Global equities were little changed last week, slipping 0.5% in local currency terms but edging up 0.2% in sterling terms.
Chinese equities performed best, rising 1.5% on the back of the news of further substantial policy stimulus. Last Monday’s announcement of the first formal relaxation of the monetary policy stance since 2010 was followed up later in the week by a statement that vigorous efforts to boost consumption are now the top economic priority.
While concrete measures to stimulate consumption now look certain to be forthcoming, they may have to wait until after it becomes clear in the new year how aggressively President-elect Trump will be raising tariffs. In the meantime, news today of an unexpected slowdown in retail sales growth in November just reinforced the need for such measures.
Over in the US, the focus was very much on the November consumer price data. As with the November payroll figures released earlier in the month, these came in broadly in line with expectations. Headline inflation edged up to 2.7% from 2.6% while the core rate was unchanged at 3.3%.
These numbers did nothing to change the market’s view that the Fed is all but guaranteed on Wednesday to lower rates by a further 0.25% to 4.25-4.5%. However, they did reinforce the perception that inflation has bottomed out at 2.5-3% and a return to the Fed’s 2% target is no longer on the cards any time soon – all the more so as Trump’s plans to raise tariffs and deport migrants are likely to put upward pressure on inflation.
The market now expects US rates only to be reduced a further 0.5% to 3.75-4% by end-2025, a far cry from the view at peak optimism in mid-September that rates would be down to 2.75-3% by then. US Treasury yields duly rose 0.2% last week, dragging UK gilt yields higher in the process and leading to gilts and Treasuries both losing around 1% over the week.
US Treasury yields are once again back slightly above their level prior to Trump’s victory. And they could come under further upward pressure as Trump’s plans could not only boost inflation but also increase the already sizeable budget deficit.
Back here in the UK, the October GDP numbers were disappointing. Rather than edging higher as had been anticipated, GDP edged down 0.1% for the second month running. Even so, this still left GDP up slightly over the last three months and the hope is that with the Budget out of the way, growth will resume.
Although businesses are still moaning about the hike in national insurance contributions, consumers have certainly cheered up a bit. Consumer confidence rose in both November and December and house prices also saw a sizeable gain last month.
As for the Bank of England, barring the release of unexpectedly good inflation numbers on Wednesday, it looks very likely to leave rates unchanged at 4.75% on Thursday with the next rate cut not occurring until February. The European Central Bank, by contrast, is rather less concerned than the BOE about inflation and more concerned about supporting growth.
Last Thursday, as widely expected, it cut rates by 0.25% to 3%. The ECB revised down its growth forecasts and looks set to lower rates next year distinctly faster than either the Fed or BOE , with rates forecast to end 2025 at 1.75%. The Swiss National Bank also cut rates last week and by more than forecast from 1% to 0.5%.
Meanwhile, France saw President Macron choose the centrist Bayrou as the new Prime Minister following Barnier’s ousting a couple of weeks ago. With the need to appease both the far right and the far left still as pressing and problematic as ever, the political situation in France looks set to remain in a simultaneous state of paralysis and instability – if that is not a contradiction – for some time to come
This coming week, the Fed meeting on Wednesday will be the main focus for markets, even if a 0.25% rate cut is all but certain. But the Bank of Japan meeting on Thursday will also be in the spotlight with a further rise in rates looking possible but not probable. And for UK investors, there are the inflation numbers on Wednesday – which are forecast to show the headline and core rates increasing to 2.6% and 3.6% respectively – and the BOE meeting on Thursday where rates should be kept on hold.
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