Weekly Market Recap

UK business activity moved into contractionary territory, ending 12 months of sustained expansion.

Inflation in the UK accelerated more than expected in October, mainly due to higher household energy bills. The year-over-year change in consumer prices increased from 1.7% in September to 2.3% – the highest since April and above economists’ forecasts of 2.2%. The core measure, which excludes volatile food and energy costs, ticked up to 3.3%. Inflation in the services sector also strengthened slightly to 5%, which is in line with the predictions of the Bank of England (BoE).

The data reinforced expectations that the BoE will likely keep policy steady for the rest of the year. Markets also scaled back their expectations from three rate cuts to two in 2025. Separately, BoE policymakers were split over the persistence of inflation and the path for interest rates at a parliamentary committee meeting held before the release of the inflation data. Governor Andrew Bailey said there were “risks on both sides” of the inflation outlook.

On Thursday, the Department of Labor reported an unexpected drop in initial jobless claims for the week ended 16 November 2024, which seemed to help drive positive sentiment toward the end of the week. Applications for unemployment benefits fell to 213,000, a decline of 6,000 from the prior week and the lowest number since April 2024. While the number of continuing claims reached a three-year high of 1.91 million, some of this increase was attributed to secondary effects of the aircraft machinist strike at Boeing, which has since been resolved.

In addition, investors seemed encouraged by the National Association of Realtors’ report of existing home sales in October, rising year over year for the first time since July 2021. The upbeat report cited additional job gains, continued economic growth and stabilising mortgage rates as factors leading to the growth in housing demand.

Much of the macroeconomic focus remained on the Federal Reserve’s final meeting of the year in December as investors looked for clues about the pace of interest rate cuts. Speaking Wednesday, Federal Reserve Governor Lisa Cook stated that “the disinflationary process is continuing” and that she sees the appropriate path of short-term interest rates to be downward. However, she noted that the magnitude and timing of rate cuts should be driven by inflation and labour market data.

According to purchasing managers' indices (PMIs) conducted by S&P Global, business activity in the euro area contracted unexpectedly in November, underlining the uncertain economic outlook.

The HCOB Flash Eurozone Composite PMI Output Index unexpectedly fell to 48.1 – a 10-month low – from 50 in October, as the manufacturing sector sank deeper into recession and the services sector started to struggle after two months of marginal growth (PMI readings below 50 indicate a fall in output). The PMIs for the bloc’s largest economies – France and Germany – also shrank.

Weak PMI data seemed to bolster expectations that the European Central Bank (ECB) could further ease monetary policy in December. However, a pickup in negotiated wage growth – a measure watched by the ECB for signals of underlying inflationary pressures – may reinforce the case for continued caution on policy. Negotiated wages grew 5.4% in the three months through September, up from an annual increase of 3.5% in the previous quarter.

Chinese banks left their one- and five-year loan prime rates unchanged at 3.1% and 3.6%, respectively. The move was largely anticipated after banks slashed the benchmark lending rates by a greater-than-expected 25 basis points (bp) in October, making it cheaper for consumers to take out mortgages and other loans.

Since late September, Beijing has unveiled several stimulus measures to boost the ailing housing sector and revive consumer demand. Officials have signalled further easing measures in the near term, including potentially cutting the reserve requirement ratio for domestic banks. However, some analysts believe policymakers will wait until President-elect Donald Trump takes office in January and US policies become more apparent.

Earlier in November, Beijing announced an RMB 10 trillion debt swap to ease the burden on indebted local governments and raised the debt ceiling for local governments midyear for the first time since 2015. While the scale of the debt package is at the upper end of the market’s expectations, the government did not mention buying unsold property or stimulating consumption, noted T. Rowe Price’s Head of International Equities and Chief Investment Officer Justin Thomson. Thomson added that China appears to be unprepared to front-run any move on tariffs and keep the powder dry for the new year.

In other news, China's youth unemployment rate eased for the second straight month since August, when it hit its highest level this year. According to official data, the jobless rate for 16- to 24-year-olds, excluding students, was 17.1% in October, down from 17.6% in September.

With the timing of the next interest rate hike of the Bank of Japan (BoJ) (likely in December or January) still finely balanced, the yield on the 10-year Japanese government bond (JGB) approached 1.1%, nearing a 13-year high. Consumer inflation held above the BoJ’s 2% target in October. Although the headline consumer price index fell to 2.3% year on year, this was in line with expectations given the return of electricity and gas subsidies. The reading broadly supported the more hawkish stance that the BoJ has adopted this year. BoJ Governor Kazuo Ueda said earlier in the week that the central bank expected wage-driven inflationary pressure to heighten as the economy continued to improve and companies continued hiking pay. He reiterated that the bank would keep raising rates if the economy and prices moved as expected.

According to November flash PMI data collated by au Jibun Bank, within Japan’s private sector, service providers recorded a slight expansion in activity, while manufacturers saw a sustained reduction in output. Price pressures remained elevated across the private sector, and firms increasingly sought to pass on higher cost burdens to customers.

On Friday, Japan’s government approved an economic package to ease the pain of inflation on households and businesses and revitalise struggling regional economies. Combined with expected spending from the private sector, the package is estimated to add JPY 39 trillion (USD 250 billion) to the economy. Measures include subsidies to curb rising energy costs, cash handouts to low-income households, and an increase in the tax-free salary threshold to boost disposable incomes.

Australia’s largest home builders reported increased new home sales in October, while the absolute transaction volume remained low. The preliminary Australia composite Purchasing Managers’ Index (PMI) showed ongoing softness in November, with output and new orders broadly unchanged. Flash employment PMIs were subdued, suggesting weaker employment growth than in the labour force survey. The minutes from the November meeting of the Reserve Bank of Australia (RBA) reiterated the possibility of further tightening but also left the door open to rate cuts if consumption, the labour market or inflation weakened materially more than expected.

Last week, the MSCI All Country World Index (MSCI ACWI) rose 1.4% (19.7% YTD).

In the US, the S&P 500 Index gained 1.7% (26.7% YTD), recovering some of the previous week’s losses despite continuing uncertainty around the incoming Trump administration’s policies and escalating geopolitical tensions stemming from the conflict between Russia and Ukraine. Gains for the week were also relatively broad-based, with growth stocks lagging value shares, smaller-cap indexes outperforming large-caps and an equal-weighted version of the S&P 500 outpacing its more familiar capitalisation-weighted counterpart. The Russell 1000 Growth Index returned 1.7% (30.8% YTD), the Russell 1000 Value Index 2.5% (21.5% YTD) and the Russell 2000 Index 4.5% (20.1% YTD). The price of Bitcoin continued its postelection rally and notched its third consecutive week with a gain exceeding 10%. The technology-oriented Nasdaq Composite ended the week up 1.8% (27.4% YTD).

With a relatively light economic calendar for the week, much of the focus was on NVIDIA’s third-quarter earnings release on Wednesday. Shares of the chip giant ended the week with little change as investors appeared to be generally satisfied with the results. However, the company’s guidance for the fourth quarter was lighter than some analysts expected. Relatedly, the utilities sector outperformed as commentary on NVIDIA’s earnings call seemed to drive optimism around rising artificial intelligence-driven demand for clean energy. Communication services stocks lagged, driven in part by a drop in shares of Google parent Alphabet following reports of the Justice Department filing a proposal to break up the internet search giant.

In Europe, the MSCI Europe ex UK Index ended the week 0.7% higher (6.9% YTD) on hopes that the ECB could lower borrowing costs in December after purchasing managers’ indices signalled a deterioration in the economic outlook. Major stock indexes were mixed. Germany’s DAX Index added 0.6% (15.3% YTD), France’s CAC 40 Index decreased -0.2% (-1.0% YTD) and Italy’s FTSE MIB Index retreated -0.8% (16.5% YTD). Switzerland’s SMI Index put on 0.8% (8.6% YTD). The euro depreciated versus the US dollar, ending the week at USD 1.04 for EUR, down from 1.05.

In the UK, the FTSE 100 Index rose 2.5% (10.6% YTD), and the FTSE 250 Index gained 0.6% (7.7% YTD). The British pound weakened versus the US dollar, ending the week at USD 1.25 for GBP, down from 1.26.

Japan’s stock markets lost ground over the week. The TOPIX Index declined -0.6% (16.5% YTD), and the TOPIX Small Index tacked on 0.9% (11.4% YTD). Heightened geopolitical tensions dented risk appetite and prompted demand for assets perceived as safer, including the Japanese yen. However, the currency weakened to JPY 154.8 against the US dollar from JPY 154.3 at the end of the previous week.

In Australia, the S&P ASX 200 Index ended the week 1.3% higher (15.8% YTD) because of the re-emerging Trump rally and the slightly more dovish tone from the RBA’s November meeting minutes. Australian government bond yields shifted lower, with the curve largely unchanged. The Australian dollar strengthened against the US dollar by 0.5%.

The MSCI Emerging Markets Index was 0.2% higher (8.9% YTD), with a negative contribution to performance from the stock markets of China and a positive contribution from those of India, Taiwan, South Korea and Brazil.

Chinese equities declined as a light economic calendar and concerns about the incoming Trump administration curbed risk appetites. The Shanghai Composite Index lost -1.9% (13.1% YTD), and the blue-chip CSI 300 Index fell -2.6% (16.0% YTD). Hong Kong's benchmark Hang Seng Index was down -1.0% (17.8% YTD).

In Hungary, the National Bank of Hungary (NBH) held its regularly scheduled meeting and kept its main policy rate, the base rate, at 6.50%. The NBH also held the overnight collateralised lending rate – the upper limit of an interest rate “corridor” for the base rate – at 7.50%. In addition, the central bank left the overnight deposit rate, which is the lower limit of that corridor, unchanged at 5.50%. This inaction was generally expected.

According to the central bank’s post-meeting statement, policymakers noted that global investor sentiment has recently been “volatile” due to geopolitical developments, expectations for economic outlooks for developed economies, and the “future interest rate paths” from major central banks. They also noted that a stronger US dollar has increased risk aversion toward emerging markets.

Regarding domestic conditions, central bank officials noted that GDP declined -0.8% year over year in the third quarter of 2024 due to “weak performance of industry, construction and agriculture.” They also expect subdued European economic activity to “hold back domestic exports in the short term,” though they expect Hungary’s export market share to increase over time.

As for inflation, policymakers acknowledged that broad inflation was measured at 3.2% in October, while core inflation was higher at 4.5%. They attributed the increase in inflation to “the accelerating dynamics in food and fuel prices” and expect inflation to “rise temporarily in the rest of the year.” In addition, they anticipate that “exchange rate depreciation” in the last few months, coupled with “changes to the system of excise duties”, will have “inflationary effects in the next year.”

Policymakers ultimately concluded that continuing geopolitical tensions “are raising upside risks to inflation through increasing risk aversion towards emerging markets.” Adhering to “a careful and patient approach to monetary policy,” particularly amid “volatile financial market developments,” central bank officials decided to leave various interest rates at current levels.

In Türkiye, the central bank held its scheduled monetary policy meeting. As was generally expected, policymakers kept the one-week repo auction rate at 50.0%.

According to the post-meeting statement, policymakers observed that the underlying inflation trend “registered a decline” in October, while various economic indicators “suggest that domestic demand continues to slow down, reaching disinflationary levels.” Nevertheless, they expressed their belief that “inflation expectations and pricing behaviour…continue to pose risks to the disinflation process” – hence, their decision to leave rates unchanged.

Central bank officials remained convinced that a “tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations.” One noteworthy addition to the post-meeting statement is that they expect “increased coordination of fiscal policy will also contribute significantly to this process.” Policymakers insist they will maintain a tight monetary stance “until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge” to their projected forecast range.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.2% (3.1% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.3% (10.4% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned 0.1% (6.1% YTD).

US Treasuries posted positive returns heading into Friday among mixed yield curve movement. Over the week, the 10-year Treasury yield decreased -4bp to 4.40% from 4.44% (up 52bp YTD). The 2-year Treasury yield rose 7bp, ending the week at 4.38% from 4.31% (up 13bp YTD).

Meanwhile, spreads in the US investment-grade corporate bond market largely tightened throughout the week. The issuance amount was well above expectations, and most issues were oversubscribed. Volumes in the high yield market rose from below-average levels at the start of the week. Broader macro stability, the rally in technology stocks and tightening rates supported the asset class. In issuer-specific news, Spirit Airlines officially filed for bankruptcy.

Over the week, the 10-year German bund yield decreased -11bp, ending at 2.24% from 2.35% (up 22bp YTD).

The 10-year UK gilt yield decreased -9bp, ending the week at 4.38% from 4.47% (up 86bp YTD).