Global Markets Weekly Update

U.S.

U.S. stocks indexes finished the last full trading week of the year mixed. The Russell 2000 Index performed worst, declining 0.86%, followed by the Dow Jones Industrial Average, which shed 0.67%. The S&P MidCap 400 and S&P 500 indexes both finished little changed, while the Nasdaq Composite added 0.48%. 

Equities started the week broadly lower in what was partially a continuation of the prior week’s tech-stock weakness, as ongoing concerns around valuations and spending in the artificial intelligence (AI) space helped drag major indexes down. Some mixed economic data, including November’s jobs report on Tuesday, also appeared to weigh on sentiment. 

However, indexes reversed course toward the end of the week, supported in part by an encouraging inflation report as well as strong earnings results from semiconductor manufacturer Micron Technology that seemed to help shift AI-related sentiment.

Jobs data deliver mixed signals

The Bureau of Labor Statistics (BLS) released its closely watched nonfarm payrolls report on Tuesday, which showed that U.S. employers added 64,000 jobs in November, ahead of estimates for around 45,000 and a sharp rebound from the 105,000 jobs lost in October. The decline in October—which was also reported Tuesday due to delays stemming from the U.S. federal government shutdown—was largely driven by a loss of 162,000 federal government jobs, while the gains in November were led by increases in health care (46,000) and construction (28,000). 

Meanwhile, the unemployment rate rose to 4.6% in November, the highest level in over four years.

Core inflation drops to slowest pace since early 2021

Later in the week, the BLS reported that U.S. inflation unexpectedly cooled in November. According to the BLS’s consumer price index (CPI), prices rose 2.7% year over year during the month, below estimates for around a 3.1% increase and down from a 3% rise in September (October data were not released due to collection issues related to the federal government shutdown). Core prices—which exclude volatile food and energy costs—rose 2.6% over the same period, also well below estimates and the lowest level since March 2021. Shelter cost inflation—a significant component of the CPI—dropped to a year-over-year reading of 3%, the lowest since August 2021. 

While there were some caveats to the data given the recent shutdown-related collection issues, the cooler-than-expected print appeared to be positively received by investors as stocks opened higher following the release.

December business activity growth slows to six-month low

Elsewhere, S&P Global reported that U.S. business activity growth moderated in December, according to its Flash U.S. Composite Purchasing Managers’ Index (PMI), which declined to 53.0 in December from 54.2 in the prior month (readings above 50 indicate expanding economic activity). December’s reading was the lowest in six months. Growth slowed in both the manufacturing and services sectors, and businesses’ confidence for the year ahead pulled back while price pressures “intensified noticeably.” 

According to Chris Williamson, chief business economist at S&P Global Market Intelligence, the December data “suggest that the recent economic growth spurt is losing momentum.” Williamson also noted that firms have “restricted their hiring” amid the “more challenging business environment.” 

U.S. Treasuries advance, outperform munis and high yield bonds

U.S. Treasuries generated positive returns, with yields generally decreasing across most maturities in the wake of the Federal Reserve’s interest rate cut in the prior week. (Bond prices and yields move in opposite directions.) According to T. Rowe Price traders, the municipal bond market was broadly stable, although munis generally underperformed Treasuries. Secondary activity in the muni market remained largely quiet. 

Our traders also noted that despite the mixed employment data and equity weakness early in the week, high yield market sentiment was firmer, particularly following the release of the CPI data. Trading volumes were below average, and issuer-specific headlines drove most of the market’s trading activity.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 1.60% higher, buoyed by signs of steady economic growth and looser monetary policy. Major stock indexes also rose. Italy’s FTSE MIB gained 2.86%, France’s CAC 40 Index tacked on 1.03%, and Germany’s DAX rose 0.42%. The UK’s FTSE 100 Index added 2.57%.

ECB keeps rates unchanged

The European Central Bank (ECB) left the deposit rate unchanged at 2.0% for a fourth consecutive meeting. ECB President Christine Lagarde said policy remains "in a good place" and left the door open to a change because of uncertainty around the outlook. The ECB reiterated that decisions would remain data-dependent and would be taken meeting by meeting. The ECB raised its estimates for annual growth in gross domestic product to 1.4% for 2025, 1.2% in 2026, and 1.4% in 2027 and 2028. Headline inflation is estimated to fall just below the ECB’s 2.0% target in 2026 and 2027 before accelerating back to 2.0% in 2028.

BoE cuts rates, inflation slows, labor market weakens

The Bank of England (BoE) cut its key policy rate by a quarter point to 3.75%. The decision was finely balanced at 5–4, with Governor Andrew Bailey switching to a more dovish stance. The BoE reiterated that rates were still on a gradual downward path, while adding that “judgements around further policy easing will become a closer call.” 

The rate reduction came after data showed headline annual inflation slowed sharply to 3.2% in November from 3.6% in October, well below the consensus forecast in a FactSet poll of economists. The labor market also loosened further, with unemployment rising to 5.1% in the three months through October—the highest level since early 2021. Annual growth in regular pay slowed to 4.6% over the three months through October, down from 4.7% during the previous three-month period. 

Sweden, Norway keep rates on hold

The Riksbank, Sweden’s central bank, kept its key policy rate steady at 1.75%, as was widely expected, and signaled that there was little likelihood of any change in the near term. Meanwhile, Norway’s central bank, Norges Bank, maintained borrowing costs at 4.0%, with policymakers judging that policy needed to stay restrictive to tame inflation.

Japan

Japan’s stock markets fell over the week, with the Nikkei 225 Index declining 2.61% and the broader TOPIX Index down 1.17%. Technology-oriented stocks suffered losses in tandem with their U.S. peers on concerns about lofty valuations and perceptions of aggressive spending on artificial intelligence. On the monetary policy front, the Bank of Japan (BoJ) raised short-term interest rates but offered few insights into the timing of its next increase.

BoJ delivers widely expected rate hike 

In a widely anticipated move, the BoJ voted unanimously to raise its benchmark interest rate by 25 basis points (0.25 percentage point), from 0.50% to 0.75%, its highest level since 1995, citing the increasing likelihood of the central bank’s economic outlook being realized. Markets had almost fully priced in the rate increase in the lead-up to the BoJ’s December 18–19 monetary policy meeting. The yield on the 10-year Japanese government bond rose to 2.01%, from 1.95% at the end of the previous week.

Investors were focused on any comments from BoJ Governor Kazuo Ueda about the future trajectory of the central bank’s monetary policy normalization process. Ueda reiterated that the pace at which the bank will adjust its interest rate will depend on the state of the economy and prices and that it will focus closely on how wage growth develops. Given limited indications about when the bank could next raise rates, the yen weakened to around JPY 157.3 against the U.S. dollar, from about JPY 155.8 at the end of the prior week.

The latest inflation data supported the case for further BoJ rate hikes. Japan’s core CPI rose 3.0% year over year in November, unchanged from the prior month and in line with economists’ expectations. Separate data showed that exports grew strongly in November, rising 6.1%, ahead of a forecast of 4.8%, helped by a rebound in exports to the U.S. and a weak yen boosting competitiveness.

China

Mainland Chinese stock markets ended the week on a mixed note, weighed by a trio of indicators underscoring lackluster growth in the economy. The CSI 300 Index, the main onshore benchmark, declined 0.28% and the Shanghai Composite Index edged up 0.03%, according to FactSet. In Hong Kong, the benchmark Hang Seng Index fell 1.10%.

Retail sales rose 1.3% in November from a year earlier, the slowest pace since the pandemic, Bloomberg reported, citing data from China’s National Bureau of Statistics. Fixed asset investment fell 2.6% in the first 11 months of the year, lagging economists’ estimates and putting the measure on track for its first annual contraction in data going back to 1998. Industrial output also trailed forecasts and grew 4.8% year on year, underscoring the importance of China’s export sector in driving the economy as domestic demand languishes. 

The latest retail sales data showed that consumption remains a weak spot in China’s economy despite the government’s efforts to stimulate demand. Earlier in December, China’s leaders signaled that they would refrain from ramping up stimulus next year even as they pledged to support growth. China will “flexibly and efficiently” use interest rate and reserve requirement cuts to ensure liquidity and maintain a “necessary” level of budget deficit and spending in 2026, according to a readout following the Central Economic Work Conference, an annual meeting of government officials that lays out the next year’s economic agenda. Analysts interpreted the readout as a sign that Beijing would stick with its current manufacturing-led growth strategy as it takes steps to boost consumption.

Other key markets

Chile

Policymakers reduce rates following a faster-than-expected drop in inflation

On Tuesday, Chile’s central bank held its scheduled meeting, and policymakers decided to lower the monetary policy interest rate by 25 basis points (0.25 percentage point), from 4.75% to 4.50%. The decision, which was generally expected, was unanimous among meeting participants. 

According to the post-meeting statement, policymakers believe that the global economy is giving a “somewhat stronger boost” to the Chilean economy than they previously expected due to factors such as strength in trading partners’ economies, technology investments, and fiscal spending. A rise in the price of copper—a key Chilean export—above USD 5 per pound has also been supportive. In addition, the local economy has benefited from lower long-term interest rates and a stronger peso, which—all other things being equal—reduces the costs of imports to Chile. 

That said, there have been some pockets of weakness. For example, gross domestic product growth has been hindered by “weak” mining sector performance. Also, the labor market is facing “significant challenges” and “limited” job creation, though the unemployment rate has been falling in recent months. 

As for inflation, policymakers noted that it has declined faster than they expected back in September. Both headline and core inflation fell to a 3.4% year-over-year rate in November, and officials believe that inflation will fall to the central bank’s 3% target during the first quarter of 2026. With inflation expectations two years ahead at 3%, policymakers felt comfortable reducing rates at this time.

Mexico

Weak economic activity prompts policymakers to reduce rates again

On Thursday, Mexico’s central bank held its scheduled policy meeting, and policymakers decided to lower the target for the overnight interbank interest rate by 25 basis points (0.25 percentage point), from 7.25% to 7.00%. The decision was not unanimous, however. Four Governing Board members voted in favor of a rate cut, while one preferred to leave rates unchanged.

In their post-meeting statement, policymakers noted that Mexican economic activity “is expected to have remained weak” in the fourth quarter and that the “environment of uncertainty and trade tensions continues posing significant downward risks.” Although headline and core inflation increased from October to November, and although the central bank revised higher its forecasts for headline and core inflation in the fourth quarter and for the following two quarters, policymakers still believe that headline inflation will converge to the central bank’s 3% target in the third quarter of 2026.

Ultimately, policymakers felt it was “appropriate to continue the rate-cutting cycle.” They deemed their decision to be “consistent with the assessment of the current inflationary outlook” and took into account several factors, including the “weakness of economic activity” and the previous “level of monetary restriction that has been implemented.”