Weekly Market Update

2024 in Review and What to Expect in 2025 with Hunt Economics

December 19, 2024

As 2024 draws to a close, we sat down with Andrew Hunt of Hunt Economics to review the key economic and market developments of the past year and discuss what may lie ahead in 2025.

Looking back at 2024, Hunt gives himself a solid "B+ or even an A" in terms of forecasting the year's major themes. In a year when the sluggish economy took a backseat to liquidity-driven financial markets, Hunt rightly focused on the importance of following the liquidity, while also anticipating the pickup in volatility seen around August. As the U.S. election approached, Hunt kept investors on an even keel despite some surprises in the extent of political polarisation.

The resilience of the U.S. credit boom in the final weeks of the year took Hunt by surprise. As he noted back in mid-2024, the high carry costs in private credit channels mean this is a credit boom that must keep expanding or die out. While some weakness emerged recently, the market's upward trajectory and liquidity-driven nature shone through.

Turning to 2025, Hunt sees the coming year as potentially the end of the old economic regime taken to a "ridiculous extreme" rather than the clean start of a new paradigm. Stress points are already emerging, from the blowout in U.K. gilt-bund spreads to recessionary indicators in the U.K. economy, to the market impact of political events in France, Korea and Indonesia. The prospect of a second Trump presidency could further stress test the system and expose its weaknesses.

Hunt envisions a crescendo of the liquidity-driven model playing out in early 2025 as the new administration injects $500-700 billion into the financial system by drawing down the Treasury cash balance. This "last big liquidity wave" could power a positive start to the year for markets.

However, the accompanying tariffs may stoke inflation just as Treasury issuance picks up in Q2 to replenish the cash balance. The resulting selloff in bonds would stress the financial system, particularly private credit. Hunt draws a parallel to Japan in 1989-90, where an inflation scare and credit boom ended with a rapid transition to disinflation, deflation, and economic slowdown.

For the U.S. in 2025, Hunt sees a possible trajectory from an inflation scare in Q2, to economic slowdown in Q3, to a dramatic monetary policy response by Q4 - potentially even a return to quantitative easing by the Fed and other major central banks. While this stabilizes economies, it may plant the seeds for inflation in 2026-27.

The upshot is a prospective "wild ride" for bond markets in 2025. Hunt advises staying cautiously long in Q1, looking for signs to get defensive in late Q1 as liquidity wanes and inflation picks up. He then suggests preparing for a strong policy response if deflation fears take hold by mid-year. Once the "deflation scare" is on, it may be time to position for an overly generous policy easing that swings the pendulum back towards inflation.

While the exact path will depend on how events unfold, 2025 will likely be an eventful, volatile year for financial markets. The key will be staying attentive to liquidity conditions and the evolving inflation/deflation narrative. If 2024 sharpened investors' instincts, those skills will certainly be put to the test in the coming year.

No items found.

Markets Shrug Off Surprise Upside in US Inflation

August 2, 2024
Despite a higher-than-expected rise in US CPI for December 2022, markets remained relatively sanguine over the implications for growth and monetary policy.
Read More

Rocking the Boat - Equities Stumble After Big Tech Selloff

August 2, 2024
After outsized gains in big tech stocks last year, global equities have stumbled over the past week amidst a tech selloff, challenging the notion of their invulnerability and potentially signaling a shift in market optimism tied to recent liquidity trends.
Read More

Recap of 2023: Two Stories With The Same Ending

August 2, 2024
This week started with more optimism about the US economy and further stock market gains until a sharp pullback on Wednesday snapped the US market’s nine-session winning streak. Thursday then saw a recovery, putting the S&P 500 back on track for an eighth week of gains, after US inflation data showed a gradual economic cooling in line with Fed hopes.
Read More

Santa (Powell) Has Come Early For Markets

August 2, 2024
The last week in markets, as is often the case, was totally dominated by the US economy and monetary policy. In this case it was an encouraging inflation print on Wednesday, followed by the US Fed’s decision to keep rates on hold the next day.
Read More

Big Tech Flexes Its Muscles With Late Week Surge

August 2, 2024
It was a mixed week in global financial markets as the market continued to assess the likelihood of a hard or soft landing next year and the implication for inflation and interest
Read More

Booming Small Caps to Bond Spreads Tightening

August 2, 2024
It was a mildly positive week for global markets, with the S&P/ASX 300 gaining 0.7%. International developed markets were down 0.4% in AUD terms as measured by the MSCI World ex-Australia index.
Read More
No items found.
No items found.
No items found.
Icon of a letter

InvestSense insights, delivered straight to your inbox.

Icon of a letter

Get the latest industry news

Icon of a letter

Get the latest industry news

Icon of a letter

Get the latest industry news