Global markets weekly update

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Most indexes decline while Nasdaq hits another record high

Most major stock indexes ended the week lower, although the technology-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. Large-cap stocks held up better than their smaller-cap peers as the Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. As measured by Russell 1000 indexes, growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12.08%) and Google parent Alphabet (8.44%), the latter of which recorded its largest two-day gain since 2015 between Tuesday and Wednesday.

T. Rowe Price traders noted that Monday was the worst day for the momentum factor—a factor based on buying stocks with strong recent performance and selling stocks with weak recent performance—in over a year, although this stabilized by the end of the week. Sector performance was also largely negative, with only communication services and consumer discretionary notching gains. Our traders also noted that while it was a relatively quiet week in terms of market catalysts, daily trading volumes outpaced the six-month average throughout the week. The week ahead is also expected to be busy, with index rebalances and the Federal Reserve’s final meeting of the year on the calendar.

Progress on inflation stalls; labor market cools

The highlight of the week’s economic calendar came on Wednesday with the Labor Department’s report of headline and core (less food and energy) consumer price inflation (CPI), which both rose by 0.3% in November and were in line with consensus expectations. On a year-over-year basis, core prices increased 3.3% in November, unchanged from the prior month, while overall inflation accelerated modestly to 2.7%, up from 2.6% in October. Higher shelter costs were responsible for nearly 40% of the total price increase in November, and very few of the index’s components decreased during the month. Similarly, producer price inflation accelerated a tick in November, to 0.4% from 0.3%.

On Thursday, the Labor Department also reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000. While some of the increase was attributed to seasonal factors around the Thanksgiving holiday, continuing claims also rose and remained near three-year highs, a sign that it is taking longer for some unemployed individuals to find a job. The jobs data served as another indication of a softening labor market following the prior week’s report of an uptick in the unemployment rate in November.

Expectations rise for December rate cut

The week’s economic data releases appeared to be enough for markets to solidify expectations for a rate cut at the upcoming Federal Reserve meeting. According to the CME FedWatch Tool, futures markets on Friday were pricing in a 97.1% chance of the Fed cutting rates at its upcoming meeting, up from 86.0% at the end of the prior week. The two-day meeting begins December 17, with an announcement on the rate decision made the following day.

U.S. Treasuries delivered negative returns heading into Friday as Treasury yields increased across most of the yield curve. (Bond prices and yields move in opposite directions.) U.S. investment-grade corporate bond performance was also dragged lower by rising yields. Corporates improved marginally relative to Treasuries on Wednesday following the CPI report before retreating slowly Thursday in a mostly quiet trading session. According to T. Rowe Price traders, high yield bond market volumes picked up following the CPI report as equities rallied; however, broader macro sentiment and rising Treasury yields subsequently caused the market to turn lower.

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.77% lower, as investors debated whether the European Central Bank (ECB) has been easing monetary policy fast enough to support the struggling economy. Major stock indexes, however, were mixed. Germany’s DAX eked out a 0.10% gain, while Italy’s FTSE MIB added 0.40%. France’s CAC 40 Index fell 0.23%, and the UK’s FTSE 100 Index declined 0.10%.

ECB, SNB cut interest rates

The ECB lowered its key deposit rate by a quarter of a percentage point to 3.0%, the fourth reduction this year. The ECB appeared to leave the door open to ease monetary policy further, dropping a reference to keeping rates “sufficiently restrictive for as long as necessary” from its statement. Nevertheless, the ECB’s announcement retained its emphasis on taking a meeting-by-meeting approach to policy decisions. The central bank also revised lower its outlooks for growth and inflation.

Meanwhile, the Swiss National Bank (SNB) surprised markets with a larger-than-expected half-percentage-point reduction on the same day—its biggest rate cut since January 2015. The central bank said it aimed to counter lower inflationary pressure and keep consumer price growth within its defined range for price stability of 0% to 2%. The SNB also lowered its forecast for inflation to 0.3% in 2025, half of what it projected in September.

UK economy unexpectedly contracts

The UK economy has slowed significantly after a strong start to the year. Real gross domestic product (GDP) in October unexpectedly shrank 0.1% sequentially, as production output weakened. The economy suffered a contraction of the same magnitude in September. Output in the services sector, which dwarfs the rest of the economy, was flat in both months. Still, the Office for National Statistics estimated that the economy grew 0.1% in the three months through October, compared with the three months through July, amid expansion in the services and construction sectors. The Bank of England is widely expected to hold interest rates steady at its upcoming policy meeting and to proceed cautiously next year due to persistently high services inflation.

UK industrial production fell by 0.6% sequentially in October, a second monthly decline that defied expectations for a 0.3% increase. Manufacturing output also contracted 0.6% over the period, which was less than the 1.0% drop that occurred in September.

New French PM appointed

French President Emmanuel Macron appointed his former justice minister François Bayrou, a centrist politician, as prime minister to replace the ousted Michel Barnier.

Japan’s stock markets registered modest gains over the week, with the Nikkei 225 Index rising 0.97% and the broader TOPIX Index up 0.71%. Regional market sentiment was boosted by China’s announcement of more proactive fiscal measures and moderately looser monetary policy.

On the domestic monetary policy front, speculation grew that the Bank of Japan (BoJ) may hold off on an interest rate hike at its December 18–19 meeting, leading the yen to weaken to about the middle of the JPY 153 range against the USD, from the prior week’s 150. In the fixed income markets, the yield on the 10-year Japanese government bond fell to around 1.04%, from 1.06% at the end of the previous week.

Sentiment leans to January rate hike

While expectations for the timing of the BoJ’s next interest rate hike had been finely balanced between December and January, investors now appear to have converged around the view that a 25-basis-point (0.25%) hike at the central bank’s first meeting in the new year is more likely. The probabilities have gradually tilted to a January hike, possibly because it gives the BoJ the benefit of seeing two more consumer inflation prints, the quarterly economic report, and feedback from the regional manager meeting. The central bank has repeatedly said that it will raise interest rates if its projections for the economy and inflation (as well as wage growth) are met.

Final GDP data showed that Japan’s economy grew 0.3% quarter on quarter in the three months through September, exceeding the 0.2% expected by consensus and indicated by preliminary data. Support for the country’s economic outlook came from the BoJ’s tankan survey—a gauge of sentiment among big manufacturers—which edged higher in the fourth quarter, indicating that there were more companies that said they were optimistic about business conditions than companies that said they were pessimistic.

Chinese equities lost ground as recent policy announcements underwhelmed investors. The Shanghai Composite Index gave up 0.36%, while the blue chip CSI 300 fell 1.01%. In Hong Kong, the benchmark Hang Seng Index added 0.53%, according to FactSet.

China pledged to implement a more proactive fiscal policy and increase the budget deficit in 2025 at the annual Central Economic Work Conference, a high-level meeting in which top officials plan the economic agenda for the next year. Officials also stated that the central government will continue issuing ultra-long special Treasury bonds to fund major projects. However, the readout following the two-day conference did not provide any details, which dampened investor sentiment.

Inflation data released earlier in the week showed that China’s economy remained stuck in deflation. The consumer price index rose a below-consensus 0.2% in November from a year earlier, down from 0.3% in October. Core inflation, which strips out volatile food and energy costs, edged up to 0.3%, from October’s 0.2% rise. The producer price index fell 2.5% year on year, easing from the prior month’s 2.9% drop and marking the 26th straight monthly decline despite Beijing’s efforts to boost domestic demand in recent months. 

On the trade front, exports rose a weaker-than-expected 6.7% in November from a year earlier, slowing from 12.7% in October, and expanded for the eighth straight month. Shipments to the U.S. reached their highest level since September 2022, while exports to Southeast Asia also surged, Bloomberg reported. Imports fell 3.9%, deepening from the prior month's 2.3% drop. The overall trade surplus widened to USD 97.4 billion from USD 95.72 billion in October. The rise in exports was partly attributed to Chinese firms frontloading goods to the U.S. to avoid potentially higher tariffs when President-elect Donald Trump takes office in January.

Türkiye (Turkey)

Macro adjustments led to smaller current account deficit; rate cuts could begin soon

Earlier in the week, the Turkish government reported that its current account in October had a surplus of USD 1.9 billion. As a result, the current account deficit from January through October was only USD 3.3 billion. According to T. Rowe Price sovereign analyst Peter Botoucharov, this is a substantial improvement from the January to October 2023 deficit of USD 36.1 billion. He believes the improvement has been driven by the ongoing macroeconomic adjustments, leading to a better core trade balance, and narrower energy and gold deficits.

In the weeks ahead, Botoucharov will be closely monitoring minimum wage negotiations and their outcome. Minister of Treasury and Finance Mehmet Simsek has indicated that there will be an increase of about 25% to 30% for 2025, but Botoucharov would not be surprised to see a slightly greater increase. While such an outcome might not be welcomed by the financial markets, he believes that it would not be enough to derail the macroeconomic adjustment process. In addition, Botoucharov will be awaiting the outcome of the central bank’s December 26 monetary policy meeting. While there are expectations for policymakers to begin reducing short-term interest rates in early 2025, Botoucharov would not be surprised to see the central bank begin a rate-cutting cycle at the end of this year.

Brazil

Central bank raises Selic rate by 1.00%, projects similar increases at next two meetings

On Wednesday, Brazil’s central bank raised its key interest rate, the Selic rate, by 100 basis points (1.00%), from 11.25% to 12.25%. The decision among policymakers was unanimous, and the post-meeting statement was hawkish. Policymakers characterized the global environment as “challenging,” requiring “caution from emerging market economies.” Domestically, economic and labor market indicators continue to “exhibit strength,” while inflation expectations for 2024 and 2025 have “increased significantly.”

Policymakers noted that, because of the “materialization of risks,” their current base case scenario for inflation through the second quarter of 2026 “is less uncertain and more adverse than in the previous meeting.” They specifically identified several factors, such as “de-anchoring of inflation expectations, an increase of inflation projections,” and “stronger than expected economic activity” as factors requiring “an even more contractionary monetary policy.”

As a result, central bank officials decided to raise the Selic rate by one percentage point. In addition, policymakers projected that they will make “further adjustments of the same magnitude in the next two meetings” if their inflation scenario “evolves as expected.”

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