Deutsche Bank looks forward to 2025: it is difficult to have surprises in economy and market.

After two consecutive years of exceeding expectations, it may be difficult for the global economy and market to have more surprises.

Deutsche Bank believes that Deutsche Bank believes that strong economic growth expectations, interest rate cuts by European and American central banks, and inflation stabilization have been priced by the market. Coupled with the high asset valuation, it will become more difficult to achieve extraordinary performance in 2025. The market needs new and powerful positive factors to promote growth, and these factors are not obvious at present.

Henry Allen, macro strategist at Deutsche Bank, released a research report on Monday, saying:

From a macro perspective, 2023 and 2024 both exceeded expectations-the economy avoided a hard landing. The growth of the United States and the euro zone exceeded the consensus expectations at the beginning of each year. Therefore, the market performance is very strong, stocks rise, credit spreads tighten, and overall volatility decreases.

But an important consequence is that it raises the threshold for another extraordinary performance in 2025. After all, fears of a hard landing have subsided, and the consensus growth expectations of the United States and the euro zone are stronger than this time in 2023 or 2024. In addition, the market has priced some fairly moderate results, including further interest rate cuts by the Federal Reserve and the European Central Bank, and the suppression of inflation.

More importantly, the Deutsche Bank report pointed out that compared with 2023 and 2024, the economic growth in 2025 is expected to be stronger. According to the Bloomberg Consensus forecast, it is estimated that the US economy will grow by 2.1% in 2025, and the euro zone will grow by 1.2%, which is significantly higher than expected one year ago.

It can also be seen from the consensus prediction of recession probability:

This increase in expectations means that just avoiding economic recession is not enough to constitute a positive surprise for the market. The market needs more positive stimulation to achieve extraordinary performance.

Considering that more interest rate cuts by the Federal Reserve and the European Central Bank have been priced by the market, monetary policy is now approaching neutrality. The report wrote:

Judging from market pricing, investors expect more interest rate cuts in the coming months. They predict that by June 2025, the Federal Reserve will cut interest rates by 55 basis points and the European Central Bank will cut interest rates by 141 basis points. So in itself, this is unlikely to be a positive catalyst for the market, because it is already priced.

In addition, as many central banks have started to cut interest rates, we are approaching the point where the central bank considers the policy "neutral". This means that in the benign scenario of slowing inflation, there is less room to lower interest rates to neutral. After all, lowering them below neutral and entering loose areas is usually a response to insufficient demand or some kind of growth shock.

Of course, the market may cut interest rates faster, but when this happens, it is usually for bad reasons. In fact, at the peak of the summer market turmoil, the futures market priced the possibility of the Fed cutting interest rates by 50 basis points twice in a row. However, given concerns about the growth prospects, this is accompanied by a significant decline in risky assets, rather than a rebound.

Meanwhile, long-term inflation expectations, including market-based measures, have stabilized near the target level.

The report pointed out that the interest rate of 5y5y forward inflation swap in the United States was 2.44%, which was lower than 2.57% a year ago. The euro zone was 1.99%, down from 2.37% in the previous year. The market generally expects that inflation will remain at the target level in the next few years, so the stability of inflation is no longer a major positive surprise.

In addition, it should be noted that the continuous rise in the past two years has made the valuations of many asset classes higher.

The S&P 500 index has risen by 20% for two consecutive years, and the CAPE ratio is now at a level that was only reached before major adjustments, including the Internet bubble and 2021. Credit spreads have also reached the closest level since the global financial crisis. All these factors limit the room for further increase in asset prices in the future.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.