Week ending 10th January 2025.

As you can see from the accompanying table, markets were mixed this week.

It was another short week for US markets, which were closed on Thursday, 9th January, in observance of a national day of mourning for former President Jimmy Carter. Federal Reserve minutes from their last meeting in December, where they cut interest rates by 25 basis points, were released on Wednesday. Officials anticipate a considerably slower pace of rate cuts in 2025, with the median respondent expecting 75 basis points for the full year. Without mentioning Trump, policymakers expressed concern about inflation and the potential implications of future immigration and trade policies, indicating that they would move more slowly in 2025 as the extent of Trump’s administration plans come to light. However, Fed members’ expectations indicate that economic growth may moderate, the labour market will remain solid, and inflation will likely stay on track to reach the 2% target.

On Friday, data showed the US added 256,000 jobs in December, far exceeding expectations of 155,000, while the unemployment rate held steady at 4.1%, and wages rose 3.9% year-on-year. The strong labour data highlights a resilient job market but may support a slower pace of Fed rate cuts going forward. Stocks edged lower after the report, contributing to modest weekly declines.

This week, it was reported that UK government bond yields rose to levels higher than those seen after Liz Truss’ Mini Budget in October 2022. However, it’s important to note that the market reaction has been more contained as this time the increase in yields is part of a broader global trend with yields in the US, Japan, and Germany also rising.

A key driver of this rise is the uncertainty surrounding President-elect Donald Trump’s upcoming policies, particularly his promises to cut taxes and raise tariffs. These measures have raised inflation concerns among investors, with fears that they could slow the Federal Reserve’s efforts to control inflation and reduce the pace of rate cuts.

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The 10-year UK gilt yield reached 4.8% this week prompting concerns about the rising cost of servicing treasury debt, which could strain government finances and reduce fiscal flexibility outlined in Rachel Reeves’ Autumn Budget. Additionally, the pound has weakened, contrary to typical behaviour when borrowing costs rise. Despite this volatility, the FTSE 100 has provided stability for UK investors largely because 75% of its revenue comes from abroad. As a result, the index is less affected by domestic economic fluctuations and more influenced by global market trends, offering protection in uncertain times.

China remains under deflationary pressure, with December’s CPI up just 0.1% year-on-year due to lower food and fuel costs. Meanwhile, services activity improved with the private PMI reaching 52.2, the highest since May. This week, the People’s Bank of China pledged to maintain loose monetary policy, support key sectors, and consider rate cuts to boost consumption. These actions aim to drive recovery but their impact on the economy may take time to materialise and will be closely monitored by market participants.

Coming up next week: Chinese trade data, US and UK inflation figures. Key releases also include Eurozone industrial production, UK GDP for November, UK retail sales, as well as Chinese industrial production, retail sales, and GDP.

Kate Mimnagh, Portfolio Economist