Charlie Jamieson, Chief Investment Officer

As we step further into 2025, financial markets are grappling with a rapidly evolving landscape. The return of Donald Trump, significant shifts in U.S. fiscal policy, and global monetary realignments have intensified volatility, raising fundamental questions about economic growth, inflation, and investment strategies.

The re-election of Trump has reignited volatility across global markets. While Trump’s first term was marked by relatively low financial market volatility, this time around, the situation is different. A key distinction between previous rate-cutting cycles and today’s scenario is the trajectory of U.S. 10-Year Treasury Yields. In contrast to historical trends, the current yield curve remains stubbornly elevated, reflecting fiscal sustainability concerns and a shifting monetary policy landscape.

The U.S. debt clock underscores America’s financial reality, with the national debt exceeding US$36.44 trillion and the deficit surpassing US$2 trillion. Adding to the uncertainty, speculation has emerged around the possibility of a gold revaluation to shore up fiscal stability. Some analysts suggest that revaluing U.S. gold reserves from their outdated accounting price of US$42 per ounce to current market values closer to US$2,800 per ounce could inject significant gain for the Treasury, potentially reducing the need for aggressive bond issuance. Such a move, while unconventional, would mark a historic shift in how the U.S. government manages its balance sheet. The debt-to-GDP ratio has climbed to 122.95%, putting pressure on policymakers to control spending while sustaining economic growth. Treasury Secretary Scott Bessent has proposed a bold fiscal approach, focusing on reducing long-term yields rather than urging immediate Federal Reserve rate cuts. His 3-3-3 plan for cutting the deficit to 3% of GDP, targeting 3% real GDP growth, and boosting U.S. oil production by 3 million barrels per day by 2028… is ambitious. The introduction of the D.O.G.E. Clock, which tracks government spending reductions, highlights the administration’s commitment to fiscal responsibility. However, the extent of these spending cuts raises questions about their long-term impact on growth, particularly in industries reliant on federal funding.

Trump’s trade policies have resurfaced as a defining element of his economic strategy, with tariffs once again playing a crucial role. His recent Truth Social post suggests renewed efforts to apply pressure on trading partners, particularly China, Mexico, and Canada. While tariffs are generally linked to inflation, historical data from 2017-2018 indicate they contributed to slower growth, lower yields, and eventual Federal Reserve rate cuts in 2019. The effectiveness of these policies remains uncertain, as businesses and consumers adjust to evolving trade dynamics.

Market positioning suggests scepticism over Trump’s ability to mitigate the economic consequences of renewed trade disputes. The USD Index movement after the election mirrors its 2016 pattern, with initial strength followed by a notable decline as uncertainty mounts. Should trade relations deteriorate further, global supply chains may be disrupted, leading to price hikes and added inflationary pressures in essential industries.

While inflation has moderated from its peak, concerns persist. Recent data rotations have pushed U.S. CPI from 2.4% to 3.0%, though these are expected to fade by Q1 2025 as base effects rollout. The Treasury yield chart suggests a narrow trading range of 3.70% to 4.70%, reflecting uncertainty over Federal Reserve policy moves. A key issue remains U.S. mortgage market exceptionalism with 30-year fixed mortgages still locked at 3.00%, American consumers are shielded from rate hikes, unlike their counterparts in Australia, Canada, and the UK, who have experienced sharp increases in borrowing costs.

Despite persistent volatility, market dynamics continue to offer opportunities for those positioned strategically. The shifting fiscal and trade environment will play a defining role in shaping medium-term themes, which can quickly turn into short-term realities. As global monetary conditions adjust, investors must remain vigilant, with key areas of focus including long-duration bonds, currency movements such as AUD vs. EUR, and selective commodity plays. With uncertainty at the forefront, flexibility and risk management will be essential as markets navigate the unpredictable road ahead.

We can however look forward to the start of an RBA rate cutting policy, with a February rate cut fully expected by markets and all major banks. This should be the first of several cuts over the year, however the destination rate (terminal rate) will be heavily dictated by the path of the U.S. Federal Reserve rate policy, which in turn will be driven by the U.S. trade and tariff policy.