international cooperation or other geopolitical collaboration. We see this environment as fueling market volatility in 2025, as market participants react to incoming information about the policy environment. However, it can also create opportunities for investment, as there will be winners and losers in this new policy environment. For example, some companies may benefit from a trade realignment, whereas others will not benefit as thoroughly. Looking beyond the domestic policies, as you noted, how countries engage globally is also changing. Skepticism in recent years about the shared benefits of globalization and rising geopolitical tensions are really altering trade relations and alliances. Broad based protectionism, or a pullback from multilateralism, we think, would hurt global growth in 2025. But it's really our base case that even though there will be significant noise around these policies, tariffs and other policy levers will ultimately be used as negotiating tools. Still, you know, as we look out at the environment, more trade negotiations and less predictable foreign policy still elevates the potential for mishaps. And global shocks are a risk to our outlook, even though we expect a more moderate outcome. Finally, the third policy theme that you noted is particularly important, and it relates to a pressing issue for the global economy, which is fiscal sustainability. In many advanced economies, the budget outlook has deteriorated since the pandemic. For the U.S., I would say in particular, the fiscal policy is currently on an unsustainable path. This is going to need to be a priority for the new administration. While there's certainly room to trim government excess, what we see is that large adjustments are needed that could create challenging choices about non-discretionary spending or taxes, and these are politically challenging topics. Our base case is that enough adjustments are found that maintain confidence in U.S. fiscal responsibility. And in this environment, Treasury term premiums would rise modestly as investors demand higher premiums to take on still elevated Treasury issuance. But the risk is that term premiums rise more sharply if confidence is not maintained. So those were the three themes that we had, how I would take a step back and look at them is that overall, our outlook for policy in 2025 is one of disruption. We have governments responding to the domestic concerns of voters, shifting how the policies that are implemented in countries themselves. We also have them engaging on the international stage in a different way, thinking more about national interests and national security. And these can create opportunities for investment, but also elevate risks to growth. And then we have fiscal responsibility, which is going to be something that we’ll want to watch closely in 2025.
Jay Diamond: I mean, certainly the Department of Government Efficiency or DOGE, could turn out to be a very disruptive agent in the markets if they accomplish what they are saying they want to accomplish.
Patricia Zobel: Certainly. We think there is room to, to trim government excess and, and there are savings that can be found across different agencies and discretionary spending. Still, the size of the challenge is large. And when you look out over the coming years, the growth in spending comes a lot from mandatory programs like Social Security, Medicare, Medicaid. And these are hard problems to tackle, you know, so we're looking forward to seeing how that discussion evolves in 2025.
Jay Diamond: Let's move to the second bucket, if you will, of themes. And these relate to our economic outlook. And they cover the U.S. economy versus global economies around the world, the inflation or disinflation picture, and then opportunities for investment in the U.S. that will drive growth as well. Tell us about those.
Patricia Zobel: The policy environment that I just talked about will certainly shape global growth in 2025. And we have several themes related to the global economic outlook, as you mentioned. In some, what I would say is that the U.S. economy is set to outperform this year, even in the event that global growth falters. And I can talk a little bit about how we're thinking about that. The U.S. is entering the new year with strong growth, momentum and pretty solid fundamentals. Wealthy U.S. households and large businesses have strong balance sheets, and as we discussed, the labor market is on solid footing, but it's less overheated than it was in 2023 and that's a really positive development because it creates more balance in the economy and less need for tight monetary policy. As long as the overall consumer remains healthy, consumer spending growth should be solid in 2025. A second—related to another theme—is that nonresident investment growth is also entering 2025, with a relatively optimistic outlook. The U.S. is leading in new technology investment, which should support growth in the near term and also foster a longer term positive outlook for the U.S. economy. It does that by improving productivity growth in the long term, which has recently also been strong as well. Growth in nonresidential structures, as you can see in our theme, soared in 2024, driven by AI related investment as well as fiscal incentives coming from the Inflation Reduction Act and other acts. While we don't see this structure investment continuing at the same pace, what we do see is follow on investments in power, communication, transportation, as catching up in 2025 to complete projects. And what we see is that this is really going to drive another year of relatively positive investment growth in the U.S. Certainly, there are sectors that are still feeling the pinch of higher rates: lower income consumers, manufacturing and housing, are feeling still strained under a higher price environment and higher rates. This is something to watch, but we don't really anticipate it disrupting the more positive trend. So that didn't make it into our themes this year.
Jay Diamond: So what about global growth?
Patricia Zobel: Well, that's a good question because looking abroad there's really a global growth divergence with many other advanced economies facing stronger headwinds in 2025. I would say in particular, core European growth has been slowing for some time and even the labor market there is showing signs of softness. And China, of course, continues to struggle under a property downturn. This slower global growth could ultimately weigh on the U.S., but I think we would still see the U.S. outperforming even in a downturn because of its solid fundamentals. In terms of inflation, the global inflationary outlook, while still uncertain, is also more positive than it has been in recent years, really paving the way for central banks to ease in 2025. In the U.S., much of the remaining stickiness is in non-market categories that should moderate and tariff policies or supply shocks are kind of a risk to our outlook but our base case is tariffs to be more targeted and have modest inflationary impact. When looking abroad, slower growth is really bringing inflation down in most other countries. And so, this paves the way for central banks to ease further. This includes the Fed, but we see other central banks as in a position to ease more.
Jay Diamond: So our third grouping of themes is really where the rubber meets the road here, which is how is this going to play out in the markets? And we touch on the equity market, interest rates going forward, as well as credit spreads. Tell us what we were thinking about here.
Patricia Zobel: So overall, with the strong U.S. fundamentals that we just talked about, we see the current environment as one that's attractive for fixed-income investment. The run up in equity prices is showing signs of fatigue, we think on a relative basis. Therefore, we see fixed-income as offering attractive risk adjusted returns. Taking a look at equities they soared in 2024, reflecting positive news about the U.S. economy and advancements in AI. Still, this has left equity valuations as quite elevated. Currently, the equity risk premium, which is the premium measured as the earnings yield over Treasury yields, suggests that investors are now accepting very little in extra return to take on the risks of equity investment. And analyst expectations, on top of that, for earnings growth this coming year are quite elevated, in particular for companies that are investing in the AI transition. And should there be any heating up in competition for those companies or disappointment with the pace of change, of transition, to AI that could end up being a big disappointment. We think a better way to capitalize on solid U.S. fundamentals is in fixed-income. Thinking about yield levels in fixed-income, we think higher U.S. yields are likely to persist. After over a decade where Treasury yields were under 3 percent and provided very little income to investors. The ten year Treasury yield is now above 4.5 percent. When looking back at the post GFC period, you know, we look at that period as being less relevant going forward. It was a period after the global financial crisis when deleveraging and below mandate inflation levels weighed on the neutral policy rate and compressed yields in the United States. More recently, what I would say is that the U.S. economy has shifted into higher gear and positive long term growth prospects and somewhat higher inflation are supportive of higher yield levels. At the same time, and yields have risen quite substantially recently, we don't see yields rising sharply from here, which would hurt investors. Inflation expectations are well contained, which would be the risk that we would look out for yields rising sharply. So we tend to see Treasury yields this year trading in a range. And while volatility is likely to remain high and yields are going to swing around in this range, we would see larger swings as opportunities to adjust positioning.
Jay Diamond: And what about spreads?
Patricia Zobel: Certainly, we are credit investors at Guggenheim. So spreads are an important consideration for investors. Spreads are certainly tight in the current environment. And index credit spreads have reached historically tight levels. Still, we see strong fundamentals and demand is containing any spread widening. And we find that for active fixed-income investors still, there are areas of the fixed-income market that are less competitive and offer opportunities outside of the index universe.
Jay Diamond: In case you're counting and keeping track, that brings us to our 10th and final theme, which is what does it all mean for a fixed-income investors? What's our 10th theme, and how do you see that playing out?
Patricia Zobel: Well, the 10th theme is really the culminating theme of everything that we've talked about. So, in our minds, it's a good time to be an active fixed-income investor. Strong U.S. fundamentals and attractive all-in yields make actively managed, fixed-income as a good part of a diversified portfolio. It provides strong income and return potential. Elevated U.S. yields are likely here to stay, and with inflation under control and central banks easing, we see yields is likely to stay in a range, allowing investors to capitalize on that income. Managers with expertise in, as I said, less competitive fixed-income sectors can find stable excess returns even in an environment where overall spreads are a little bit tight. The areas that we think are currently attractive are things like agency MBS and structured credit, where there still is some value. And in an environment where investment is going to be strong, real asset lending can also provide stable, uncorrelated returns. So we think it's a good environment. Still, it is a shifting global policy landscape. And we should expect volatility this year. Heightened volatility and uncertainty creates some risk. But it also creates opportunity. There will be companies, countries that will benefit under new policy environments. So, we think overall it's a good time to be an active fixed-income investor.
Jay Diamond: Well Patricia, now that we've discussed all ten of the macro themes, and again I encourage folks to find the chart pack because the charts are really wonderful, but now that we've discussed all of them, what would you say is the overarching message that you would want our listeners to take away from the macro themes for 2025?
Patricia Zobel: I would say the overarching message is that it's a shifting landscape. Global policy is changing from an environment where governments focused on multilateralism and free trade to one where they're thinking a little bit more about national interests. And so that's going to shift the global policy landscape. Even in that environment, the US is coming into 2025 with solid fundamentals and we think that that's going to help the U.S. outperform even if global growth lags a little bit. So overall, I would say that it's a positive backdrop but one where we'll have to see how, you know, the year evolves. There's a lot of uncertainty that we'll be following along with our investors and managing through.
Jay Diamond: Well, before I let you go, Patricia, and thank you very much for your time. Any final thoughts for our listeners as they head off into 2025?
Patricia Zobel: Well, I'm, I'm looking forward to 2025, along with our investors and seeing how the year turns out. And it's been a pleasure to be here on Macro Markets podcast.
Jay Diamond: Thank you again, Patricia, for your time and your insight. And I hope you'll come back to chat with us and keep us updated on how the themes are turning out. And thanks to all of you who have joined us for our podcast. If you like what you are hearing, please rate us five stars. And if you have any questions for Patricia Zobel or any of our other podcast guests, please send them to MacroMarkets@GuggenheimInvestments.com, and we will do our best to answer them on a future episode or offline. I'm Jay Diamond and we look forward to gathering again for the next episode of Macro Markets with Guggenheim Investments. In the meantime, for more of our thought leadership, visit GuggenheimInvestments.com/perspectives. So long.
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