After the European Central Bank cut interest rates and the US Federal Reserve put theirs on hold, and data showed that US GDP grew this week, albeit at a slowing rate in the final quarter of 2024, wealth managers discuss the impact on the economy, asset allocation and potential rate cuts.

Investors were confronted with important economic and monetary policy data events on boths side of the Atlantic this week. 

The US economy continued to grow in the fourth quarter of 2024, coming in at an annualized rate of 2.3 per cent, fueled by strong consumer spending, according to the advance estimate released by the US Bureau of Economic Analysis. However, this is below consensus forecasts of 2.6 per cent and the lowest rate since the first quarter of 2024.

Separately, the European Central Bank yesterday cut the deposit facility rate by 25 basis points, from 3 per cent to 2.75 per cent. Wealth managers sought to grapple with the US data and the eurozone direction of monetary policy in what has been a busy week, given the selloff to US stocks at the start following reports that China has issued its DeepSeek AI app that, apparently, cost far less to develop than its US counterparts. Such developments have given equity market asset allocators food for thought.

“With the US Federal Reserve holding interest rates at 4.25 to 4.50 per cent this week, this unexpected slowdown in the growth rate may boost expectations of a restart in the rate-cutting cycle sooner rather than later,” Isaac Stell, investment manager at Wealth Club, said in a note.

“With Chair Jerome Powell under the spotlight of the current administration and a vocal President keen to share his views on the direction of monetary policy, the pressure on the Fed will continue to build, especially if this slowdown looks to be more than just a blip,” Stell continued.

Nathaniel Casey, investment strategist at UK wealth management firm Evelyn Partners, emphasized how inflation remains above target with the underlying economy looking resilient for the time being, so the Fed feels that it can afford to maintain its restrictive policy stance a while longer. “Looking out over the rest of 2025, given the resilient growth outlook for the US economy, markets are currently expecting just two 25-basis point rate cuts to materialize this year,” Casey said.

“The US economy continues to expand at a reasonable pace," he added. With consumption remaining strong and expansionary fiscal policy from President Trump potentially on the horizon, Casey remains confident that the growth outlook for the US will continue to be constructive over 2025. 

Meanwhile, as expected, the European Central Bank (ECB) reduced its deposit rate by 25 basis points to 2.75 per cent on Thursday, in a bid to respond to the eurozone's weak growth. It marks the fifth reduction since the start of the easing cycle in June last year.

EU versus US
“Eurozone economic growth is weak, with the latest report pointing to stagnation, a stark contrast relative to the robust pace of expansion of the US,” Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley), said.

“Given divergent economic trajectories, the European Central Bank has more incentive to cut in the near term than its US counterpart and will likely reduce rates to around 2 per cent as inflation normalizes,” Antonucci continued. He expects the eurozone to lag the US, with the risk of trade tariffs creating a headwind for growth, which he expects to stay subdued.

“This divergence in growth suggests a weak euro in the near term,” he added. He continues to be overweight in US equities, but has diversified his exposure into more attractively valued sectors such as industrials and financials that might benefit from US fiscal stimulus. After the recent sell-off, driven by the ramifications of China’s DeepSeek on AI stocks, Antonucci bought an ‘insurance’ instrument that appreciates in case US equities were to fall, mitigating downside risks.

Antonucci has also recently adjusted his European equity exposure lower, to neutral, given downside risks such as higher tariffs, while maintaining his ‘insurance’ instrument which appreciates when European equities decline.

At the turn of the year, he has increased his exposure to European government bonds, preferring short-dated ones, which should benefit from rate cuts as well as slower growth and inflation.

Daniela Sabin Hathorn, senior market analyst at Capital.com also emphasized that the euro remains under pressure, struggling to sustain a rebound against the dollar, as investors weigh the prospect of further ECB rate cuts in the months ahead.

Other reactions to ECB rate cut
David Zahn, head of European fixed income at Franklin Templeton
“The European Central Bank has reduced its deposit rate by 25 basis points to 2.75 per cent, as anticipated. In our view, we predict rates to reduce to 1.5 per cent by end of 2025. Analysts forecast further cuts, potentially bringing the rate to 2 per cent by the end of 2025. The eurozone’s stagnant economy, with a Q4 2024 GDP growth of 0.0 per cent, suggests a need for additional monetary easing. While inflation remains a concern, the economic slowdown is likely to take precedence. The upcoming March forecast will be pivotal in confirming the trajectory of increased ECB rate cuts throughout 2025.  A more accommodative ECB should be supportive of European bonds, specifically the short end of the market.”

Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management
“As expected, the ECB delivered its fifth 0.25 per cent cut in the cycle, reaffirming the view that disinflation remains on track. We expect additional back-to-back cuts through to June as inflation continues trending lower and growth risks linger. The ECB may need to extend its cutting cycle through the second half of the year if the growth outlook deteriorates further.”

Felix Feather, economist at abrdn
“The ECB’s decision to cut rates by 25 bps came as no surprise. Inflation is near the ECB’s 2 per cent inflation target, while the economy stagnated over Q4. We don’t think the ECB’s cutting cycle is finished yet, and anticipate three further cuts this year. This view is based on a weak outlook for growth and our expectation for inflation to move down toward target and remain there.”

Mathieu Savary, chief European strategist at BCA Research
“The ECB maintains its direction and sees no case to reevaluate policy until the deposit rate hits 2 per cent this June, or its estimate of neutral. Beyond that point, we expect two to three additional cuts: wage growth will fall back to 2 per cent, unit profits are weakening, and most importantly, the US trade policy remains a major drag on European economic activity.”

Patrick O'Donnell, senior investment strategist at Omnis Investments 
“The ECB cut interest rates, as priced by markets. The need to do so was underlined by the recent disappointing GDP releases and at the margin, the Bank Lending Survey results on Tuesday. It is difficult to see how the ECB will change the narrative of relatively gradual cuts, or indeed, why they would want to at this stage. I would expect markets to take their cue from other events, rather than this decision.”

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International
"Looking ahead, we anticipate the ECB to maintain its current pace of rate cuts until reaching the neutral rate of around 2 per cent, followed by a more gradual approach with cuts at alternate meetings. Our view remains more dovish than current market pricing, as we expect continued growth headwinds to push the terminal rate to 1.5 per cent by year-end, notably due to persistent concerns over global trade tensions. We expect to see developments on the tariff front in coming weeks. This will be a critical driver of ECB policy going forward."