Global markets weekly update

Stocks gave back a portion of the previous week’s gains, as uncertainty over the incoming administration’s policies appeared to continue 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 (32.46%) since the eve of the election, as investors anticipated looser regulation of digital currencies.

Conversely, health care shares fell sharply—on Friday, the iShares Biotechnology ETF declined 4.79%—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 programs, particularly vaccine initiatives, and as HHS head would oversee Medicare, Medicaid, and other programs accounting for roughly one-quarter of government spending.

Electric vehicle (EV) makers—especially “Magnificent Seven” member Tesla—were also 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 42.63% 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.

Tesla and other EV makers fell back late in the week, however, as confirmation arrived from Reuters 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 week’s economic calendar was highlighted by Wednesday’s inflation data, which were largely in line with expectations, with headline prices rising 0.2% in October and core (less food and energy) prices rising 0.3%. Due largely to stubbornly high housing costs, however, year-over-year headline inflation rose for the first time since March, from 2.4% to 2.6%. Monthly headline and core producer price inflation, reported Thursday, rose in line with expectations and their consumer counterparts.

Speaking Thursday, Federal Reserve Chair Jerome Powell seemed to dampen sentiment a bit 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 quarter-point 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 full percentage point of cuts by the end of next year fell more considerably, from 41.3% to 32.6%.

Expectations for higher long-term interest rates were also reflected in a sharp rise in the yield of the benchmark 10-year U.S. Treasury note, which touched its highest intraday level (4.51%) on Friday since the start of June. (Bond prices and yields move in opposite directions.) While U.S. Treasury yields moved higher across most of the curve, municipal bond yields ended the week roughly unchanged, apart from modest declines in front-end yields. According to our traders, trading volumes and demand for munis in the secondary market were healthy.

Meanwhile, issuance was heavy in the 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, our traders reported that 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.

In local currency terms, the pan-European STOXX Europe 600 Index ended 0.69% lower, falling for a fourth consecutive week. Concerns about the incoming Trump administration’s trade policies and political upheaval in Germany weighed on sentiment, as did Federal Reserve Chair Jerome Powell’s cautious comments on U.S. interest rates. Major stock indexes were mixed. France’s CAC 40 Index fell 0.94%, Germany’s DAX was little changed, and Italy’s FTSE MIB advanced 1.11%. The UK’s FTSE 100 Index was down modestly.

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 more than two years. Bank of England Chief Economist Huw Pill said after the data release that inflation pressures remained too high for the 2% target.

Euro area data kept hopes of a soft landing for the economy alive. A second estimate of GDP from Eurostat confirmed the surprisingly strong 0.4% expansion 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 the labor market remained stable. Employment rose by 0.2% in the third quarter, after increasing 0.1% in the preceding three months.

European Central Bank (ECB) policymakers unanimously backed October’s quarter-point interest rate cut, arguing that “the disinflationary trend was getting stronger” and that it was important 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 an undershooting of 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.

Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 2.2% and the broader TOPIX Index down 1.1%. The weakness of the yen lent a degree of support, but 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 U.S.

The yen weakened to the JPY 155 range against the U.S. dollar, from about 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 U.S. presidential election, which stoked some expectations that his administration’s policies could prove inflationary and alter the Federal Reserve’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% in the second half of fiscal 2025 at the earliest. The yield on the 10-year Japanese government bond rose to 1.07%, from the prior week’s 1.00%.

Japan’s gross domestic product 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 annualized 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.

Chinese equities declined as evidence of persistent deflation and worries about potential U.S. tariffs under incoming U.S. President Trump hurt investor confidence. The Shanghai Composite Index fell 3.52%, while the blue chip CSI 300 gave up 3.29%. In Hong Kong, the benchmark Hang Seng Index plunged 6.28%, according to FactSet.

China’s consumer price index rose a below-consensus 0.3% in October from a year earlier, down from 0.4% in September, largely 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 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 marked 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% in the January to October period, while property investment in the period fell 10.3%. China’s urban unemployment rate eased to 5%, from 5.1% in September.

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

Earlier in the week, the Hungarian government reported that the 3.2% year-over-year inflation rate in October 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 to be 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 annualized rate of less than 2%.

Overall, Morozov believes that the latest inflation data, combined with 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.

On Thursday, 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 U.S. elections. They also noted that “employment slowed down” and that the “balance of risks to growth of economic activity remained biased to the downside.”

Regarding inflation, central bank officials acknowledged that annual headline inflation rose to 4.76% in October, while core inflation—which they believe is a better reflection of 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 behavior 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, but 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 signaled 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.