Stocks take a Friday Beating.
London stocks ended the week lower, with investors reacting to a better-than-expected US nonfarm payrolls report during the afternoon.
The FTSE 100 fell 0.86% to close at 8,248.49 points, while the FTSE 250 underperformed further dropping another 1.36% to 19,733.94 points. The FTSE 250 is now down -4.31% on the year so far.
Europe faired better than the US this week as American stocks continue to yoyo over inflation, interest rates and comments from Donald Trump.
In the UK, the Treasury tried to calm markets and reaffirmed its commitment to fiscal rules after a sell-off in the pound sterling and UK government bonds, which propelled the 10-year gilt yield to 4.8%, the highest level since August 2008.
The move reflected a broader increase in bond yields stoked by concerns over President-elect Donald Trump’s policies and a more hawkish outlook for U.S. interest rates. Mounting investor concerns about the UK’s debt levels and the Labour government’s ability to shore up the public finances while implementing budget plans added to the upward pressure on gilt yields.
The Times reported that Chancellor of the Exchequer Rachel Reeves, the UK finance minister, asked colleagues at a Cabinet meeting to come up with ideas to boost economic growth – better late than never I guess. Getting into power wasn’t a huge shock though so perhaps she should have been asking this question 12 months ago.
On Tuesday retail sales in the United Kingdom saw a notable increase of 3.1% in December 2024, compared to the previous month’s 3.4% decline. This surge exceeded market expectations, which had predicted a 0.2% drop, largely driven by strong Black Friday spending. This marked the largest rise since March 2024.
However, despite the December boost, the BRC reported that overall retail performance in the fourth quarter of 2024 was underwhelming, with sales growing by just 0.4% year-on-year. For the full year, total retail sales rose by 0.7%, while like-for-like sales saw a modest 0.5% increase.
The Halifax House Price Index in the UK increased 3.3% year-on-year in December 2024, the least in five months, following a downwardly revised 4.7% rise in November. Compared to the previous month, house prices decreased 0.2%, the first fall in nine months, after soaring 1.2% in November and compared to forecasts of a 0.8% gain. The average house price moved down to £297,166.
Europe
The STOXX Europe 600 Index ended 0.65% higher as investors continue to expect the European Central Bank to cut interest rates in January despite a pickup in inflation. Italy’s FTSE MIB increased by 2.82%, Germany’s DAX 1.55%, and France’s CAC 40 Index 2.04%.
A flurry of data points painted a mixed picture of the eurozone economy. Year-over-year inflation accelerated in December to 2.4%, from 2.2% in November, driven by higher energy prices and services costs. The core rate, which excludes energy, food, alcohol, and tobacco prices, steadied at 2.7%. Retail sales barely grew in November, after falling in October. Meanwhile, the jobless rate stayed at a record low of 6.3% in November.
The European Central Bank (ECB) said in its latest Economic Bulletin that the disinflation process was well on track and highlighted that most measures of underlying inflation suggested inflation would settle at the ECB’s 2% medium-term target on a sustained basis. Separately, policymaker Piero Cipollone was quoted by the Italian newspaper Corriere della Sera as saying that the ECB “shouldn’t try to guard excessively against possible future inflation shocks” and that “running the economy below potential weakens it and reduces the scope to react to shocks when they occur.” His colleague Francois Villeroy said in a speech to the French central bank, "If the pullback in inflation is confirmed in the coming quarters as we expect, common sense would have us heading towards the neutral rate without slowing the pace by summer."
The US
US equities declined during the week, which was shortened due to Thursday’s market closure in honour of former US President Jimmy Carter, who recently passed away. Small-cap stocks underperformed their large-cap peers for the fifth week in the past six weeks, as the Russell 2000 Index dipped into correction territory on Friday morning. As measured by Russell 1000 indexes, value stocks held up better than their growth counterparts. The Nasdaq Composite fell 2.34%, its biggest weekly drop since mid-November.
The week started on a positive note following a report that the incoming Trump administration’s proposed stance on tariffs was likely to be softer than previously indicated, which led to most indexes finishing higher on Monday. However, optimism faded throughout the week after President-elect Donald Trump refuted these reports and several pieces of economic data fuelled concerns about stubborn inflation.
In terms of economic data releases, on Tuesday, the Institute for Supply Management reported its Services Purchasing Managers’ Index, a measure of economic activity in the services sector. The index came in at 54.1 for the month of December, two percentage points higher than November’s reading (readings above 50 indicate expansion). Notably, the component of the index that measures prices paid by services organizations for materials and services increased by 6.2 percentage points to 64.4, stoking fears that progress on bringing down inflation has stalled and that interest rates could remain “higher for longer.”
Adding to these fears, Federal Reserve Governor Michelle Bowman noted in a speech on Thursday that inflation has held “uncomfortably above” the Fed’s 2% long-term target and that while the Fed made significant progress in 2023, there are still upside risks to inflation.
The economic calendar wrapped up Friday morning with the Labour Department’s closely watched monthly nonfarm payrolls report for December. The report indicated that the U.S. economy added 256,000 jobs during the month, well ahead of consensus expectations for 155,000. The unemployment rate was little changed at 4.1%, and wages grew 3.9% year over year.
Asia
Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 1.8% and the broader TOPIX Index down 2.5%. Speculation continued about the timing of the Bank of Japan’s next interest rate hike.
In the currency markets, the yen weakened to around JPY 158.1 against the U.S. dollar, from about 157.3 at the end of the prior week. The weakness of the Japanese currency was attributable to both uncertainty about the pace of further monetary policy normalization by the BoJ and pressure from a recent widening of the U.S.-Japan interest rate differential. Japan’s Finance Minister Katsunobu Kato issued a verbal warning about speculative, one-sided moves in the currency markets, signalling authorities’ readiness to take appropriate action against excessive moves. Japanese authorities have in the past intervened in the foreign exchange markets to prop up the yen, most recently in July 2024.
Japan’s real (inflation-adjusted) wage growth, a key indicator of consumers’ purchasing power that is closely watched by the BoJ, fell 0.3% year on year in November. This marked the fourth consecutive month of negative real wage growth. The central bank’s base case is that if the economy and prices (as well as wage growth) develop in line with its projections, it will raise interest rates.
Chinese stocks fell as data showed that the economy remained stuck in deflation. The Shanghai Composite Index lost 1.34%, while the blue-chip CSI 300 gave up 1.13%. Hong Kong’s benchmark Hang Seng Index fell 3.52%, according to FactSet.
Inflation data released Thursday showed that China is still grappling with deflationary pressures. The consumer price index rose 0.1% in December from a year earlier, in line with estimates and down from 0.2% in November amid lower food and fuel prices. Core inflation, which strips out volatile food and energy costs, ticked up to 0.4% from November’s 0.3% rise. The producer price index declined 2.3% year on year, slowing from the prior month’s 2.5% drop and extending the deflation in factory gate prices for the 27th consecutive month.
In other news, the private Caixin/S&P Global survey of services activity rose to a better-than-expected 52.2 in December, the highest level since May. The reading matched official data released the prior week showing that nonmanufacturing activity rose to 52.2 in December, the highest level in nine months, after Beijing rolled out a broad stimulus package in late September.
The Week Ahead
Inflation will be the theme next week as consumer price data gets released on both sides of the Atlantic.
Tuesday will bring the first update from the UK, where prices are expected to have climbed by 2.6% in December, in line with November’s increase, according to Trading Economics.
Data on Wednesday is then expected to show US inflation accelerated by 2.9% over the month, compared with November’s 2.7% uptick in prices. Given a hawkish turn among central bankers in recent months, focus is set to be on both for clarity around the direction of interest rates ahead.
ING Economics noted an uptick in line with expectations “may go some way to easing concerns about prolonged elevated inflation readings” in the US.
“Mortgage rates have soared, consumer borrowing costs elsewhere remain elevated and the dollar has strengthened,” ING said,” all of these are counteracting the Fed’s rate cuts and we take the view that the Fed may need to push harder”.
UK gross domestic product figures for November will take centre stage on Thursday after October saw the economy unexpectedly contract by 0.1%.
Fears over stagnating economic growth, alongside stubborn inflation, have contributed to a spike in UK debt yields recently, leaving eyes on whether the economy can drum up an expected 0.1% uptick in November.
A busier schedule next week brings updates from housebuilders, recruiters and more retailers.
PageGroup will kick off proceedings on Monday, before peer Hays later in the week, with the pairs' updates set to offer clarity on job market conditions.
A packed Tuesday then sees JD Sports and Ocado join a string of retailers recently in reflecting on the key Christmas period. Persimmon will get the housebuilding updates underway in the meantime, ahead of Vistry and Taylor Wimpey in the following days.
Currys follows suit among the retailers on Wednesday, before Thursday sees Premier Inn owner Whitbread update.
On our platform:
An interesting week in the market, and after the sell off on Friday, many traders will be watching the market open in Asia this Evening, for clues as to early form for equities during the week.
The UK Government also have a critical week ahead. The UK debt market yields are going sky high, and if this continues there could be further chapters to this story.
On our platform, our trackers have had a choppy week as they've been tracking their benchmarks. A number of our long or flats have sat out most of the week whilst waiting for an opportunity. Many took the sell off on Friday to enter on the BUY side.
Finally, our active strategies used the market pullback to add to their BUY positions, meaning we're positioned for markets to rally across the board this week.
Enjoy the rest of your weekend.
For more insight head to www.tppglobal.io
