Weekly Market Recap

The UK economy slowed unexpectedly in the three months through September. Gross domestic product (GDP) was measured at 0.1% – down from 0.5% in the preceding quarter and below the consensus forecast of 0.2%. A contraction of -0.1% in September, mainly due to weaker manufacturing output, contributed to the slowdown. The services sector grew 0.1% over the three months, overshadowed by a 0.8% increase in the construction sector.

Meanwhile, annual wage growth excluding bonuses averaged 4.8% in the same three-month period – the lowest level in over two years. Bank of England Chief Economist Huw Pill said after the data release that inflation pressures remained too high for the 2% target.

Last week’s economic calendar’s highlight was Wednesday’s inflation data, which were mainly in line with expectations. Headline prices rose 0.2% in October, and core (less food and energy) prices rose 0.3%. Due mainly to stubbornly high housing costs, however, year-over-year headline inflation rose for the first time since March, from 2.4% to 2.6%. The monthly headline and core producer price inflation, reported Thursday, rose in line with expectations and those of their consumer counterparts.

Speaking Thursday, Federal Reserve (Fed) Chair Jerome Powell seemed to dampen sentiment by remarking that “the economy is not sending any signals that we need to be in a hurry to lower rates.” As measured by the CME FedWatch Tool, expectations priced into futures markets for a 25-basis-point (bp) cut in December fell moderately over the week, from 64.6% to 58.4%. Whether because of Powell’s comments or new policy signals from the incoming administration, expectations for a whole percentage point of cuts by the end of next year fell considerably, from 41.3% to 32.6%.

Euro area data kept hopes of a soft landing for the economy alive. Eurostat's second estimate of GDP confirmed the surprisingly strong expansion of 0.4% in the third quarter. In addition, the European Commission projected growth of 0.8% in 2024, although Germany’s economy is expected to contract by -0.1%. Other data showed that the labour market remained stable. Employment rose by 0.2% in the third quarter after increasing by 0.1% in the preceding three months.

European Central Bank (ECB) policymakers unanimously backed October’s 25bp interest rate cut, arguing that “the disinflationary trend was getting stronger” and that it was essential to avoid “harming the real economy by more than was necessary,” according to minutes of the meeting. The ECB acknowledged the decision was also motivated by “prudent risk management” and provided insurance against downside risks that could lead to undershooting the inflation target. The central bank reiterated that decisions would remain dependent on incoming economic data and that it was not pre-committed to a future rate path.

China’s consumer price index (CPI) rose a below-consensus 0.3% in October from a year earlier, down from 0.4% in September, mainly due to lower food and energy prices. Core inflation, which strips out volatile food and energy costs, increased 0.2% from September’s 0.1% rise. The producer price index (PPI) fell -2.9% year on year, more than the -2.5% decrease predicted by analysts and accelerating from September’s -2.8% drop, extending the deflation in factory gate prices that began in late 2022.

Other data painted a mixed picture of the economy. Retail sales expanded a better-than-expected 4.8% from a year ago, up from September’s 3.2% rise and marking the strongest growth since February. Industrial production rose 5.3% from a year earlier, lagging forecasts and September’s 5.4% increase, amid weaker auto sales. Fixed asset investment remained steady at 3.4% from January to October, while property investment fell -10.3%. China’s urban unemployment rate eased to 5% from 5.1% in September.

According to the National Bureau of Statistics, new home prices in 70 cities fell -0.5% in October from September, when they dropped -0.7% from August. According to Bloomberg, October’s decline marked the second month of slowing home price declines and the slowest pace since March. The improvement came after Beijing unleashed in recent months a series of stimulus measures to boost the housing sector, including reducing mortgage rates, relaxing homebuying curbs in big cities and cutting taxes on home purchases.

The yen weakened to JPY 154.3 against the US dollar from JPY 152.6 at the end of the previous week. Authorities again warned that they would take appropriate action against excessive currency moves. The Japanese currency has come under pressure as the greenback strengthened on Trump’s victory in the US presidential election, which stoked some expectations that his administration’s policies could prove inflationary and alter the Fed’s plans to lower borrowing costs. Uncertainty about the timing of future interest rate hikes by the Bank of Japan (BoJ) also weighed on the yen.

The summary of opinions from the BoJ’s October meeting reaffirmed the forecast that if economic activity and prices evolve as expected, the central bank can follow a path in which it raises the policy interest rate gradually so that the rate will be at 1.00% the second half of fiscal 2025 at the earliest. The 10-year Japanese government bond yield rose to 1.07% from the prior week’s 1.00%.

Japan’s GDP grew 0.2% quarter on quarter in the third quarter of 2024, slowing from the 0.5% increase registered over the second quarter. On an annualised basis, the economy grew 0.9%, down from 2.2%. The second consecutive quarter of GDP growth was driven by increased private consumption (which accounts for more than half of the economy), supported by a one-off income tax cut and higher summer bonuses.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -2.3% (18.0% YTD).

In the US, the S&P 500 Index fell -2.0% (24.5% YTD). Stocks gave back some of the previous week’s gains as uncertainty over the incoming administration’s policies continued driving the so-called Trump Trade. The potential policy implications for corporate earnings were visible in the wide dispersion of sector returns, with financials and energy shares continuing to benefit from hopes for deregulation and merger approvals. Likewise, at its peak Wednesday, the price of Bitcoin had surged by nearly a third (32.5%) since the eve of the election, as investors anticipated looser regulation of digital currencies.

Conversely, healthcare shares fell sharply – on Friday, the iShares Biotechnology ETF declined -4.8% – following news Thursday evening that Robert F. Kennedy, Jr., would be President-elect Donald Trump’s nominee to head the Health and Human Services Department (HHS). Kennedy has been a vocal critic of the pharmaceutical industry and existing public health programmes, particularly vaccine initiatives, and as HHS head, would oversee Medicare, Medicaid and other programmes accounting for roughly one-quarter of government spending.

Electric vehicle (EV) makers – especially “Magnificent Seven” member Tesla – were notable movers during the week. President-elect Trump’s promises that Tesla CEO Elon Musk would play a key role in his administration appeared to help drive a surge in the stock – which, at its intraday high Monday, had gained 42.6% since the day before the election. On Wednesday, reports surfaced that Musk would co-head a planned new Department of Government Efficiency alongside Vivek Ramaswamy, another tech investor, entrepreneur and Trump supporter.

However, Tesla and other EV makers fell back late in the week, as Reuters confirmed that the incoming administration plans to eliminate the $7,500 consumer tax credit for EV purchases. Rivian, a producer of other higher-cost EVs, was particularly hard hit, falling -14.3% in the wake of the news.

The technology-oriented Nasdaq Composite ended the week down -3.1% (25.2% YTD). Growth stocks fared worse than value shares, and small caps lagged large caps. The Russell 1000 Growth Index returned -2.7% (28.6% YTD), the Russell 1000 Value Index -1.2% (18.6% YTD) and the Russell 2000 Index -4.0% (15.0% YTD).

In Europe, the MSCI Europe ex UK Index ended the week -0.7% lower (6.2% YTD), declining for a fourth consecutive week. Concerns about the incoming Trump administration’s trade policies and political upheaval in Germany weighed on sentiment, as did Fed Chair Powell’s cautious comments on US interest rates. Major stock indexes were mixed. Germany’s DAX Index was flat (14.7% YTD), France’s CAC 40 Index decreased -0.9% (-0.8% YTD) and Italy’s FTSE MIB Index advanced 1.1% (17.5% YTD). Switzerland’s SMI Index slid -1.4% (7.8% YTD). The euro depreciated versus the US dollar, ending the week at USD 1.05 for EUR, down from 1.05.

The FTSE 100 Index was little changed (7.9% YTD), and the FTSE 250 Index gave back -0.1% (7.1% YTD). The British pound weakened versus the US dollar, ending the week at USD 1.26 for GBP, down from 1.29.

Japan’s stock markets lost ground over the week. The TOPIX Index declined -1.1% (17.1% YTD), and the TOPIX Small Index lost -0.8% (10.5% YTD). The weakness of the yen lent a degree of support. Still, the prospect of President-elect Donald Trump’s incoming administration raising tariffs weighed on the outlook for those Japanese companies that are heavy exporters to the US.

In Australia, the S&P ASX 200 Index ended the week 0.2% higher (14.2% YTD).

The MSCI Emerging Markets Index was -4.4% lower (8.7% YTD), with a negative contribution to performance from the stock markets of China, India, Taiwan and South Korea and a flat contribution from that of Brazil. 

Chinese equities declined as evidence of persistent deflation and worries about potential US tariffs under incoming US President Trump hurt investor confidence. The Shanghai Composite Index dropped -3.5% (15.3% YTD), and the blue-chip CSI 300 Index fell -3.3% (19.1% YTD). Hong Kong's benchmark Hang Seng Index plunged -6.2% (19.0% YTD).

In Hungary, the Hungarian government reported that October's 3.2% year-over-year inflation rate was lower than expected, though it was higher than September’s 3.0% year-over-year rate. Nevertheless, T. Rowe Price credit analyst Ivan Morozov considers the data dovish. According to his analysis, the small pickup in inflation was driven by food prices, while core inflation fell again to a 4.5% year-over-year rate versus 4.8% previously. Also, core momentum further slowed and now runs at an annualised rate of less than 2%.

Overall, Morozov believes that the latest inflation data, combined with the continuing stagnation of the Hungarian economy and a likely additional tightening of fiscal policy next year, is a formula for additional central bank rate cuts. However, because the central bank is supersensitive to the forint’s recent weakness in the foreign exchange market, Morozov would not be surprised to see policymakers leave short-term interest rates at current levels in the near future – and possibly until a new central bank governor is appointed in early 2025.

In Mexico, the Mexican central bank decided to reduce the target for the overnight interbank interest rate from 10.50% to 10.25%. The decision, which was unanimous among policymakers, was generally expected.

According to the central bank’s post-meeting statement, policymakers noted that medium- and long-term interest rates have increased and the peso “depreciated markedly” since the previous monetary policy decision – which took place before US elections. They also noted that “employment slowed down” and that the “balance of risks to growth of economic activity remained biased to the downside.”

Central bank officials acknowledged that annual headline inflation rose to 4.76% in October, while core inflation – which they believe better reflects inflationary trends – decreased to 3.80%. Although they consider the “balance of risks for the trajectory of inflation within the forecast horizon” to be “biased to the upside,” they also believe that core inflation’s recent behaviour is reflecting a general improvement in inflation following the “significant shocks” caused by the coronavirus pandemic and the Russian invasion of Ukraine.

Policymakers determined that a restrictive monetary policy stance is still necessary. Still, because they expect core inflation to continue decreasing, they concluded that the evolution of inflation “implies that it is adequate to reduce the level of monetary restriction.” In addition, the Governing Board members signalled that the inflationary environment “will allow further reference rate adjustments,” noting that their future actions will aim to bring headline inflation down to the central bank’s 3% target.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.3% (2.9% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.3% (10.0% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned -0.8% (5.9% YTD).

Expectations for higher long-term interest rates were reflected in a sharp rise in the yield of the benchmark 10-year US Treasury note, which touched its highest intraday level (4.51%) on Friday since the start of June. Over the week, the 10-year Treasury yield increased 15bp to 4.39% from 4.44% (up 56bp YTD). The 2-year Treasury yield rose 5bp, ending the week at 4.31% from 4.26% (up 5bp YTD).

Meanwhile, issuance was heavy in the US investment-grade corporate bond market and spreads drifted wider as investors focused on the new supply. Likewise, the high yield market was marginally lower due to the move in rates and heavier issuance in the primary space. Similarly, the bank loan market was active with a high volume of new deals as issuers sought to take advantage of the market’s recent strength.

Over the week, the 10-year German bund yield decreased -2bp, ending at 2.35% from 2.37% (up 33bp YTD).

The 10-year UK gilt yield rose 4bp, ending the week at 4.47% from 4.43% (up 94bp YTD).