Global Markets Weekly Update

U.S.

Stocks rally to start the year

Equities advanced in the first full trading week of the year as investors largely looked past mounting geopolitical tensions, pushing most major indexes to all-time highs. Small-cap and value shares outpaced the large-cap growth stocks that have led returns in recent years, while an equal-weighted version of the S&P 500 Index outperformed its market cap-weighted counterpart. Of the major indexes, the Russell 2000 Index performed best, adding 4.62%, while the S&P 500 performed worst but still gained 1.57%.  

The week also saw several notable industry-level moves in response to a flurry of policy announcements from President Donald Trump. For example, stocks of aerospace and defense companies were hurt on Wednesday by comments that Trump “will not permit” them to pay dividends or repurchase shares unless they accelerate production of military hardware. The next day, defense stocks rallied after the administration proposed a sizable increase in military spending, as investors priced in the potential for higher government outlays.

Similarly, shares of homebuilders and related industries initially came under pressure after the administration said it would seek to restrict institutional purchases of single-family homes. However, the group rebounded later in the week after Trump announced that he was instructing government-controlled mortgage companies Fannie Mae and Freddie Mac to buy USD 200 billion of mortgage bonds to help drive down lending rates. Credit spreads in the agency mortgage-backed security sector also rapidly tightened on the news. 

December job growth moderates; October and November revised lower

The week also brought a heavy dose of economic data releases, including several labor market reports that generally surprised to the downside. Most notably, the Labor Department released its closely watched nonfarm payrolls report on Friday, which showed that U.S. employers added a lighter-than-expected 50,000 jobs in December, while October’s and November’s readings were revised down by a combined 76,000. However, on the more positive side, the unemployment rate ticked down to 4.4% from a revised 4.5% in the prior month. 

The Labor Department’s Job Openings and Labor Turnover Summary for November provided another sign of cooling in the U.S. labor market. According to the report, hires declined to 5.1 million for the month, down from 5.4 million in October, while job openings dropped to the lowest level since September 2024 at 7.1 million. 

Elsewhere, private payrolls processing firm ADP reported that private employers added 41,000 jobs in December, rebounding from a net loss of jobs in the prior month but falling short of estimates for around 47,000 jobs added. 

Manufacturing weakness persists, while services remain resilient

Data from the Institute for Supply Management (ISM) showed that economic activity in the U.S. manufacturing sector contracted for the 10th consecutive month in December, as the ISM’s Manufacturing Purchasing Managers’ Index (PMI) declined by 0.3 points to 47.9, the lowest reading of 2025 (readings below 50 indicate contraction). The employment index remained in contraction for the 11th straight month, while the prices index stayed in expansion—indicating rising input prices—for the 15th consecutive month.

On the other hand, the ISM’s measure of services activity expanded for the 10th month in a row. Gains in new orders, business activity, and a rebound in employment from contraction to expansion helped push the Services PMI to the highest reading of the year. Price pressures also eased somewhat, although the services prices index remained solidly in expansion territory.   

U.S. Treasuries post modest gains; munis, corporate bonds outperform 

Government securities were higher heading into Friday, with some long-term yields decreasing modestly and short-term yields inching higher. (Bond prices and yields move in opposite directions.) Treasuries rallied early in the week in response to some weaker-than-expected economic data, but T. Rowe Price traders noted that follow-through was limited and trading activity was muted overall. 

Meanwhile, municipal bonds delivered gains and outperformed U.S. Treasuries, supported by strong reinvestment demand and limited new supply. Investment-grade corporate bonds also posted positive returns amid heavy issuance that was met with solid demand, while high yield bonds strengthened as trading activity picked up following the holiday lull, with investors focusing on new bond offerings and company-specific developments.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 2.27% higher amid continuing optimism about the economy, company earnings, and a favorable interest rate backdrop. Major stock indexes rose. Germany’s DAX climbed 2.94%, France’s CAC 40 Index gained 2.04%, and Italy’s FTSE MIB added 0.76%. The UK’s FTSE 100 Index tacked on 1.74%.

Data point to German revival, stronger eurozone economy

The eurozone economy appeared to be strengthening toward the end of 2025 amid evidence that Germany may have turned a corner.

Industrial production in Germany, France, and Spain came in better than forecast in November. German output increased sequentially by a seasonally adjusted 0.8%, rather than shrinking 0.5% as predicted by a consensus estimate. This came on top of a jump in manufacturing orders, which grew 5.6% month over month, defying forecasts for a 1.3% decline. In Spain, nonseasonally adjusted production rose 1.0% sequentially, an acceleration from the 0.6% logged in October. France’s industrial output contracted by a seasonally adjusted 0.1% in November, which was less than the 0.2% predicted.

Separately, retail sales in the bloc grew in November by 0.2% versus the prior month, while the annual rate picked up to 2.3%, beating forecasts for 1.6% after a major upward revision to October’s numbers. 

Euro area inflation slows more than expected

Headline annual inflation in the eurozone slowed to the European Central Bank’s (ECB’s) target of 2.0% in December, down a tick from November. The core rate, which excludes volatile food and energy costs, fell to 2.3% from 2.4%. But services inflation, which is closely watched by the ECB, eased only slightly to 3.4%.

Tomasz Wieladek, chief European macro strategist at T. Rowe Price, says services inflation continues to be stronger and more persistent than is consistent with the ECB’s target. In his view, this “will continue to worry” policymakers. “The ECB’s cutting cycle is certainly over.”

More signs of softer UK housing market at end of 2025

The number of mortgages approved by British lenders for house purchases fell to 64,530 in November from 65,010 in October, Bank of England data showed. Halifax, a mortgage lender, said house prices unexpectedly fell in December by 0.6% sequentially, after dipping 0.1% in November, as economic and tax uncertainty damped sentiment at the end of last year.

Japan

Japan’s stock markets registered strong gains over the week, with the Nikkei 225 Index rising 3.18% and the broader TOPIX Index up 3.08%. Geopolitical and trade tensions between China and Japan failed to dent the markets’ advance. Technology companies continued to rally while yen weakness provided a boost to export-oriented companies and trading houses. The Japanese currency depreciated to around JPY 157.6 against the U.S. dollar, from about JPY 156.8 at the end of the prior week. Investor concerns about the government’s massive spending plans to stimulate economic growth have weighed on the yen.

The yield on the 10-year Japanese government bond ticked up slightly to 2.09% from 2.07% at the end of the previous week. Upward pressure on yields continued to be exerted by expectations of further interest rate hikes by the Bank of Japan (BoJ) in 2026. BoJ Governor Kazuo Ueda said during the week that the central bank will keep raising rates in line with improvements in the economy and inflation. He added that the mechanism between moderate wage growth and inflation is likely to be maintained. 

Household spending bounces back

In the latest economic data, Japan’s household spending rose 2.9% year over year in November, outpacing expectations of a 1.0% decline and following a 3.0% fall in October. The solid rebound in spending was primarily due to an increase in households’ auto purchases. Even excluding the often-volatile category of auto spending, outlays on food and dining increased, boosted by the two November holidays, suggesting that a recovery in consumer spending is becoming more entrenched. This was despite a fall in households’ purchasing power in November, with real (inflation-adjusted) wages contracting 2.8% year over year. 

China

Mainland Chinese stock markets gained, fueled by artificial intelligence trades. The CSI 300 Index, the main onshore benchmark, added 2.79%, according to FactSet, retreating from a four-year high it hit earlier in the week. The Shanghai Composite Index advanced 3.82%, while Hong Kong’s benchmark Hang Seng Index shed 0.41%. Optimism about the domestic tech sector fueled the weekly advance. Turnover in China’s onshore market climbed to about CNY 2.8 trillion, roughly USD 400.6 billion, while outstanding loans taken out by investors to buy stocks hovered near a record, according to Bloomberg. 

On the economics front, inflation data showed that consumer price growth picked up in December, though producer prices fell for the 39th straight month. China’s consumer price index (CPI) rose 0.8% in December from a year ago, in line with forecasts, the country’s statistics bureau reported. The producer price index fell 1.9%, the smallest decrease in more than a year. The core CPI, which strips out food and energy, increased 1.2% for the third straight month. 

Unlike most Western countries, China has struggled with deflation since the end of the pandemic, as a prolonged housing downturn and overproduction in several industries have weighed on domestic consumption and corporate profits. Inflation for the full calendar year was zero, the lowest level since 2009 and well below China’s official target of about 2%, Bloomberg reported, citing official data. The latest inflation report supported the view of some economists that China’s central bank will continue to ease policy in 2026.

Other key markets

Venezuela

Maduro captured by U.S. following months of pressure 

On Saturday, January 3, the U.S. carried out military action in Venezuela that resulted in the capture and removal of the country’s president, Nicolás Maduro, and his wife, Cilia Flores. They are facing criminal charges related to what prosecutors allege is their participation in a conspiracy to import illegal drugs into the U.S. 

The capture of Maduro took place following months of U.S. pressure on Venezuela. In mid-December, U.S. President Donald Trump wrote in a social media post that he had ordered a “total and complete blockade” of oil tankers travelling to and from Venezuela. 

Venezuela’s new leader is Delcy Rodriguez, who was formerly Maduro’s vice president. However, Trump said that the U.S. will “run” Venezuela until there is a “safe, proper, and judicious transition” of power in the country. 

Initial and longer-term market implications

In the near term, oil market impacts appear somewhat limited, as production and export constraints remain subject to U.S. sanctions and enforcement decisions, which could evolve. Venezuela currently produces under 1 million barrels of oil per day, which is less than 1% of the global output.

Over the longer term, Venezuela’s oil sector would require significant capital, infrastructure rebuilding, and policy clarity before any meaningful changes in output could occur. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuela has around 303 billion barrels of proven oil reserves—among the largest in the world.

The situation continues to develop, and there remain a number of uncertainties, including potential changes to U.S. sanctions policy regarding PDVSA, the country’s state-owned oil and gas company, and the government of Venezuela. As noted in our Global Market Outlook for 2026, we anticipate geopolitical uncertainty to remain a feature of markets in the year ahead. We continue to monitor this current development and potential implications.

Czech Republic

Dovish inflation reading opens door for possible rate cuts later this year

Earlier in the week, the Czech government reported that headline inflation in December was measured at a month-over-month rate of -0.3% and a year-over-year rate of 2.1%. Both readings were lower than expected. According to T. Rowe Price analysts, the downside surprise seems to be primarily driven by food prices, while core inflation stayed unchanged around 2.5% to 2.6%.

With the potential for inflation to fall toward the 1.0% to 1.5% range in 2026, central bank officials may contemplate resuming interest rate reductions later this year. The two-week repo rate, which is the Czech National Bank’s main policy rate, has been at 3.50% since May 2025, when policymakers made a “very cautious” 25-basis-point (0.25%) rate cut.