Market Commentary week ending 22 December 2024
US: Strong stock drop despite interest rate cuts
US stock indexes fell sharply last week despite the Fed’s decision to cut interest rates on Wednesday: the S&P fell 1.99%, the Nasdaq 100 2.25%, and the Russell 2000, which includes small-cap companies, has been significantly underperforming other indexes for several weeks in a row, falling 4.45%.
The main contributor to market sentiment was the Fed’s meeting, during which it was decided to cut interest rates by 25 basis points to 4.5%. In total, the Fed has cut interest rates by 1% this year since September. Although the Fed’s decision was as the market expected, the Fed chairman’s speech and the board members’ forecasts for next year set a negative tone for sentiment. First, the board currently expects only two rate cuts in 2025, compared to four forecast in September. Second, Chairman Powell emphasized that the board raised its inflation projection excluding food and energy prices for 2025 from 2.2% to 2.5%. Powell also mentioned that the central bank plans to be cautious about further interest rate cuts. Such news from the central bank led to a nearly 3% drop in the S&P 500 index on Wednesday, the second worst day this year for the index.
In macroeconomic news, it was announced on Thursday that US GDP growth reached 3.1% in annual terms and significantly exceeded the 2.8% forecast — the growth was significantly contributed by rising consumption. In addition, retail sales, which increased by 0.7% in November, can also be attributed to this. The labor market situation, as measured by the number of unemployment claims, looked positive and stable. Finally, on Friday, the results of the personal consumption expenditure price index (PCE Price index) were released, which were slightly lower than economists expected. The PCE price index, excluding seasonal food and energy prices, rose by 2.8% over the year, when analysts had forecast 2.9%. This result significantly contributed to the rebound in stock prices recorded on Friday.
The bond market saw a sharp decline as reduced interest rate cut expectations and strong US GDP data negatively impacted the prices of various investment-grade bonds. The yield on the US 10-year Treasury note rose from 4.39% to 4.53%. It was also noted during the week that there were significantly fewer primary market bids, while bond yields in the secondary market also rose accordingly.
Europe: Conservative BoE and difficult economic situation in the eurozone
European stock indexes also recorded huge falls in response to Trump’s warnings about potential trade tariffs and concerns about the outlook for interest rates next year: Germany’s DAX fell 2.55%, France’s CAC 40 1.82%, and the UK’s FTSE 100 2.60%.
The Bank of England, which met last week, decided not to change interest rates and left them at 4.75%, as expected. True, three of the nine board members voted in favor of reducing interest rates by 25 basis points. However, most board members argued that rising prices and wages pose a risk that inflation may remain at a high level. Annual inflation in the United Kingdom rose from 2.3% to 2.6% in November, mainly due to higher fuel and clothing prices. Meanwhile, average weekly earnings excluding bonuses grew by 5.2% in annual terms over the three months, when economists had predicted a 5% increase.
In continental Europe, the important news was the vote of no confidence in the current Chancellor Olaf Scholz in Germany. For this reason, the country will hold early elections on February 23, in which the far-right AfD party currently holds high ranking positions. Looking at macroeconomic data, the German manufacturing sector continues to disappoint economists — the purchasing managers’ index for this sector fell from 43 to 42.5 points. In addition, the overall purchasing managers’ index for the euro area ended the year below the 50-point mark, indicating a contraction in private sector activity — Germany and France contributed most significantly to the decline in the index.
