The European Central Bank cut interest rates by 25 basis points, while the central banks of Canada and Switzerland surprised with sharper cuts of 50 basis points. Market performance was mixed. U.S. inflation rose moderately in November, while unemployment data pointed to a softening labor market, raising expectations for a Federal Reserve rate cut. All eyes are now on the Fed, whose rate decision is expected on Wednesday.
USA
Most major stock indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly, crossing the 20,000 mark for the first time. Large-cap stocks outperformed smaller-cap stocks as the Russell 2000 underperformed the S&P 500 for the second straight week. Growth stocks outperformed value stocks for the third straight week, partly driven by gains in Tesla (12.08%) and Google parent Alphabet (8.44%). Sector performance was also largely negative, with only communications services and discretionary spending finishing in the red. Daily trading volume topped its six-month average throughout the week. The coming week is also expected to be busy with the Federal Reserve’s final meeting of the year on the calendar. The highlight of the weekly economic calendar was Wednesday’s Labor Department report on core and core consumer price inflation (CPI), which rose 0.3% in November, in line with consensus expectations. On an annualized basis, core prices rose 3.3% in November, unchanged from the previous month, while overall inflation accelerated modestly to 2.7%, up from 2.6% in October. Higher housing costs accounted for nearly 40% of the total price increase in November. Similarly, producer price inflation accelerated to 0.4% in November from 0.3%. On Thursday, the Labor Department reported a surprise jump in weekly initial claims for unemployment benefits to a two-month high of 242,000. While some of the increase was attributed to seasonal factors around the Thanksgiving holiday, continuing claims also rose and remained near a three-year high, a sign that some unemployed people are taking longer to find work. The jobs data provided another indication of a softening labor market after last week’s report that the unemployment rate rose in November. The weekly economic data appears to have been enough to solidify market expectations for a rate cut at the upcoming Federal Reserve meeting. According to the CME FedWatch Tool, futures markets on Friday saw a 97.1% chance of the Fed cutting rates at the upcoming meeting, up from 86.0% at the end of last week. The two-day meeting begins on December 17, with the rate decision due the following day. U.S. bonds had posted negative returns through Friday as bond yields rose across much of the yield curve (bond prices and yields move in opposite directions). High-yield bond market volumes rose after the CPI report as stocks recovered. However, macro sentiment and rising bond yields subsequently caused the market to fall.
Europe
The STOXX 600 ended 0.77% lower as investors debated whether the ECB had eased monetary policy quickly enough to support the struggling economy. Major stock indexes were mixed. Germany's DAX rose 0.10% and Italy's FTSE MIB added 0.40%. France's CAC 40 fell 0.23% and Britain's FTSE 100 lost 0.10%. The ECB cut its key interest rate by a quarter of a percentage point to 3.0%, its fourth cut this year. The ECB appeared to leave the door open for further monetary policy easing, dropping a reference to keeping rates "tight enough as necessary" from its statement. Nevertheless, the ECB's statement maintained its emphasis on a meeting-by-meeting approach to policy decisions. The central bank also downgraded its outlook for growth and inflation. The Swiss National Bank (SNB) surprised markets with a larger cut of half a percentage point, the largest rate cut since January 2015. The SNB said it intended to counter downward inflationary pressures and keep consumer price growth within its defined price stability range of 0% to 2%. The SNB also lowered its inflation forecast to 0.3% in 2025, half of what it projected in September. The UK economy has slowed significantly after a strong start to the year. Real GDP fell unexpectedly by 0.1% in October as manufacturing weakened. The economy contracted by the same amount in September. Output in the services sector, which underpins the rest of the economy, was flat in both months. The Office for National Statistics estimates that the economy grew by 0.1% in the three months to October, compared with the three months to July, amid expansion in the services and construction sectors. The Bank of England is widely expected to keep interest rates steady at its upcoming policy meeting and to continue cautiously next year amid persistently high services inflation. UK industrial production fell by 0.6% in October, the second consecutive monthly decline that defied expectations for a 0.3% rise. Manufacturing output also contracted by 0.6% in the period, down from a 1.0% drop in September. French President Emmanuel Macron has appointed his former justice minister, François Bayrou, a centrist politician, as prime minister to replace the ousted Michel Barnier.
Japan
Japanese stock markets posted modest gains on the week, with the Nikkei 225 up 0.97% and the broader TOPIX up 0.71%. Regional market sentiment was boosted by China’s announcement of more proactive fiscal measures and moderately loose monetary policy. On the domestic monetary policy front, speculation has been growing that the Bank of Japan (BoJ) may hold off on raising interest rates at its December 18 meeting, leading to a weakening yen. The yield on 10-year Japanese government bonds fell to around 1.04%. While expectations about the timing of the BoJ’s next rate hike were balanced between December and January, investors now appear to have converged on the view that a 25 basis point hike at the central bank’s first meeting of the new year is more likely. The odds have been gradually leaning towards an increase in January, likely because it gives the BoJ the benefit of seeing two more consumer inflation figures, the quarterly economic report and feedback from a meeting of regional governors. The central bank has repeatedly said it will raise interest rates if its projections for the economy and inflation come to fruition. Final GDP data showed Japan's economy grew 0.3% quarter-on-quarter in the three months to September, beating the 0.2% consensus expected and indicated by preliminary data.
China
Chinese stocks were in the red as recent policy announcements disappointed investors. The Shanghai Composite lost 0.36%, while the blue chip CSI 300 fell 1.01%. In Hong Kong, the reference Hang Seng added 0.53%. China has pledged to implement a more proactive fiscal policy and increase the budget deficit in 2025. Officials also said the central government would continue to issue ultra-long special government bonds to finance major projects. However, the reading after the two-day conference provided no details, dampening investor sentiment. Inflation data released earlier this week showed China's economy remained mired in deflation. The consumer price index rose below consensus by 0.2% in November from a year earlier, down from 0.3% in October. Core inflation, which excludes volatile food and energy costs, rose to 0.3%, from a 0.2% rise in October. The producer price index fell 2.5% year-on-year, easing from a 2.9% decline last month and marking the 26th consecutive monthly decline despite Beijing's efforts to boost domestic demand in recent months. The overall trade surplus widened to $97.4 billion from $95.72 billion.