Weekly Market Recap

The latest data appeared to indicate that budget uncertainty and higher taxes were curbing UK economic growth and the housing market.

Gross domestic product (GDP) contracted by 0.1% sequentially in October, after shrinking by a similar amount in September. Economists polled by FactSet expected a 0.2% expansion. GDP also fell 0.1% in the three months through October. Construction performed worst in October, with output falling 0.6%. The services sector, the biggest part of the economy, declined by 0.3%. However, production, which includes manufacturing, rose by 1.1% after the Jaguar Land Rover shutdown ended.

The Royal Institution of Chartered Surveyors said its latest survey showed a “notable cooling” in the UK housing market in November as demand for homes hit a two-year low.

The Federal Reserve (Fed) concluded its final meeting of the year on Wednesday and, as was widely expected, announced that it would lower its target range for the federal funds rate by 0.25% to the 3.50%–3.75% range. Notably, however, three policymakers dissented for the first time in six years, with two officials favouring no change to the policy rate and one preferring a 0.5% cut. The central bank’s policy statement also included language that has previously signalled a pause in policy actions, noting that policymakers “will carefully assess incoming data” to determine “the extent and timing of additional adjustments to the target range.”

Fed Chair Jerome Powell’s post-meeting press conference offered somewhat mixed messages, though ultimately appeared to be less hawkish than some investors were anticipating. While Powell noted that the fed funds rate is “within a broad range of estimates of its neutral value” and that policymakers are “well positioned to wait and see how the economy evolves,” he also referenced concerns about “significant downside risks” to the labour market. The central bank also said that it will “initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.”

Potentially adding to concerns around the labour market, the Labor Department reported Thursday that applications for unemployment benefits for the week ending December 6 totalled 236,000, an increase of 44,000 from the prior week’s revised level. This was the highest weekly total since early September. On the other hand, continuing claims declined by 99,000 to 1.838 million, the lowest since mid-April.

Meanwhile, the Bureau of Labor Statistics reported that job openings in October rose to a five-month high of 7.670 million, up from 7.658 million the prior month. Layoffs rose to 1.854 million from 1.781 million, while hires fell to 5.149 million from 5.367 million. October’s quits rate fell to the lowest since 2020, a signal that workers may have less confidence in leaving their jobs and finding employment elsewhere.

European Central Bank (ECB) Executive Board member Isabel Schnabel told Bloomberg that she was “rather comfortable” with market expectations for an increase rather than a decrease in borrowing costs but indicated that any potential rate hike would hinge on incoming economic data. Schnabel asserted that risks to growth and inflation are tilted to the upside. 

Later, ECB President Christine Lagarde said at a Financial Times conference that the economy is proving resilient to trade tensions and growing close to its potential. She indicated that the ECB could upgrade its growth projections at its December meeting. Separately, Governing Council member Gediminas Simkus told Bloomberg that there was no need for more rate reductions, while Francois Villeroy de Galhau said that the wise thing is to keep borrowing costs steady at their current level of 2.0%.

Separately, a Reuters poll of 96 economists showed that all of them expect the ECB to keep the deposit rate steady next week, while almost 75% expected no change until the end of 2026—up from about two-thirds in last month's survey.

The Swiss National Bank (SNB) kept its policy rate unchanged at 0.0%, as expected, citing soft inflation and weak economic activity.

November inflation data underscored the weight of deflationary pressures on China’s economy. The consumer price index (CPI) rose to 0.7% in November year on year, staying above zero for the second straight month. But the producer price index fell 2.2%, marking the 38th straight month of declines. The core CPI, which excludes food and energy, was unchanged at 1.2%, Bloomberg reported, citing official data.

Unlike the U.S. and Europe, China has been grappling with deflation since the pandemic ended amid a prolonged housing slump that has in turn discouraged consumption. In response, the government launched a so-called anti-involution campaign aimed at curbing price wars and excessive output in industries ranging from food delivery to car manufacturing. But the latest inflation report suggested that Beijing’s efforts in beating deflation have had limited progress.

Markets overwhelmingly priced in the likelihood of a Bank of Japan (BoJ) interest rate hike at its December 18–19 meeting, reflecting perceptions of improved communication by the central bank as it seeks to prevent a bout of market turmoil like the one triggered by its July 2024 rate hike, which came as a surprise to many investors.

Ahead of the BoJ’s December 18–19 monetary policy meeting, all of the 50 economists polled by Bloomberg expected the central bank to raise its key policy rate by 0.25% to 0.75% at its final meeting of 2025. The BoJ raised the rate to its current 0.50% level in January.

BoJ Governor Kazuo Ueda said during the week that the bank foresees a convergence to 2% of underlying inflation and that it is closer to reaching its inflation target on a sustained basis. He expects a tight domestic labour market to continue putting upward pressure on wages. While a slowdown in global artificial intelligence spending could represent a shock to Japan’s economy, strong enough momentum in domestic wage-price dynamics would likely prevent a large fall in the rate of price or wage inflation. Ueda also emphasized that the BoJ is focused on how exchange rates affect the outlook for inflation.

Japan’s final third-quarter GDP contracted by an annualized 2.3%, worse than the preliminary 1.8% contraction and consensus estimates of a 2.0% decline. The downward revision was due to a fall in the capital expenditure component of GDP, when the initial estimate was a rise; economists had also anticipated a pickup.

In an unanimous decision, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 3.6% at the December meeting, in line with expectations. The brief statement focused less on downside risk to growth but more on the upside risk to inflation, indicating that the RBA may be on hold for an extended period. 

Australian employment fell by 21,000 in November, against expectations for an increase of 20,000. The decline in jobs was full-time driven (-57,000). However, due to a large decline in participation rate, the unemployment rate held flat at 4.3%. The underemployment rose sharply, from 5.7% to 6.2%, as did youth unemployment (from 9.7% to 10.2%). Nominal consumer spending growth in Australia remained robust in November, according to CommBank’s Household Spending Insights.

Last week, the MSCI All Country World Index (MSCI ACWI) fell 0.2% (22.1% YTD).

Most major stock indexes in the US hit all-time highs during the week, supported by the Fed’s third consecutive interest rate cut and commentary from central bank officials that some investors interpreted as less hawkish than feared. However, the S&P 500 Index pulled back sharply on Friday and erased its gains from earlier in the week, finishing down -0.6% (17.5% YTD). The small-cap Russell 2000 Index, which can be more sensitive to interest rate moves than its large-cap peers, performed better, adding 1.2% (15.8% YTD).

Renewed concerns regarding technology stock valuations and questions around whether elevated spending on artificial intelligence (AI) infrastructure will pay off weighed on the tech-heavy Nasdaq Composite, which fell 1.6% over the week (20.9% YTD). These concerns came back into focus after enterprise software company Oracle—which has been a recent beneficiary of AI enthusiasm—announced quarterly revenue results that fell short of consensus estimates on Wednesday, while the company also guided for a substantial increase in capital expenditures. Growth stocks underperformed value stocks as a result. The Russell 1000 Growth Index returned -1.5% (18.0% YTD) and the Russell 1000 Value Index 0.6% (16.1% YTD).

In Europe, the MSCI Europe ex-UK Index added 0.1% (17.2% YTD) on the news of US interest rate cuts. Major stock indexes were mixed. Germany’s DAX Index was up 0.7% (21.5% YTD), France’s CAC 40 Index fell -0.6% (13.0% YTD), and Italy’s FTSE MIB Index put on 0.2% (33.7% YTD). Switzerland’s SMI fell back by -0.4% (14.7% YTD). The euro was up slightly against the US dollar, closing the week at USD 1.17 for EUR versus USD 1.16 at the end of the previous week.

The FTSE 100 Index in the UK lost -0.2% (22.1% YTD), and the FTSE 250 Index gave back -0.8% (9.8% YTD). The British pound continued to appreciate against the US dollar, closing the week at USD 1.34 for GBP, up from 1.33.

Japan’s stock markets delivered positive performance over the week. The TOPIX Index was up 1.8% (25.1% YTD), and the TOPIX Small Index advanced 1.2% (28.4% YTD).

In Australia, the S&P/ASX 200 Index rose 0.7% (11.1% YTD), following the global equity rally post the anticipated Fed rate cut. Australian government bond shorter term yields moved more than longer term rates, reflecting a bear flattening after the hawkish RBA narratives. Australian dollar strengthened against the US dollar. 

In Canada, the S&P/TSX Composite was up by 0.8% (30.7% YTD).

The MSCI Emerging Markets Index rose 0.4% (32.8% YTD), with markets in Taiwan, Brazil, and South Korea contributing to the gains. The Chinese and Indian stock markets contributed negatively.

Mainland Chinese stock markets retreated as investors took profits after recent gains. The onshore CSI 300 Index, the main onshore benchmark, fell by -0.1% (19.5% YTD), and the Shanghai Composite Index was down by -0.3% (19.0% YTD). Hong Kong's benchmark Hang Seng Index also declined, by -0.4% (34.3% YTD). The MSCI China Index, which primarily consists of offshore-listed stocks, was the largest decliner, down -0.7% (34.1% YTD).

On Thursday, Turkiye’s central bank held its scheduled monetary policy meeting, and policymakers decided to reduce the one-week repo auction rate by 1.5%, from 39.5% to 38.0%. Simultaneously, policymakers lowered the overnight lending rate from 42.5% to 41.0% and the overnight borrowing rate from 38.0% to 36.5%.

According to the relatively short post-meeting statement, policymakers noted that consumer inflation in November was lower than anticipated due to a “downward surprise in food prices.” They also noted that the underlying trend of inflation declined slightly in October and November, while third-quarter GDP growth was higher than expected. With “demand conditions” continuing to “support the disinflation process,” policymakers felt that it was appropriate to reduce interest rates, though they acknowledged that “inflation expectations and pricing behaviour continue to pose risks” to that process. They reaffirmed their intention to maintain the “tight monetary policy stance…until price stability is achieved.”

On Wednesday, Brazil’s central bank decided to keep its key interest rate, the Selic rate, at 15.0%. The decision, which was generally expected, was unanimous among policymakers. In their post-meeting statement, policymakers acknowledged that economic indicators are showing “a path of moderation on economic growth” and characterized the labour market as showing “resilience.” Regarding inflation, central bank officials noted that various inflation measures “continued to show some improvement” but remained above the central bank’s inflation target. While inflation expectations are currently anticipated to decrease from 4.4% in 2025 to 4.2% in 2026, policymakers project that inflation will decrease to 3.2% by the second quarter of 2027, which they currently consider to be “the relevant horizon for monetary policy.”

Policymakers identified several upside and downside risks to inflation and noted again that the risks “continue to be higher than usual.” Among the upside inflation risks are “a more prolonged period of deanchoring” of inflation expectations, “resilience of services inflation,” and a “conjunction of internal and external economic policies” that impact inflation. The downside risks include a stronger-than-expected deceleration of domestic growth, a “steeper global slowdown” stemming from trade tensions and uncertainty, and lower commodity prices.

Central bank officials concluded that the environment of “heightened uncertainty” warrants “a cautious stance in monetary policy” and that “a significantly contractionary monetary policy for a very prolonged period” is needed to help bring inflation down to the central bank’s target. As a result, they judged that leaving interest rates unchanged at this time is “consistent” with their inflation convergence strategy.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.2% (4.5% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.1% (9.3% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index was broadly flat (11.6% YTD).

U.S. Treasury performance was mixed across maturities. Shorter-term yields generally decreased - particularly after the Fed announcements on Wednesday - while longer-term yields largely finished the week higher. Over the week, the 10-year Treasury yield increased by 5bp, ending at 4.19% from 4.14% (down -38bps YTD). The 2-year Treasury yield, in contrast, fell by 4bps, ending the week at 3.52% from 3.56% (down -72bps YTD).

Investment-grade corporate bonds outperformed Treasuries, and new issues were, on average, oversubscribed, with volumes in line with expectations. It was also noted that high yield bonds experienced some weakness ahead of the Fed’s rate decision, and that much of the week’s trading activity was driven by credit-specific headlines. 

Over the week, the 10-year German Bund yield increased by 6bp, ending at 2.86% from 2.80% (up 50bps YTD). The 10-year UK gilt yield increased by 6bps, ending the week at 4.54% from 4.48% (down -4bps YTD).