Interest Rates

Rates markets are starting off the new year with substantially different expectations for the path of the Fed Funds Target range than just four months ago, when they began reducing rates with a 50bps “recalibration” at their September meeting. While the FOMC has already cut by a total of 100bps, Fed Funds Futures markets currently imply less than two additional 25bps cuts this year. Market based expectations for the future path of policy have changed quickly. A brief look back at last year may offer a cautionary tale.

Starting last year the FOMC was widely expected to lower interest rates in 2024, but expectations for the timing and magnitude of rate cuts varied meaningfully. In January of 2024, Fed Funds Futures markets implied as many six to seven 25bp reductions by the end of 2024. Markets dialed back rate cut expectations throughout the remainder of the first and second quarter. The FOMC ultimately held policy rates steady for more than a year before cutting at their September meeting. It’s entirely plausible the FOMC cuts twice this year, but it would be in response to how the economy is progressing rather than predictions from a volatile Fed Funds Futures market. 

— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income

• Market based expectations for the future path of policy have changed quickly.
  
  
• Accordingly, take the predictive power of fed funds futures markets with a grain of salt.
  
  
• A fairly wide range of outcomes with respect to the Federal Funds Target range are possible again in 2025.

Credit Markets

Following strong performance in November across risk assets, market participants began the month with a renewed focus on the Fed and the potential path forward for monetary policy. However, at the December FOMC meeting, the tone shifted from concern around future labor market weakness to more attention on stubbornly resilient inflation. Interest rates rose over the course of a month. Higher interest rates coupled with spread widening contributed to a negative return for high yield in December.

The backdrop in high yield (HY) continues to be supported by strong underlying fundamentals heading into 2025 as 3Q24 data unveiled relative stability in credit metrics. Leverage has increased to 4.05x from the record lows back in 1Q23, although that still leaves it below the historical average of 4.30x. Interest coverage decreased 0.23x to 4.66x, but it remains above the long-term average (4.50x). HY market valuations are likely to be supported by stable issuer fundamentals and a benign default outlook. These factors provide a strong backdrop for high levels of carry and total return potential. In our view spreads are more likely to be influenced by interest rates going forward, rather than deterioration in fundamentals.

— Eric Williams, Head of Capital Structure, Global Fixed Income

• The backdrop in high yield continues to be supported by strong underlying fundamentals heading into 2025 as 3Q24 data unveiled relative stability in credit metrics.
  
  
• Leverage has increased to 4.05x from the record lows back in 1Q23, although that still leaves it below the historical average of 4.30x.
  
  
• Interest coverage decreased 0.23x to 4.66x, but it remains above the long-term average of 4.50x.

Equities

The last month highlighted the importance of the macroeconomic backdrop. Global equities weakened after the Fed delivered a hawkish rate cut in December. Each of the major regions fell lower for the month. U.S. large cap value has had a strong January so far and is outperforming U.S. large cap growth after significantly underperforming in December and across the full-year 2024. In December, many cyclical areas of the market (e.g. small caps, industrials, materials) shaved off a majority of their post-election returns as Fed rate cut expectations were scaled back. However, softer-than-expected U.S. inflation data provided a boost for risk-assets in mid-January, leading to a reversal of many of the above moves.

U.S. economic growth data has remained solid. Although U.S. equity valuations are above historical averages, a strong earnings backdrop continues to provide support. Given a subdued economic growth outlook in the Eurozone and uncertainty around tariffs, we remain underweight to developed ex-U.S equities. But we remain broadly overweight equities overall with a preference for the U.S. and a smaller overweight to emerging markets.

— Christian Lambert, Investment Analyst, Global Asset Allocation

• Softer-than-expected U.S. inflation data provided a boost for risk-assets in mid-January.
  
  
• Resilience in the U.S. economy and a supportive earnings backdrop has supported U.S. equity returns.
  
  
• We maintain overweights to the U.S. and emerging markets. We are underweight developed ex-U.S. equities.

Real Assets

2024 was a good year for listed infrastructure. Strong earnings and momentum for energy midstream and a structural positive shift in the growth rate for utilities were tailwinds for the asset class. We believe the asset class is in a good position to continue to thrive as its defensive cash flows are more attractive in a slowing global economy. We also expect significant growth in capital expenditures from infrastructure modernization and improvements in transition. Asset class fundamentals are robust and the growth outlook is very strong.

Another important piece to the infrastructure puzzle is downside protection from global capital on the sidelines (over $346 billion of private capital according to Preqin). These funds could potentially provide a floor of support and downside protection for global listed infrastructure valuations. Also, private funds have had difficulty deploying capital and are acquiring assets at significant premiums over appraisals, representing upside for the listed space. With the combination of strong fundamentals and higher earnings growth, discounted valuations, and deep private capital interest, we are excited about the listed infrastructure sector heading into 2025.

— Jim Hardman, Head of Real Assets, Multi-Manager Solutions

• Private market capital could provide a floor of support and downside protection for listed infrastructure valuations.
  
  
• We confirm our overweight to infrastructure on strong fundamentals, robust earnings growth, discounted valuations, and record private market capital dry powder.