Weekly Market Recap

Bank of England (BoE) Governor Andrew Bailey signalled in an interview with the Financial Times that he sees the potential for four interest rate cuts next year if the economy develops in line with the central bank’s outlook.

Last week, several closely watched economic reports, particularly related to labour market data, were brought in, with much of the focus on Friday’s nonfarm payroll report. The Labor Department reported that the US added a seasonally adjusted 227,000 jobs in November, slightly higher than consensus estimates. The November number represented a sharp rebound from October’s disappointing data amid the fallout from hurricanes in the southeast US and a major strike at Boeing. The report also noted that unemployment in November increased to 4.2%. Major stock indexes opened higher on Friday as investors appeared to celebrate the final major labour market update ahead of the Federal Reserve’s December meeting.

Earlier in the week, the Labor Department also reported that the number of job openings in October increased to 7.74 million, up from September’s revised 7.37 million reading. The report also noted that layoffs during the month were little changed, but the number of Americans quitting jobs voluntarily – seen by some as a better measure of labour market conditions – increased to 3.3 million.

Elsewhere, payrolls firm ADP reported that private employers added 146,000 jobs in November, and annual pay increased 4.8% year over year. Commenting on the report, ADP chief economist Nela Richardson said, “While overall growth for the month was healthy, industry performance was mixed. Manufacturing was the weakest we’ve seen since spring. Financial services and leisure and hospitality were also soft.”

Other headlines during the week centred around comments from Fed officials as investors continued to look for clues regarding the pace of interest rate cuts. Speaking Monday, Fed Governor Christopher Waller noted that despite some recent data indicating that progress on inflation may be stalling, he is leaning toward supporting a cut to the policy rate at the Fed’s December meeting, absent any surprising incoming economic data.

Meanwhile, on Wednesday, Fed Chair Jerome Powell took a more neutral tone, stating, “The US economy is in very good shape, and there’s no reason for that not to continue…. So, the good news is that we can afford to be a little more cautious as we try to find neutral.” The week’s economic data releases and Governor Waller’s comments helped boost expectations priced into futures markets for a 25-basis-point (bp) rate cut in December.

In France, Prime Minister Michel Barnier’s minority government collapsed after Parliament backed a no-confidence motion tabled by the National Rally (NR) and left-wing New Popular Front to stymy the proposed deficit-reducing budget for 2025. In the aftermath, the yield spread between German 10-year bunds and French 10-year OATS – a measure of political and financial risk in the eurozone – widened at one point to 90bps, the most since 2012. The gap then narrowed to below 80bp when President Emmanuel Macron said he would appoint a new prime minister in the “coming days” and meet with political leaders from the left and right to form a new “government of general interest.”

Key macroeconomic data in Europe continued to point to a slowing economy in the year's fourth quarter. Eurozone retail trade volumes declined in October by -0.5% sequentially, after increasing 0.5% in September, mainly due to drops in sales of non-food products and auto fuel. In Germany, manufacturing continued to struggle. Industrial output fell by -1.0% month over month, falling short of expectations for a 1.2% rebound. Factory orders weakened by -1.5% during the month, with demand for machinery and equipment declining the most.

The European Central Bank (ECB) may be moving away from its data-dependent approach, the bank’s chief economist, Philip Lane, indicated in a Financial Times podcast. He said future policy decisions would need to focus on upcoming risks rather than being backwards-looking, particularly once the central bank is confident that inflation is on track to meet its 2% target.

Many analysts expect China’s leadership to announce further action to support the economy during the Central Economic Work Conference, an annual meeting in which top officials map out the economic agenda for the next year. Economic growth targets and plans for more stimulus are among the topics that investors will look for at the two-day meeting, which starts on 11 December. Expectations are high that China will roll out additional measures to ward off the growth risks posed by the incoming Trump administration’s trade policies.

China’s factory activity expanded for the second straight month. The official manufacturing Purchasing Managers’ Index (PMI) rose to a better-than-expected 50.3 in November from 50.1 in October, according to the statistics bureau, remaining above the 50-mark threshold separating growth from contraction. The nonmanufacturing PMI, which measures construction and services activity, fell to a below-consensus 50 in November from October’s 50.2 reading. Separately, the private Caixin/S&P Global survey of manufacturing activity rose to 51.5 in November from 50.3 in October. The Caixin services PMI eased to 51.5 from 52 in October but remained in expansion.

According to the China Real Estate Information Corp, the value of new home sales by the country’s top 100 developers fell -6.9% in November from a year ago, reversing October’s 7.1% gain. The persistent slide in new home prices showed that China's property sector has yet to show a sustained recovery and supported the view that Beijing will announce further measures to arrest the sector’s yearslong decline.

The latest commentary from the Bank of Japan (BoJ) was balanced. Toyoaki Nakamura, a member of the central bank’s board, reiterated that the merits of an interest rate hike will be judged on incoming data, specifically wage and economic growth. Market participants remain broadly split between December and January regarding the timing of the next 25bp rate hike.

Recent comments by BoJ Governor Kazuo Ueda on the need to observe 2025 wage trends and whether wage hikes are reflected in service prices suggest that a January rate increase could be more likely. Ueda also mentioned uncertainty around US economic policy (the prospective imposition of tariffs) and waiting for further clarity to avoid a hasty rate hike. The BoJ is set to deliver its next monetary policy decision on 19 December.

On the economic data front, average nominal wages grew 2.6% year on year in October, matching consensus and up from a revised 2.5% in September. Real (inflation-adjusted) wage growth was flat, following a revised -0.4% contraction. Meanwhile, household spending fell -1.3% year on year, shrinking for the third straight month.

Australia's GDP increased by 0.3% in the third quarter, below the market consensus of 0.5%, leaving annual growth at an anaemic 0.8%. Despite softness in economic activity, hours worked grew 0.8% quarter on quarter, indicating another sharp decline in labour productivity. Private sector conditions were subdued in the quarter, and government spending drove the entirety of activity growth once again. Implied market expectations for the cash rate of the Reserve Bank of Australia (RBA) fell following the softer-than-expected GDP print. A rate cut in April is now fully priced in.

Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.3% (22.5% YTD).

In the US, the S&P 500 Index gained 1.0% (29.3% YTD) in a week that saw the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all continue to hit record highs, while the Russell 2000 Index declined after back-to-back weeks of outperformance versus its larger-cap peers. As measured by Russell 1000 indexes, growth shares outperformed value stocks by 5.5%, the largest margin since the week ended 17 March 2023. The Russell 1000 Growth Index returned 3.6% (37.0% YTD), the Russell 1000 Value Index -1.9% (20.5% YTD) and the Russell 2000 Index -1.0% (20.3% YTD). The technology-oriented Nasdaq Composite rallied 3.4% (33.2% YTD).

Sector performance was also widely dispersed. Consumer discretionary, communication services and information technology shares all gained over 3% for the week, while energy, utilities and materials stocks – typically more value-oriented market segments – all fell over -3 %. Geopolitical headlines through the first half of the week were primarily dominated by French and South Korean politics, though these seemed to have limited impact on US markets.

In Europe, the MSCI Europe ex UK Index ended the week 2.5% higher (9.9% YTD), as jitters about political instability in France abated. Markets also appeared to anticipate faster policy easing by the ECB. Major stock indexes advanced. Germany’s DAX Index surged 3.9% (21.7% YTD), France’s CAC 40 Index climbed 2.8% (1.5% YTD), and Italy’s FTSE MIB Index jumped 4.0% (20.9% YTD). Switzerland’s SMI Index rose 0.1% (9.2% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.06 for EUR.

In the UK, the FTSE 100 Index rose 0.3% (11.3% YTD), and the FTSE 250 Index gained 1.4% (10.3% YTD). The British pound was stable versus the US dollar, ending the week at USD 1.27 for GBP.

Japan’s stock markets rose over the week. The TOPIX Index added 1.7% (17.8% YTD), and the TOPIX Small Index advanced 1.0% (11.9% YTD). The yen's weakness supported the profit outlooks for Japan’s export-heavy industries. The yen depreciated to JPY 150.0 against the USD from 149.8 at the end of the previous week. In fixed income, the yield on the 10-year Japanese government bond traded in a narrow range, closing the week broadly flat at 1.05%, as uncertainty about the BoJ’s rate hike plans persisted.

In Australia, the S&P ASX 200 Index edged down -0.2% (16.2% YTD), after giving back the gain accumulated at the beginning of the week after the release of the below-consensus third-quarter GDP growth data. Australian government bond yields abated on lower economic growth expectations. The Australian dollar weakened against the US dollar by -1.3%.

The MSCI Emerging Markets Index finished 2.5% higher (10.8% YTD), with a positive contribution to performance from the stock markets of China, India, Taiwan and Brazil and a negative contribution from that of South Korea.

Chinese stocks rose in anticipation of fresh stimulus measures and resilient manufacturing data released the prior week. The Shanghai Composite Index gained 2.3% (17.9% YTD), and the blue-chip CSI 300 Index added 1.4% (19.2% YTD). Hong Kong's benchmark Hang Seng Index was up 2.3% (21.7% YTD).

In South Korea, T. Rowe Price emerging markets analysts expect political uncertainty to linger following the country's surprise imposition and withdrawal of martial law. The opposition Democratic Party has announced that it will charge President Yoon Suk Yeol with impeachment and treason. Much will depend on the extent to which the president fights a potential impeachment campaign. Prior experience with presidential impeachments suggests a six-month timeline until a new presidential election is called. In that scenario, there are high odds of an opposition victory given the prevailing public discontent, in which case fiscal policy should tilt toward being more expansionary.

Our analysts believe that implications for the broader economy are negative at the margin. Sentiment shocks to consumers and potential investors might weigh on growth. Further, fiscal disbursement could be distorted in the event of a delay in next year’s budget, as the government may instead choose to pass a provisional budget with limited authority for spending.

On the other hand, there is a potential silver lining. A peaceful resolution can demonstrate South Korea’s political maturity in addressing anti-democratic actions without descending into chaos. Furthermore, the rapid response from financial regulators has validated South Korea’s institutional strength. The pledge issued early on 4 December to provide “unlimited liquidity” support proved instrumental.

In Poland, the central bank concluded its regularly scheduled two-day monetary policy meeting and kept its key interest rate, the reference rate, at 5.75%. Other interest rates controlled by the central bank were unchanged.

According to the post-meeting statement, central bank officials observed that “economic conditions in the environment of the Polish economy” (i.e. the eurozone) “are still weakened.” They noted that third-quarter growth in the eurozone was “moderate” and “negative” in Germany and that “uncertainty about the activity outlook in the largest economies persists.”

Policymakers noted that third-quarter GDP growth decelerated to a year-over-year rate of 2.7% from 3.2% in the second quarter – which they attributed to “a marked decline in consumption and investment growth” and “the negative contribution of net exports.” As for inflation, they observed that the annual consumer price index inflation rate in November fell to 4.6% from 5.0% in October. Nevertheless, they indicated that recent inflation has been higher than in the first half of the year primarily because of “increases in administered prices of energy carriers” and, to a lesser degree, “the higher annual growth in prices of food and non-alcoholic beverages.” Policymakers also claim that “inflation net of food and energy prices remains elevated, including due to the relatively high growth in services prices.”

Central bank officials concluded that inflation is “currently significantly boosted by rising energy carriers’ prices and other regulatory factors.” They also expect inflation in the next few quarters “will remain markedly above” the central bank’s target, driven by previous increases in energy costs and a “planned increase in excise duties and administered services prices.” As a result, policymakers decided to leave interest rates unchanged.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.4% (4.6% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.5% (11.5% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.6% (7.8% YTD).

US Treasuries posted positive returns as yields entered Friday lower than where they ended the prior week. On Friday morning, yields across the curve fell further following the release of the Labor Department’s employment situation report. Over the week, the 10-year Treasury yield decreased -2bp to 4.15% from 4.17% (up 27bp YTD). The 2-year Treasury yield declined -4bp, ending the week at 4.11% from 4.15% (down -15bp YTD).

Meanwhile, US investment-grade corporate bonds generally performed well. About half of the week’s new investment-grade corporate issues were oversubscribed, and the issuance amount was slightly below estimates.

Over the week, the 10-year German bund yield increased 2bp, ending at 2.11% from 2.09% (up 9bp YTD).

The 10-year UK gilt yield rose 3bp, ending the week at 4.27% from 4.24% (up 74bp YTD).