This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
US | Another interest rate reduction
As expected, the US Federal Reserve (Fed) cut interest rates for the third time this year, lowering its target range by 25 basis points to 3.50-3.75%. Chair Jerome Powell cited a softening labour market, noting that payroll growth may be overstated. Inflation pressures also appear slightly weaker than anticipated.
The Fed also announced a restart of quantitative easing, with monthly T-Bill purchases of $40bn, which is likely to support bond prices. It raised its 2026 economic growth forecast by half a percentage point to 2.3%, roughly in line with our above-consensus view. While the rate path remains data-dependent, Fed projections point to one cut in each of the next two years, implying a terminal rate of 3.125%. While we agree with the terminal rate, we think the two cuts could come in 2026. A new Fed Chair is likely to be named soon, and markets see Trump’s National Economic Council Director Kevin Hassett as the frontrunner. This could mean the committee turns even more dovish next year.
Portfolio positioning | Preferring equities over bonds
We continue to favour equities over bonds, while keeping portfolios broadly diversified. After taking profits in Japanese equities to bring that position back to neutral, we are now overweight equities in the US, Europe and emerging markets. US equities continue to offer strong growth potential, while emerging markets are attractively valued. We also favour Europe because of its defence and infrastructure spending and the possible upside if Russia-Ukraine tensions ease.
On the fixed income side, we have sold Japanese government bonds and added currency-hedged UK gilts and short-dated European government bonds. Gold, commodities and inflation-linked bonds remain key strategic diversifiers.
To reduce concentration risk from large US technology names, we remain invested in an equal-weighted US index tilted towards industrials and financials. These sectors could benefit from stimulus and deregulation. Where appropriate, we also use ‘insurance’ strategies designed to appreciate when equities fall.
This week | Monetary policy still in focus
Three major central banks meet this week. We expect the Bank of England to cut rates by 25 basis points on Thursday, supported by an improving inflation outlook. UK inflation for November, due on Wednesday, should ease from October’s 3.6%. The European Central Bank is likely to hold steady with Eurozone inflation near its 2% target. We think the Bank of Japan may hike rates on Friday. Japanese inflation, also out Friday, is expected to soften slightly below October’s 3%, therefore remaining above target.
In the US, Tuesday’s postponed jobs report should clarify labour market trends after October’s data gap, pointing to continued softening. Thursday brings the delayed US inflation report for November, likely above October’s 3% because of tariff effects. In Europe, purchasing managers’ indices and confidence indicators will offer insight into corporate activity and consumer sentiment ahead of the year-end break.
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Information correct as of 15 December 2025.
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