KCM Trade Chief Market Analyst Tim Waterer Shares Outlook 2025: Macroeconomic Trends, Geopolitical Shifts, and Market Implications

Macroeconomic Factors – The Fed and Inflation

Interest rates will continue to be a key driver of market sentiment in 2025. Following a period of high global inflation that began in 2022 and high interest rates, 2024 ushered in a period of monetary policy loosening for many countries around the globe, including from the US FOMC (Federal Open Markets Committee) which cut rates by 100 basis points during the final four months of the year. But how much further will the US central bank cut rates in 2025? This will be a burning question for investors this year. Interest rate levels greatly influence economic growth rates and exchange rate levels, which is why financial markets are highly sensitive to any changes in this regard.  

During the FOMC’s final meeting of 2024 the central bank raised their inflation forecast for 2025 and reduced their expected number of interest rate cuts to just two (totalling 50 basis points of interest rate cuts) for this year. So, expectations for interest rate cuts in the US are already quite low, and it is not out of the question that the Fed could stay on hold as far as interest rates are concerned for the year if inflation readings continue to edge higher and away from their 2% target. However, there is also scope for the Fed to become less hawkish and to deliver more rate cuts than anticipated should inflation readings ease. As such, much like in 2024, inflation figures such as US CPI and Core PCE data will be highly scrutinised by investors given how these results can shape the interest rate outlook.  

There are a multitude of factors which can influence inflation and therefore interest rate settings, but there is one which will be at the forefront of financial markets in 2025 which has to do with the new incoming US President on January 20^th. Which brings us onto geopolitical factors…

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Geopolitical Factors – Trump and Tariffs

It is a new year, with a new US President and therefore new US policies. And when President Trump gets sworn in as the 47^th President, a focal point not only for investors but for world leaders and the global economy at large will be watching how Trump’s trade policy takes shape.  

It is Trump’s proposed 60% tariffs on China which could cause the biggest repercussions for both US inflation and the global economy in 2025. This may not be the final figure we land on in terms of the tariff level though, as there is incentive for both Trump and China to try and find some middle ground. For Trump, he will not want to be seeing inflation tracking higher during his term courtesy of stiff tariffs, meanwhile China may find itself in a less favorable economic position compared to Trump’s first term, particularly due to its ongoing challenges in recovering from the effects of Covid.  

How this tariff dynamic plays out between the world’s two biggest economies in 2025 could be instrumental in determining the path of risk sentiment in financial markets. Aside from tariffs, tax cuts and deregulation efforts from the incoming Trump administration could also put some upside pressure on inflation.  

Financial markets will also be watching to see whether Trump delivers on his vow to end the Russia-Ukraine conflict. It will be interesting to see whether a lifting of Russian sanctions forms part of any deal to end the conflict. We have seen European economies struggling in recent years, notably Germany, in part due to reduced access to cheap Russian gas which has hindered Europe’s largest economy. Which is why the details of any peace deal could have implications for the European economy.  

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China Stimulus Watch

What will China deliver on the economic stimulus front in 2025, and will it be enough to please investors? This will be one of key questions of the new year. While China has vowed to increase its fiscal stimulus efforts, investors are waiting on the specifics to see whether the PBoC will be effective in addressing the key areas of concern – property market and domestic demand.  

In the year ahead, we will specifically be watching to see whether Chinese stimulus measures will be enough to create a turnaround in the key economic measures such as CPI, retail sales and house prices. Will 2025 be the year that the tide finally turns to a more favourably one on the Chinese economy? How the Trump tariff story and Chinese stimulus efforts play out will be instrumental in answering this question as the year progresses.  

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Will Gold’s Record Setting 2025 Continue?

Gold was one of the big storylines of 2024 with the precious metal gaining more than 27% and racking up a new all-time high price. One of the primary drivers of gold’s price gains has been a steady undercurrent of central bank buying demand. Central banks from China, Russia, India, Poland, and others have been consistently adding to their gold reserves, and this demand kept momentum on the side of gold. This central bank appetite for gold looks set to continue in 2025, particularly with various central banks wanting to create some separation from the USD and less dependency on the greenback (particularly from BRICS members).  

Safe haven buying demand also kept gold well supported, and as such, events between Russia-Ukraine and in Gaza during 2025 will influence how much demand there is for gold as a safe haven asset during 2025.  

So, between safe haven demand, and demand stemming from central banks, there are numerous factors which could lead gold to again trade higher during 2025. One possible obstacle for gold could be what happens with the USD and treasury yields. If these assets continue to be well supported on expectations of pro-growth and pro-inflationary US policies, and if the US Federal Reserve adopts a more hawkish stance on interest rates than the market anticipates, this could be a headwind for gold, an asset which historically performs better when the USD and interest rates are both lower.  

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Key Factors Shaping 2025 Market Sentiment

Interest rates and inflation will again be on the radar for financial markets in 2025. And one significant factor which will influence both could be what policies are announced from the new US administration once President Trump takes office on January 20^th. Trade policies between the US and the rest of the world, most notably with China and the EU, could be the key factor around which market sentiment swings during the year. Let us see how it plays out.  

Wishing all our clients a Happy New Year and happy trading in 2025.

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