
Global equities last week lost around 2% in both local currency and sterling terms. The US was the cause and was down as much as 3% on Wednesday. But as ever, the US dragged other countries down with it and all the major regions ended the week 2-3% lower in sterling terms, other than as it happens China which was only down 1%.
Bonds also lost ground with UK gilts and US Treasuries losing 0.6% or so, as yields moved a little higher. By contrast, the dollar had a strong week, leading to the pound slipping below $1.26.
There was only one real driver behind these various moves which was the US Fed. Unlike last Christmas, when it was a bearer of good tidings and promising rate cuts galore, the Fed’s Xmas message this time was rather more Scrooge-like. It did lower rates on Wednesday by 0.25% to 4.25-4.5% as everyone expected. But the problem was that it scaled back its forecast for future cuts by more than the market had been hoping.
The Fed is now forecasting rates to decline only to 3.9% by the end of next year, up from a September forecast of 3.4%. The change of heart followed an upgrading of both its growth and inflation forecasts. Most importantly, the Fed now sees core inflation still running by end-2025 at 2.5%, significantly above its 2% target.
Still, the US market did manage to recover a bit of its festive mood at the end of the week, cheered up by some better than expected inflation numbers. The Fed’s favoured measure of core consumer prices rose only 0.1% in November to be up 2.8% on a year earlier. An upward revision to third quarter GDP growth to a robust annualised 3.1%, along with a rise in business confidence in December, also confirmed the economy remains on a firm footing.
Even if the Fed was the driver of last week’s moves, the threat of a potential US government shut-down certainly made a few headlines. In the event, the altercation between Democrats, Republicans, President-elect Trump and even Elon Musk was ultimately resolved with the passage of a stop-gap spending bill until March.
This is far from the first time we have seen such last minute fiscal manoeuvrings over US government spending and the federal debt ceiling. And next year looks certain to see more with the debt ceiling needing to be raised next summer. But perhaps the most notable point of the recent shenanigans was Trump’s inability to get Congressional Republicans to bow to his demands. With the Republicans possessing only a narrow majority in Congress, Trump may not find it as easy as he hoped to enact some of his more contentious policies.
Here in the UK, the Bank of England meeting caused rather less of a storm but was equally lacking in festive cheer. As expected, it kept rates unchanged at 4.75%. Although a larger than anticipated three members of the nine-strong committee did vote for a cut, the Bank’s message was very much that rates will only be reduced gradually. The market is now anticipating rates only falling to 4.0-4.25% by the end of next year.
The downbeat mood was reinforced by the latest economic data. Regular wage growth picked up unexpectedly in October to 5.2% from 4.9%, reinforcing worries about lingering inflation pressures. Meanwhile, core inflation rose, albeit by a tad less than forecast, to 3.5% in November, and services inflation was unchanged at 5.0%. As for headline inflation, it moved back up to 2.6% from 2.3%.
The latest UK growth numbers have done nothing to lift the mood. Recent data showing GDP had declined slightly in October was followed this morning by news that activity had flatlined in the third quarter, rather than risen 0.1% as initially estimated. Slightly more encouragingly, UK business confidence was unchanged in December and remained in expansionary territory, if only by a small margin.
The Bank of Japan also met last week and left rates unchanged at 0.25%, leading to a fall in the yen. However, rates remain on a gradual upward path and a hike looks likely in January, particularly in light of the renewed weakening of the currency.
Moving onto the forthcoming festive period, this is unsurprisingly rather light on economic data. Thin markets, rather than economic releases, are likely to be the source of any volatility.
We will return early in the New Year with our latest thoughts on the market outlook for the coming year. Today’s commentary has had a rather downbeat unfestive tone but it shouldn’t be forgotten that for equities at least, if not bonds, 2024 has been a good year. Just as importantly, we believe market prospects remain reasonably attractive – even if a Trump presidency will inevitably herald some volatility.
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