According to our assumptions, stimulus measures, immigration restrictions and tariffs should push up inflation as the economy remains close to full employment. Tariff increases are expected to remain lower than expected, however, as tariff threats could mainly be used as a negotiating tool. European growth is at risk, but we do not expect any major changes to growth forecasts beyond 2025. We expect little impact on European inflation forecasts, which could even surprise on the downside .
Exchange rate and yield differential
A key consequence of the US elections is that the Fed could interrupt the rate cut cycle earlier than expected, with inflation potentially rising in late 2025. In the short term, the Fed is unlikely to change its plan, as it makes its decisions based on based on economic data and does not speculate on the impact of the new president’s actions. Thus, the plan to lower key rates in December and at a quarterly rate over most of 2025 remains valid in our opinion. However, we believe that the Fed will stop its cycle of rate cuts in September 2025 with a key rate of 3.75%, i.e. two cuts of 25 bp less compared to our previous scenario. In the eurozone, disinflation is well underway and economic growth is slowing. The probability of having more key rate cuts is therefore higher. We are now counting on an end-of-cycle rate of 2% (depository rate) which should be reached in September 2025, compared to 2.25% in our previous scenario.
Concerning the longer-term interest rate, we have revised our objectives upwards in the United States given the risk of inflation detailed above as well as the risk of an increase in budgetary expenditure which would lead to an increase in emissions. Treasury bills. The US 10-year yield (sovereign bond) should settle around 4.25% in 12 months. We have not changed our 12-month target for long-term interest rates in the euro zone. The yield on the German sovereign bond should stabilize around 2.25% over the same horizon.
In addition, the new political environment across the Atlantic improves the outlook for American equity markets despite already high valuation levels. We believe three key factors have the potential to increase the profitability of American companies in the coming months:
1. The extension of the very favorable tax regime for businesses and even additional reductions in tax rates
2. Deregulation
3. The downside potential for oil and gas prices.
The increase in the expected yield differential in favor of the United States offers significant support to the dollar for the coming months. We now see upside potential for the US currency over the coming year. However, we do not think that we will see parity again in 2025, but we could return to the level of 1.02 (value of one euro).
Canada
