Hard landing alarm? Jupiter Asset Management predicts turbulence in the bond market in 2025, and the Federal Reserve may significantly cut interest rates

According to the Zhitong Finance APP, Ariel Bezalel, Bond Investment Manager at Jupiter Asset Management, and Harry Richards, Bond Investment Manager, shared insights on the bond market outlook for 2025. The U.S. economy has experienced a "hard landing" about 80% of the time over the past 120 years, with only about 20% of the time achieving a "soft landing." The market may be underestimating the likelihood of an economic slowdown, which could prompt the Federal Reserve to cut interest rates significantly more than currently priced in. Jupiter Asset Management stated that given the 10-year U.S. Treasury yield is around 4.5%, this presents an attractive option to hedge portfolio risk considering future conditions.

Jupiter Asset Management pointed out that while the absolute level of the U.S. unemployment rate remains relatively low by historical standards, the speed of its increase, when measured by the closely watched Sam Rule, appears concerning. According to the Sam recession indicator, a recession has begun when the three-month moving average of the national unemployment rate exceeds the lowest three-month average of the past 12 months by 0.50 percentage points or more.

Many market participants noted that part of the reason for the rising unemployment rate is labor force expansion, with immigration being one of the factors contributing to this expansion. They believe that as long as hiring remains strong, the rising unemployment rate will not pose a problem. However, a closer look at recent employment trends reveals that new jobs remain limited when excluding government jobs, healthcare, and private education (which are essentially non-cyclical sectors).

Current layoffs remain limited, but once layoffs begin to increase significantly, the opportunity for a rare soft landing may have already passed. It is also important to emphasize that during past soft landing periods, such as the mid-1990s, cyclical employment showed strong growth. The current environment seems different.

The U.S. economy is clearly diverging, and consumers are feeling the pressure

U.S. consumers are feeling pressure as the ongoing price pressures post-COVID have squeezed their ability to purchase non-essential goods. This situation is particularly evident among middle- and low-income groups, with informal evidence suggesting that consumers are becoming more cautious in their choices. The delinquency rates on credit cards and auto loans continue to rise. A few super-large companies have contributed most of the profit growth driven by a small segment of wealthy consumers. Meanwhile, many small and medium-sized enterprises are struggling with high financing costs and declining profitability. This disparity seems unusual and is unlikely to be sustainable in the long term. There are also disparities in consumption. Currently, most consumption comes from a relatively small population group, and this asymmetric consumption pattern is detrimental to economic demand and growth.

Since the end of the pandemic, the performance of the U.S. economy has outpaced that of developed markets. U.S. economic demand is supported by several key factors, including strong government spending, excess savings accumulated during the pandemic, and the wealth effect generated by soaring prices of stocks and other assets. However, these savings have been depleted. In terms of fiscal policy, as U.S. finances are now under close scrutiny, the government's ability to further increase deficits may be limited. In this environment, Trump will assume the presidency. One of the key reasons for his overwhelming victory is the strong impact of the cost of living crisis on American households over the past three years. Although overall data suggests the economy still appears strong, the general perception among the American public is not the same Global performance in other regions is sluggish, with Trump's protectionist rhetoric in focus

The sluggish performance in other regions of the world is also detrimental to economic growth. The recovery in the Eurozone has largely faded, with recent purchasing managers' index data indicating a renewed economic weakness. Although the UK economy outperformed expectations in the first half of the year, recent data shows a deterioration. By historical standards, the GDP data for Australia and New Zealand is very weak.

The political developments in Germany and France, the two largest economies in Europe, suggest that European policies may stagnate for a while. With a change of government in the UK, investors will assess the impact of the government budget on the country's long-term growth prospects. In the United States, with Trump's re-election, his protectionist rhetoric during the campaign has become a focal point. He may simply use tariffs as a negotiating tool to force global trade partners to make concessions.

Inflation in developed countries is under control, but the Federal Reserve may hesitate to cut rates

Regarding inflation, it is noteworthy that the structural factors that have driven inflation up in recent years, such as loose monetary policy, significant increases in money supply, fiscal policy, supply-side constraints, and commodity price fluctuations, have largely dissipated. Therefore, no new external factors are currently exerting pressure on inflation.

More and more developed countries are seeing overall inflation under control and close to target levels. Core inflation remains slightly elevated, at least on a year-on-year basis. This is mainly influenced by services in the inflation basket, while core goods are in a deflationary range. As housing inflation (especially in the U.S.) gradually declines and wage pressures ease, overall inflation in services should fall. The potential crisis lies in inflation possibly remaining slightly above the Federal Reserve's target, causing hesitation in further rate cuts, even as the underlying economy weakens. This could lead to periods of volatility in the bond market, putting significant pressure on risk assets.

Trump's push to reduce government size and ease regulations may slow inflation

There is market concern regarding Trump's policies, including his commitment to a large-scale tax cut plan, and whether this could trigger inflation. Given that consumers are still feeling the price pressures from the past two years, it is hard to believe that Trump would announce a large number of policies that could lead to economic inflation or hyperinflation. After all, the main reason Biden and the Democrats were forced out of the White House was inflation.

On the other hand, Trump's push to reduce government size and ease regulations could ultimately become a driving force for slowing inflation. Trump has appointed Musk and Ramaswamy to lead the "Department of Government Efficiency," which will focus on cutting spending across the government.

Musk recently stated that the American public may have to endure a brief period of hardship. There is speculation that the U.S. government's financial situation is currently under review and that measures will soon be taken to control government spending. Additionally, a popular candidate for the next Secretary of the Treasury, Basant, stated during a recent visit that the idea of Trump causing inflation is "absurd." He indicated that easing regulations, lowering energy prices, economic re-privatization, and gradually imposing tariffs would ensure that inflation remains low. He also mentioned that any tax cuts would be supported by other funding sources.

Geopolitics is another area of significant concern for the Trump administration, as any resolution to the Russia-Ukraine war and Middle East conflicts could suppress oil and commodity prices, thereby alleviating inflationary pressures Similarly, relaxing regulatory restrictions on environmental issues may increase oil drilling activities in the United States, helping to lower energy prices.

Interest rates in the U.S. and other developed markets remain high, and 10-year U.S. Treasury bonds can hedge risks

A key outcome of the above situation is that interest rates in the U.S. and other developed markets remain significantly high, necessitating further easing of policies. The labor market has shown signs of instability, with attention being paid to data such as the number of continuing unemployment claims to look for evidence of a sharp slowdown in growth.

In this environment, it is important to remember that the U.S. economy has experienced a "hard landing" about 80% of the time over the past 120 years, with only about 20% of the time achieving a "soft landing." The market may be underestimating the likelihood of an economic slowdown, which could prompt the Federal Reserve to cut rates significantly more than currently priced in. Jupiter Asset Management stated that given the 10-year U.S. Treasury yield is around 4.5%, this is an attractive option to hedge portfolio risks considering future conditions