Simplify the complex with clear and concise market insights direct from our investment experts every week.
Markets and macro insights with Bernard Swords, Chief Investment Officer
What affected financial markets in December?
-
Measures adopted by Central Banks were the central focus in December. The US Federal Reserve cut the policy rate by 25bps and indicated that any further cuts were ‘on hold’ due to uncertainty over US government policy in the immediate and longer-term future. The European Central Bank (ECB) followed, cutting its policy rate by 25bps, which was at the lower end of expectations. Bond markets were very strong in November, but their performance was predicated on the possibility of speedier and more extensive upcoming interest rate cuts. This led to a correction in December, especially in the US.
-
The above correction flowed into equity markets with the interest rate-sensitive sectors down 5% – 6% over the course of the month. A lack of new policy measures from China to boost its economy compounded this, and thus the commodity sectors (energy and materials) showed a weak performance. Losses in equity markets were tempered by strength in the new economy sectors. Announcements concerning capital investment in IT infrastructure had a positive effect, and Tesla upgraded its outlook. In summary, December saw positive returns in the IT, communication services, and consumer discretionary sectors, offsetting losses in other sectors.
-
The US economy’s momentum continued to the end of the last calendar year. Non-farm payrolls were the main data release. There were 256,000 jobs created, 100,000 more than expected, and the unemployment rate dropped to 4.1%. Other data was also stronger than anticipated. The Institute for Supply Management (ISM) Manufacturing and non-Manufacturing, the two main business surveys, both rose in December. The Manufacturing survey rose 0.9 to 49.3. At close to 50, it suggests that troubles in the US industrial sector may be ending. The non-Manufacturing survey moved further into expansionary territory, jumping two points to 54.1. Both surveys showed a considerable jump in the prices paid sub-indices. This caught the attention of the nervous bond market. Any indication that further US interest rates cuts could be delayed upsets the bond market.
Were the data releases from other regions positive?
-
The Purchasing Managers’ Indexes (PMI), the main business surveys in the euro area, were released in late December. They were a touch better than previous releases, but not impressive. The Composite Index rose to 49.5, returning almost to a stable level. This was driven by a solid jump in the services sector, well into expansion territory at 51.4. However, the manufacturing sector is still stuck at 45.2. Retail sales for November showed only a slight increase (0.1%) month-on-month. Overall indicators show that the euro area economy is close to stagnation. The inflation report was also gloomy. In December, the core inflation rate held at 2.7% year-on-year. The month-on-month annualised inflation rate is now below 2%. On the positive side, there is no obstacle to the ECB cutting rates, should it consider this the best course of action.
-
The Chinese business surveys (Caxin PMI’s) from December were mixed. The services survey rose to a seven-month high, but the manufacturing survey dropped, leading to a decline in the composite index. No doubt the threat of sanctions from the US weighs on manufacturing sentiment in China. Meanwhile, the inflation report for December was not as bleak as more recent reports. Core inflation rose slightly, but at 0.4% year-on-year, it indicates that China is still grappling with the problem of deflation.
-
Equity markets started the new year in good shape, responding well to improved US data. However, that welcome beginning is now taking a slightly different turn as the bond market reacts negatively to the news of robust US treasury yields generated by significant job creation (decreasing the likelihood of an imminent interest rate cut). Developments in respect to bonds have had a depressive effect on equity markets, demonstrating that signs of economic growth do not necessarily boost equities, and that these markets may be more sensitive to movements in bonds than to growth trends. With the recommencement of results season, more positive effects on equity markets can be expected, but it will be crucial to monitor sales trends in the mega-caps and to see whether the rise in the value of the US dollar is causing any difficulties.
The week ahead: what to watch out for
In the euro area, industrial production figures will be released, which might offer a sign of a recovery. From the US, predications can be elaborated based on upcoming inflation data, the Producer Price Index (PPI) and Consumer Price Index (CPI), and further news on growth momentum from the end of 2024 (retail sales and industrial production). From China, we will get fourth quarter gross domestic product (GDP). On the policy front, the minutes of the last council meeting of the ECB will be released. Last but not least, US Senate hearings on cabinet candidates will begin, perhaps providing greater clarity in respect to the economic policy direction of the incoming administration.