2024 continues to be an interesting year for FX. Even more now that the starters gun has been fired with the European Central Bank (ECB) and Bank of Canada as well as the likes of the Riksbank and SNB all starting to their respective cash rates from COVID peaks. This brings us to the next stage – who is next, who is going the other way and where does that leave pairs and crosses?

Well let's start with the biggest gorilla in the pack The US Federal Reserve. We have to start here because the US dollar at the moment is in an interesting conundrum: it has dovish to neutral leaning central policy which in theory overtime should put a downward trajectory in the dollar, but has been holding or moving to the upside against majors as its investment outlook rights and overall attractiveness outweighs the negative bias of a dovish position. The question also remains how Darvish is the outlook for rate cuts from the US Federal Reserve?

Markets have a bias for the Fed to start rate cuts in September with 18 basis points. That equates to about a 68% to 71% chance. May's softer core PCE inflation data that dropped last week supports the likelihood of cuts due to slowing inflation.

Core PCE inflation came in at 0.08% month on month, well below the expected 0.15%. The faster decline was due to lesser-known components, such as non-profit prices and imputed financial services which have now slid for three consecutive months (something we would like to see in Australia) should encourage Fed officials. But the market has been hesitant to react to the PCE why?

Clearly the Fed’s language and actions of late suggest it needs more evidence of easing inflation is sustained. This could be achieved with another favourable read for the June numbers which are due out at the end of this month. We also note that revisions to April’s core PCE were modest (were revised up), and May’s weaker data might indicate a positive trend in Q2.

Remember this is the Fed core measure of inflation and needs it to be at or around 2%. Dollar Basket Yet once again we come back to the USD – its lower compared to pre-PCE trading but not by a margin that gives confidence the Fed is going to cut rates in the coming months. Which suggests we need to break out the pairs and look more directly at actions.

EUR/USD If you look at EUR/USD, the biggest player in the DXY, the easing bias from the Fed is there. Not only that since the ECB cut rates last month there has been a growing belief the Board will hold off to see the reactions across the zone before acting again. Inflation in the likes of Germany, France and Italy are so varied it hard to get a proper read on the overall composition of the eurozone which is going to make it very hard for the ECB and its board's decision making.

Explains why the initial decrease in the euro has subsided. We also can't write off the elections that are going on inside France right now. The rise of the far right nationalistic protectionism parties clearly also is a threat to the eurozone and therefore the euro itself.

However with that in mind if you look at the central bank differentials between the ECB and the US Federal Reserve. It is clear that there is more of a dovish bias from the Fed (as they should be) and it's more likely the Fed is going to move next rather than the ECB. Listening to Fed talkers like Governor Cook who expects cuts soon.

Then there are the doves like San Francisco Fed President Mary Daly that are razer focused on unemployment. She described the risk that “future labour market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs.” She stated that past tolerance of high unemployment to curb inflation like that in the 1970 and 1980 was not tolerable – suggesting that inflation is not the only trigger there. Governor Cook downplayed recent strong job growth, citing overstated payroll gains and a slower true pace of job gains.

Weak labour data this Friday (non-farm payrolls) could signal rate cuts at the July FOMC meeting. On the NPF the consensus is for a slower 155,000 increase for the month of June. The unemployment rate is projected to stay at 4.0%, and average hourly earnings should rise by 0.4% month on month.

The Fed's June meeting minutes this week will likely show higher 2024 rate cut projections, with officials needing more data to be confident in sustained inflation reduction. In short, USD data is forecasted to be bearish. So it’s about choosing your pairs wisely and clearly things like EUR, GBP, CAD etc. are difficult to deal with currently as each is facing a bearish issue of their own.

Thus let us finish on a differential that is clear – the RBA versus the Fed and the Bank of Japan. AUD/USD Although AUD/USD hasn’t completely broken out of its 0.661 to 0.669 range. The slow uptrend momentum is building.

The test as we described last week is the July 31 CPI print. The minutes from the last RBA meeting were telling – there are only two options on the table, hold or hike and the argument for a hike was well made and without the May monthly inflation read. A print above 3.9% August 6 is basically a lock putting the RBA out of sync with the rest of the G10.

The differential here is glaring and one of the most bullish signals for the AUD. We watch the AUD/USD for signals that uptrend is on. Which brings us to the final cross to discuss.

AUD/JPY The trend is clear and the different responses between the BoJ and the RBA couldn’t be starker. The BoJ has lost control of its currency and is unable to provide stability. The pressure it's experiencing is real and with next to no inflation Japan is facing a difficult situation of dealing with capital outflows while needing to be accommodative.

Count that with the RBA that has the highest cash rate in 12 years, highly attractive yields and. The possibility of further increases – cash inflows are glaring. The cross has been capping out at Y107.5 but once again July 31 is key – inflation signalling rate hikes and AUD/JPY will be chasing Y108 and beyond.

If you look at equity markets in particular, you'd think everything smelled of roses. For the 47th time this calendar year US indices have made record all-time highs and 46 times at record closing highs. Earning season is underway and so far, it is doing what it always does, which is beating the Street 75 percent of the time.

Banking, Tech and industrials are the standouts. And even when you look at the 493 non magnificent 7 stocks on the S&P 500 the gap between the seven and the rest is finally starting to close up. So all is well at least that's how it appears.

However over the next 20 days the risks that are facing global markets cannot be understated. First and foremost is the US presidential election. As we point out in our US 2024 election specials, the margin between Trump and Harris has never been closer.

In fact, most probability markets now have Trump ahead. Predictit for example, Trump leads by three points and on RealClearPolitics it's even larger sitting at 10.8 points. Most of the key states or swing states are statistical dead heat but on average Trump is now ahead by 0.2 at 47.7 to 47.5.

Whichever way you look at it, whoever wins on Election Day, it will lead to disputes and the other side is unlikely to accept the result. The political upheaval will filter through into markets, and we need to be ready for that. What has also been lost in geopolitics and the incredible run in equities is movements in the bond market and the risks around US inflation.

And it is this that we need to take a closer look at. Trends and Key Drivers in US Inflation Blink and you will have missed it, the back end of the USU curve is back above 4%. This is down to several risk factors, The US presidential election being one, employment being another, and then the big one inflation rearing its head in September.

There was an unexpectedly strong rise in CPI inflation for September. So is there some going on here or is it just a false flag? First things first - Core PCE inflation continues to trend at a consistent pace of approximately 2 per cent on an annualised basis.

This suggests that inflationary pressures, while present in some sectors, remain largely in check but risks remain. So what are the keys here? Key Factors on the Inflation Outlook: 1.

Core CPI Outperformance and PCE Expectations: September's core CPI surprised with a 0.31per cent month-on-month (MoM) increase, surpassing consensus forecast of 0.25 per cent. While this unexpected rise is noteworthy, the details of the PPI (Producer Price Index) data suggest a more moderate increase in core PCE inflation, estimated at 0.21per cent MoM for the same period. The issues in the inflation figures however remain in components such as shelter and insurance, which had been driving much of the previous increases, with weather events and housing price volatility expect inflation fluctuations here to persist in the near term.

The upward surprises in the headline CPI data were concentrated in volatile categories like apparel and airfares. Airfares, for instance, rose by approximately 3 per cent MoM on a seasonally adjusted basis. 2. Wage Growth and Labor Market Dynamics: The Atlanta Fed’s wage tracker indicated that wages picked up in September, with the unsmoothed year-on-year (YoY) measure reaching 4.9 per cent, up from 4.7 per cent in August.

Additionally, the 3-month smoothed measure and the overall weighted average both rose to 4.7 per cent, compared to 4.6 per cent in the previous month. Whichever measure you want to use, real wages in the US are growing at about 2.5 per cent. While this wage growth exceeds the rate typically consistent with a 2 percent inflation target (in the absence of significant productivity gains), it remains only modestly stronger and isn't a concern, yet.

It’s worth noting that wage growth may take longer to cool off, particularly given seasonal patterns in early 2024 and the effects of recent labour strikes in sectors like port operations and aircraft manufacturing, both of which have underscored the potential for more persistent wage inflation. Interestingly, the Atlanta Fed wage data revealed a sharp deceleration in wage growth for job switchers compared to job stayers. Normally, job switchers see higher wage increases, but over the past few months, the growth rates for both groups have converged.

This shift may signal weaker demand for labour and could be a key indicator of wage trends in the coming months. However, wages for current employees may lag behind, requiring time to adjust downward, much like how rental prices for new leases often move ahead of existing rents in shelter inflation. This dynamic suggests that wage pressures might remain elevated for a time, particularly if companies raise wages for existing employees to catch up with the now-slowing wage increases for new hires.

The ongoing wage growth for current employees could also keep hiring demand subdued, as firms may focus on managing costs rather than expanding their workforce only time will tell here. 3. Potential Impact of Hurricanes Helene and Milton: The inflationary impact from Hurricanes Helene and Milton are yet to be factored into most forecasts and thus it is important to acknowledge the potential for volatility in certain inflation components. Historically, hurricanes have primarily affected gas prices by disrupting supply chains.

However, there has been only minimal upward pressure on retail gas prices so far. Demand led cost in infrastructure and construction supplies also tend to increase post hurricanes as the clean-up and rebuild takes precedence. Another major CPI component that has historically shown sensitivity to hurricane-related disruptions is "lodging away from home." For example, in the aftermath of Hurricane Katrina in 2005, lodging prices initially dropped before rebounding the following month.

It remains unclear whether the recent hurricanes will affect hotel or recreational service prices in Florida, which were among the areas impacted. September CPI already showed weaker-than-expected data for lodging, and with discretionary spending on services potentially declining, this component could face further downside risks. However, if there is an unusually sharp drop in lodging prices for October, any hurricane-related distortions might result in a bounce-back in November CPI.

This is why we think the market needs to remain cautious on core PCE inflation. Will it stay modestly higher than the Fed’s 2% target over the near term? It's clearly possible.

Then there is the ongoing volatility in certain sectors and potential risks from external shocks like hurricanes mean inflation forecasts could still see adjustments. All in all we remain vigilant that despite the enthusiasm and bullishness in indices risks are building and traders need to be vigilant.

One of the biggest indicators confounding markets, economists, and commentators over the past six months in particular, is the strength of the employment market. Not only are they stable, they are moving at rates outside historical ten year norms. Just have a look at Australia at the moment, unemployment at 4% averaging 35 to 40,000 jobs per month and participation in the employment market at or near record all-time highs.

This is not just an Australia story, have a look at the US where the non-farm payroll figures continue to run ahead of our expectations and forecasts. Yes it is eased from its peak in 2023/2024 but overall The US employment market is really solid. This is despite the fact that the cost of living crisis is entering its 28th month and according to all media factions is still ‘ending the world’.

The thing is - employment stability produces stronger than anticipated consumer spending. And we believe that this is what's being missed by traders and investors alike as the stability has directly supported stronger-than-anticipated consumer spending. Which in turn for western developed markets underscores why there has been resilience of the economy.

That's not to say a slowdown in economic growth is off the cards, more that the trajectory looks less steep and more delayed than previously forecasted. Retail sales data for December showed a solid 0.7% month-on-month (MoM) increase. Which suggests real consumption growth for the final quarter of 2024 was a year on year (YoY) 3%.

As long as the labour market remains resilient and equity prices avoid a sharp downturn, consumer spending should continue to hold up. Caveat is US savings rates, they are now at the lowest level in over 6 years so expect spending growth to moderate in the coming months. Something that was seen in 23/24 was weaker retail sales in Q1 of last year after a bumper December print - could repeat in 2025 following the strong December retail performance?

But you are probably thinking “who cares” what does this mean for my trades and what does this mean for my positioning? Well as explained in last week’s 5 thematics of 2025 - nationalism versus global trade supply is one area we need to look at. Because it will feed directly into the theme that has been going on now for 18 months which is the consumer price conundrum.

Why this matters markets have put so much money behind the rate cut trade impacts both positively and negatively to inflation will still be one of the biggest impactors to your trades. So looking to the US let's break down the December CPI data – there was a modest 0.23% MoM increase, for a YoY rate of 2.7%. Aligning with the 0.17% MoM rise in core Personal Consumption Expenditures (PCE), which and a YoY rate of 2.1%.

This effectively confirms the Fed’s inflation target has been hit. Think about that for one moment and the initial reactions in the market to start 2025. It was rift with bets that the Fed could be done, and that inflation would remain stubbornly high.

There is justification for this idea and more on that below. The December CPI suggests US core inflation to trend down to about 2% by mid-year. Secondly the trend is there as well - three-month core inflation has slowed to 2.2%, and six-month core inflation has eased to 2.3%.

These figures point to a clear and sustained moderation in price pressures. Going deeper – the biggest factor that is likely to drive US inflation lower is signs shelter costs have peaked and are beginning to ease. Owner’s Equivalent Rent rose just 0.23% in November and 0.31% in December.

These increases are much slower than the 0.4-0.5% monthly jumps seen in late 2023 and are more in line with pre-pandemic norms. Of course, there are caveats to this narrative. Residual seasonality in the data could skew the inflation readings.

For example, in both 2023 and 2024, softer inflation in the latter half of the year was followed by a sharp 0.5% MoM spike in core PCE inflation in January. But – if the November December trend in PCE inflation was to continue in February and March it would reinforce confidence among both the Fed and markets that inflation is on a sustainable path back to the central bank’s 2% target – and that should equal more rate cuts in the Federal Funds Rate. All things being equal - by the time the Federal Open Market Committee (FOMC) meets in May, there would likely be enough evidence to justify this move, especially to prevent real policy rates from rising unintentionally as nominal rates hold steady.

However – there are input costs coming from the newly installed Trump administration. Changes to immigration policy is likely to drive up wage and input cost on sectors such as agriculture and personal services. Then there are possible tariffs and other trade sanction issues that will also impact global supply and ultimately price.

If we look at the chatter from Fed officials, opinions vary on the implications of broader policy shifts. Hawkish members of the Fed expect these policies to exert upward pressure on inflation, while dovish officials, argue that any price increases stemming from these factors would likely be temporary and wouldn’t necessitate a monetary policy response. Either way – they are unknown knowns, and explains the flow of funds to the USD, CHF and gold.

It also probably explains further excitement in crypto. So – who is right and who is wrong? If we take the movement in the USD and bond markets as ‘right’ – inflation is going to move higher from here and the Fed is done.

Traders only now have moved from possible rate hike(s) – (yes higher) to a mild chance of a single rate cut in 2025. The Fed’s December dot plots – only has 50 basis points – so two cuts, which is not huge and explains the shifts. On the counter – if the current market trend is wrong we need to look at the economist forecast.

Most have 3 rate cuts in 2025 some have as much as 5 (so 125 basis points). If that was to be the case the speed and change in positioning will be rapid and the strength in the USD would need to be evaluated. That scenario, if it eventuates, would likely begin in May, there is plenty of time to reposition.

But risks remain, particularly around seasonality and policy uncertainties. In the interim, watch for fiscal policy around nationalism then look for changes in inflation and labour that lead to monetary policy changes in the coming months to maintain balance in the economy.

Welcome to 2025, a year that will be shaped by macro thematic events that were put in place at the end of 2024. Why we need to prioritise thematic analysis is that if we look at 2023 and 2024 indices and FX markets that were tied to the thematics of those two years outperformed peers and similar tools. Considering the S&P 500 returned a whopping 25 percent in 2024, starting the new year around the event that will shape the trading world is prudent.

So what will be the big thematics of 2025? Here are the five themes shaping the year ahead, each refined to align with evolving market dynamics: 1. The nationalisation of globalism Tricky title yes, but we are going to see a return to nationalistic policies from all walks of government.

This theme is likely to make a strong return in 2025 after pausing from about mid 2023. It will be driven by shifting global trade particularly the US and China and policy priorities of populist governments that are popping up all over the world. The push pull of nationalism versus globalism has rapidly swung back to nationalism since COVID.

Policymakers are consistently banging the drum that reducing reliance on globalised supply chains in favour of localised production and economic security. Just take a look at the policy ‘Future made in Australia’. This is a policy that is picking winners directly targeting manufacturing and a technology space that is already saturated with global supply.

The question we as traders and investors have to ask is will national policy supporting inefficient industry win out over global supply into the future? Theory would suggest not investment however follows the money and governments are piling money in. Again that's not to say it's right, it's just the flow.

With the return of a Trump administration to the White House not only is nationalistic policies going to be front and centre for investment tariffs and trade impacts will also be a major theme for 2025 and beyond. The playbook here is to review Trump 1.0 and look at the impacts on trade from 2017 to 2020. More on that below.

What is clear is the current populist shift to nationalism in global supply chains marks the biggest swing in trade systems since the 1960s. What we need to realise as investors is which multinationals and trading firms can adjust to the new reality and which will face the challenges that they are unable to survive. Identifying these changes will be key to investing going forward. 2.

China sandbagging One of the fastest developing thematics of 2025 is signs that Beijing it's starting to sandbag itself against future incoming tariffs from the West, specifically the US. Already we're seeing changes to liquidity ratios, policy and local government that haven't been in place since 2017 and 18. We're also starting to see policies around employment, aged care, and other social services that have not been enacted or tweaked in over half a decade.

Couple this with signs of increased infrastructure spending changes to manufacturing orders and a shift in direction to internal purchases. Shows Beijing really does mean business And is preparing to fight fire with fire. Most notably that ‘fire’ power is the tweaks that's happening to the renminbi.

The depreciation that has been allowed by the Peoples Bank of China (PBoC) shows very clearly that if tariffs are to be placed on Chinese exports the appearance at the import docks will be one of negligent, even better off positioning in price. It is a very, very savvy way of countering arbitrary cost increases from its biggest market, that of the US. How Washington responds to this change is likely to be just less dramatic.

Be prepared for a full blown currency trade war over the next four years as Beijing and Washington trade economic barbs. The winners and losers are already starting to present, case in point is the impact and slide in price of the Aussie dollar (AUD). Currently sitting at a 5 year low to start 2025 against the US dollar and having seen a 10 per cent decline against the JPY, and 8 per cent decline against the CHF, EUR and even a 5 per cent decline against the GBP.

The AUD’s China proxy thematic is well and truly kicking and the Aussie will be a key part of the China sandbagging thematic trade of 2025. 3. Meaningful living Do not underestimate the change in social structures around ‘meaningful living’. With aging populations across the developed world more and more societies are shifting to pursue healthier and more meaningful lives.

This is the rise of online and AI driven programming health treatments, new age drug consumption and a concentration on preventative medicine and health products. Meaningful living is moving the dial in policy, economies, and businesses. You only have to look at Apple's investment in its fitness app or the rise and rise of wearables.

Increase content on social media and the impact that AI is now having on medical and health related industries. On this point look to healthcare, particularly AI-driven advancements and obesity treatments to continue to be the stand out areas. Then there will be the changes to consumption behaviours, nutrition and affordable foods, ‘core value’ items over mass consumption as well as demand for more sustainable consumption practices.

The advantage of the meaningful living thematic is that it will likely be fairly isolated to the issues that will present from thematic 1 and 2. You will also be fairly insulated from changes of things like inflation, interest rates and politics. 4. Energy Thirst The thirst for energy supply coupled with decarbonisation is going to be a thematic not just of 2025 but over the next decade.

What will be different in 2025 is a short- and long-term supply change. Once again, nationalism will play a part here – the Trump administration has made it a cornerstone of its re-election pitch that oil will be front and centre in the US’s energy supply. However at the same time Elon Musk’s presence makes the outlook for battery storage and Electric Vehicles (EVs) also very interesting.

Longer term – energy will also face the ultimate question of 100 per cent renewables, a hybrid model that includes fossil fuels and/or a model that involves yellow cake. Uranium is facing an interesting period, the demand from China, France, the US and the like for nuclear energy is growing by the year. We are also now seeing nations that have never entertained nuclear having a debate on it as well (Australia is case in point).

Thus from a trade and investment point of view – we need to consider three points here: Supply - who are the suppliers that will benefit short term who benefits long term? And are there players that will benefit over the entire period? Demand – As stated in thematic 1,2 and 3 energy demand is only going to increase and if we include thematic 5 – not only will demand increase it could move almost exponentially.

Delivery – what form of apparatus is needed to deliver the energy nations need? That means everything from renewables to nuclear, micro units (household solar) to macro units (power plants). As well as energy storage, carbon capture and grid optimisation. 5.

AI the third digital revolution It’s been two years since ChatGPT’s debut – and in those 24 months more value has been created than in the 65 years from 1945 to 2010 and we are still early in AI’s widespread adoption. AI is being called the third digital revolution after the invention of the computer and the internet. The difference in 2025 from 23 and 24 is we are moving from “infrastructure” and “enablers” to applications.

Those programs that will drive efficiency and market leadership. Already the fight is on to be the “it” provider here as the likes of Alphabet, Meta, Microsoft and Amazon continue to redefine their individual offering. The trends here that will matter in 2025 are things like enterprise adoption of AI, which firms are adopting AI and its positive impacts?

Rapid increases in AI capabilities, surprising even the most optimistic expectations and how fast can it move? Expanded profit opportunities, reducing debates over AI’s return on investment. The faster we can understand the pace of these changes the more investors can capitalise on AI’s transformative potential.

In short, with these five thematics as our basis for 2025, it will be an exciting and transformative year.

As we sit here and review the last weeks of 2024, it has dawned on us that 2024 was the year of wanting everything and getting nothing. Now that might sound like a ridiculous statement considering equities across the MSCI world are averaging double digit returns for 2024. In fact in the US they are on track for two consecutive years of 20% gains or more.

So we certainly gained something, but what we have come to realise is that 2024 was a year of anticipation and more anticipation and more anticipation but nothing being delivered particularly here in Australia. So let us put forward our reasoning. 1. RBA Rates – Pricing v the reality At the start of 2024 it's hard to believe that three rate cuts were fully priced into the cash right by December this year.

The pricing versus the reality facing the RBA in 2024 was one reason that we have probably seen muted movements in currencies and bond markets. We do need to commend the Reserve Bank of Australia (RBA) for navigating what has been a perplexing year in 2024. As mentioned, we start the year influenced by global central banks for multiple rates, driven in particular by the U.S.

Federal Reserve. However, by mid-year, pricing shifted so dramatically it moved through 189 basis points to be factoring in not one but up to four rate increases as inflation remained in a state of suspension as sticky components slow the rate of change and has seen underlying inflation holding at 3.5% and above. Despite this the RBA held rates steady throughout the year and has now adopted a dovish tone at its December meeting.

This is key – its 2024 cautious approach is seeing a 2025 pivotal shift and the board is now making it clear that its focus of managing inflation risks is starting to switch to addressing growth concerns. Market forecasting has easing beginning at the April meeting, the range from economists is February through to May 2025. Whenever it starts, the consensus between the market and the theoretical world is the same – one cut will bring several and come December 2025 the belief is the cash rate will be as low as 3.6%. 2.

Labour Market The other factor that has kept the RBA on the sidelines has been employment. IF we were to look at employment in isolation it should be championed. Underemployment, underutilisation and unemployment as a whole is – strong.

It has completely defied expectations in 2024, with employment levels reaching record highs and participation levels for the population and women in particular also at records. It should be noted that part of the reasoning for this is robust immigration, cautious corporate behaviour toward redundancies and then the big one public sector hiring. Surges in hires for education, healthcare, and hospitality, drove public sector resilience, offsetting weakness in private sectors like manufacturing, mining, and financial services.

What could force a change here is the 2025 Federal election – a minority government or even a change of government could lead to fiscal restraint and dampen employment growth, while a surprising downturn in job data could prompt the RBA to expedite rate cuts and increase the amount of cuts as well. Something traders will need to have their fingers on. 3. Record level Wage Growth Wage growth, a key concern earlier in the tightening cycle, moderated in 2024, easing pressure on policymakers both on the fiscal and monetary side.

At one point their wages were growing at levels not seen since record began. However, it did coincide with an inflation level of a similar rate meaning real wages were flat. Looking into 2025, wages remain a concern for rate watches for the following reasons: Minimum wage has consistently followed the inflation rate with a premium suggesting the will increase exceeding 3.5%.

Industrial relations reforms over the past 2 years have embedded wage rigidity. Finally accelerating wage increases in Enterprise Bargaining Agreements are now averaging 4%. Without corresponding productivity gains, these dynamics could challenge the RBA’s assumptions, complicating the path to rate cuts. 4.

Gravity defying markets Earnings multiples of the ASX 200 and its sector have soared in 2024. It’s a reflection of the optimism bordering on exuberance about peak interest rates and an imminent easing cycle. The forward P/E ratio of 17.9x is well above the 10-year average of 16.0x and significantly above its historical average of 14.2x.

Looking into 2025 – yes, these multiples are stretched, but when put into a global context it is understandable and even defendable. For example - Australian equities trade at a 21% discount to the S&P 500’s multiples and expectation for the US market in 2025 is one of further expansion. Thus to sustain these levels robust earnings growth are needed to close the P/E gap.

A 17.0x multiple down from 17.9, would meet expectations. 5. Banks being banks? One area that we note has not just defied expectations but also logic is Australian banks.

The banking sector was the standout performer in 2024. The sector outpaced the broader market by 25%, not hard when you look at CBA which has surged 40% in the past 12 months. It’s even more remarkable when you compare it to the material sector, it has outperformed its cycle peer by 50.2%.

The surge in passive investment flows (exchange traded funds and the like) which is growing at record levels, alongside superannuation sector contributions, fuelled this robust performance considering the Big 4 and Macquarie sit inside the top 20 and make up 45% of the ASX 20. However, this dominance is likely to face challenges in 2025. Key factors to watch include China’s commodity and economic outlook, shifts in risk asset performance, and potential regulatory scrutiny of superannuation’s ties to bank equity.

Coupled with stretched bordering in snapping valuations – the risks underscore the sector’s sensitivity to macroeconomic and policy developments going forward and overdone investment. 6. Iron Ore – heavy lifting Iron ore defied the forecasts in 2024. The expected collapse never truly eventuated, buoyed by cost-curve dynamics and stronger-than-expected demand in the latter half of the year.

Prices exceeded consensus estimates by upward of US$20 a tonne and provided a tailwind for materials. But, and it is a major but, China remains a pivotal factor. Broad-based policy stimulus announcements in late 2024 lifted sentiment, but execution and clarity remain uncertain.

China is looking to stimulate itself in 2025 and that will determine whether materials can close the performance gap with commodity prices in 2025. The other big unknown for Iron Ore – Trump 2.0 and his future tariffs on Australia’s largest trading partner. Signing off 2024 was a year defined by shifting dynamics across monetary policy, sector performance, and macroeconomic trends.

As we move into 2025, investors and traders will face a complex landscape shaped by earnings growth challenges, election-related uncertainties, and potential shifts in global economic momentum and policy. Successfully navigating these factors will come from understanding the macroeconomic signals and sector-specific opportunities they will present.

With 2024 fast approaching its conclusion we thought it best to have a really good deep dive into where the Australian economy sits and therefore where the opportunities and risks are for 2025. It's pretty clear that things are soft to say the least but there are signs the household is stirring. Government spending is remaining elevated, inflation is moderating but growth is poor.

So let's dig into the data that matters The Consumer Retail sales saw a solid lift in October 2024, growing by 0.6% month on month (MoM) and 3.4% year on year (YoY)—the strongest annual growth since May 2023 and that is before we see the full picture of Black Friday sales which are on track for a record print with estimates as high as $7.2 billion for the period. This improvement indicates that consumers are starting to spend some of the Stage 3 tax cuts introduced in mid-2024. We should point out that a significant portion of the Stage 3 tax relief appears to be going into savings rather than immediate consumption.

Household deposits surged by 8.3% YoY reinforcing the notion that Australians are prioritising financial security over spending. This has been reinforced by the latest GDP figures – more on that later However what’s also telling heading into the end of the year is consumer sentiment has rebounded although modestly. We will say it's not a high bar as consumer sentiment was at levels not seen since the pandemic.

But it is picking up and that must be seen as a positive. Wage growth appears to be slowing, a weaker signal despite continued strength in employment figures. All this creates a mixed picture of the consumer for 2025.

We expect a gradual recovery in spending as rate cuts are likely in 2025, the full effect of the Stage 3 tax cuts hit full levels ($23 billion to be exact which is about 0.8% of GDP) and the Federal Government gives out more handouts with an election at hand. This is likely to support consumption over the full year however it’s not going to create an immediate boom. We will be monitoring consumer staples and discretionary sectors for signs of movement in the early part of the second quarter.

The Private Side of credit Private credit growth continues to surprise on the upside, something that is likely to keep the RBA up at night. October’s 0.6% MoM increase was above expectations and that led to YoY growth being up a staggering 6.1%—the fastest rate since May 2023 and this after 13 rates over the previous year. This growth is mainly down to housing and overall credit growth picking up significantly.

However, credit growth appears to be nearing its peak, likely to plateau around 6.5% y/y in the coming months. Several factors signal moderation ahead: Business Investment: Surveys show a downgrade in capital expenditure intentions. Home Loans: Demand is likely to stabilise as dwelling price growth flattens.

But the RBA cutting rates may change the trajectory later in the year Personal Credit: Slowing household borrowing suggests cautious consumption and a switch back to savings which manifested in Household deposits growing by 1.3% MoM in October seeing the annual growth in savings to 8.3%strongest pace since mid-2022. Housing Market Shows Signs of Cooling Dwelling prices are clearly losing momentum. November prices edged up just 0.1% MoM—the weakest monthly gain since January 2023—while annual growth moderated to 5.5%, the slowest since September 2023.

The number of dwelling sales also weakened sharply, though some of this reflects temporary reporting distortions. Any sort of recovery is projected only after the RBA begins cutting rates, which again is likely to be in the latter half of 2025. This cooling trend aligns with broader economic signals of moderation in housing demand.

This is a problem for the Bank and REIT sectors. The multiples in these two sectors are at historically high levels. The fundamentals backing banks in particular are starting to look shaky as loan growth is stagnant and house prices are falling in 2025.

Will the bank lead recovery continue next year? That is our question for the market. The Economy and all the rest GDP – is faltering there is no doubt about that now.

Figures to the end of September showed, Australia’s real GDP expanded by just 0.3% QoQ and 0.8% YoY well below the consensus 0.4% and 1.1% expected. This is a materially disappointing outcome and has triggered a new cyclical low, not seen (excluding the pandemic) since December 1991. The questions from the GDP figures are vast and need to be unpacked.

Any recovery in subsequent forward quarters is expected to be modest. As we discussed earlier, households and businesses are grappling with structurally higher cost bases, the need for increased savings and a peak in credit - this cannot be fully offset by potential easing of monetary policy. The RBA has a forecast 1.5% YoY for the final quarter of 2024.

Achieving this would require a significant 0.8% QoQ expansion, which seems increasingly unlikely given current economic dynamics and even if we take into consideration the Black Friday sales. A miss on this target could force the RBA to revise down its short-term growth outlook. Key Drivers Behind Weak Economic Performance on the Headline.

Household Sector Strains: The household sector remains weak, with aggregate spending declining slightly in Q3. Rising costs and weak income growth are pressuring budgets, curbing consumption, and keeping the sector in a vulnerable state. Contributed 0.0% in the quarter.

Business Investment Slows: Business investment softened further, reflecting heightened caution amid economic uncertainty and higher operating costs and tight labour markets in areas of need. All saw 0.0% contribution in the quarter Surprising Uptick in Dwelling Investment: Dwelling investment provided an unexpected positive contribution, rebounding slightly from a weak base. However, this increase is unlikely to represent a sustained trend given broader headwinds in the housing market.

Public Sector Reliance: Countercyclical public demand was the sole driver of growth, accounting for all the economic expansion in Q3 and the past year. Think about that – the only reason Australia didn’t have a negative quarter was from government spending. While this has supported the labour market and provided a buffer to broader weakness, over-reliance on public spending raises major sustainability concerns.

Per Capita recession and Productivity Woes GDP Per Capita Declines: The headline GDP numbers mask a persistent decline in per capita growth. Q3 marked the seventh consecutive quarter of contraction, leaving GDP per capita 2.2% below its Q2 2022 level, that is a horrible story. Productivity Drag: Productivity remains a significant weak spot, further undermining economic resilience.

Falling terms of trade have compounded this issue, leading to a marked drop in living standards. Real net national disposable income per capita has declined in five of the last six quarters, echoing the negative income shock seen during past terms-of-trade retracements. Compensation Pressures: Weak productivity has translated into falling compensation for employees, which in turn is easing unit labour cost pressures.

However, this decline in compensation is exacerbating household financial challenges, limiting their ability to support growth through spending. Where does this leave the RBA? The RBA faces a complex balancing act.

Weak economic growth underscores the need for interest rate cuts to support demand. However, persistently high inflation keeps the central bank in a cautious stance, limiting its room to manoeuvre. Additionally, the labour market remains tight, partly due to public sector demand, which inadvertently keeps inflationary pressures elevated.

This dynamic complicates the RBA’s ability to deliver meaningful monetary easing in the near term. So where does this leave markets for 2025? Structural Growth Concerns The Australian economy remains heavily reliant on two unsustainable drivers: Public Sector Spending: While critical in the current environment, excessive dependence on government expenditure highlights a lack of private sector dynamism.

Population Growth: Expanding population numbers are bolstering headline GDP but masking underlying weaknesses in per capita terms. Without addressing these structural imbalances, along with improving productivity, achieving robust and sustainable economic growth will remain elusive. We are therefore mindful of sectors that have run ahead.

The ASX 200 has just printed 4 record all-time highs in the past 8 trading days. Momentum indicators are running hot and overbought signals are flashing. Couple this with the economy falling into the end of the year. 2025 is likely to be a story or two – a recalibration in the first half – followed by a recharge in the second half.

With geopolitics thrown in and other issues. Volatility is likely to be back with a vengeance in 2025.