Market Briefing: 23rd December

The Federal Reserve took on the role of stock market grinch last week! Whilst they delivered on a much-anticipated interest rate cut (which takes their rate cuts to a full 1% this year), there was a cautious tone to their outlook which weighed on stocks and bonds. This dominated market movements in the middle of the week, with the ship being steadied towards the end of the week on the back of very strong US economic data. We’d note that a strong US consumer has been the key driver of the bull market of the last 2 years. Whilst this remains intact, we’re entering a quiet period for markets with little in the way of corporate data and generally lighter volumes.

Last week

• Investment markets had a poor week, with a cautious tone from the US Federal Reserve weighing on both stocks and bonds.
• The Federal Reserve released their much-watched Summary of Economic Projections (“SEP”), which indicated just 2 interest rate cuts next year as opposed to the 4 rate cuts which had been signposted at their September meeting.
• The Bank of England kept interest rates steady at 4.75% but noted higher wages as a reason for making fewer interest rate cuts next year.
• Bond markets sold off as yields pushed higher.

This week

• The calendar is predictably quiet this week!
• However, volumes are typically light which means that market moves can be larger than normal!

Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.

More detail:

• Global share markets posted a negative week (their worst since early September) following a less accommodative outlook from the US Federal Reserve. Although the Federal Reserve cut interest rates (to 4.5%), they indicated that there’d only be 2 further cuts next year. This was a march back from the 4 cuts in 2025 which they’d signposted at their September meeting and the market sold off on the back of this.
• Fed Chair Jerome Powell cited 2 key sources of uncertainty which had caused the Fed to adopt a more cautious stance. Namely:

1. 1. Inflation: the Fed have raised their forecasts for 2025 core inflation (to 2.5% from 2.2% back in September) and now see it moderating at a slower pace (getting back to the 2% target in 2027).
   2. Tariffs / the onset of tariffs: Powell alluded to changes in policies around trade and tariffs that could have an impact on inflation.

• The more cautious tone from the US Fed set the tone for the market last week, but it is worth noting that US economic data (which, along with earnings growth, has driven this bull market) came in very strong. 3^rd quarter US growth data (GDP) got revised up to 3.1% (from 2.8%), with personal consumption (which drives US growth) getting revised up to 3.7% (from 3.6%). Furthermore, US core Personal Consumption Expenditure (the Fed’s preferred measure of inflation) came in below expectations at a yearly run rate of 2.8%.
• The Bank of England kept interest rates steady at 4.75%, which was as expected. It was a 6-3 vote, with 3 of the 9 voters preferring a 0.25% cut. UK economic data over the week put upward pressure on bond yields (and caused the bond markets to price in less interest rate cuts next year), with wage data in particular coming in stronger than expected. Weekly earnings (ex-bonuses) came in at 5.2% for October, with the Monetary Policy Committee (MPC) noting that this had “added to the risk of inflation persistence.” Although this makes it harder for the BoE to cut interest rates, it does also make for a stronger consumer (which boosts growth) as this marked the first time that pay had accelerated in over a year and makes for 3% growth in real terms (i.e. after inflation).
• The Bank of Japan also maintained their interest rate level last week, albeit at a much lower level (than the Bank of England) at 0.25%. This was despite core CPI rising to 2.7% in November (which was ahead of expectations).
• Bond markets were under pressure last week (given the pick-up in bond yields), with UK 10 year gilt yields closing the week at 4.51% and reaching levels not seen since June of this year. Although the push higher in bond yields has made for some short-term mark-to-market losses, it is worth noting that there’s been some steepening in the yield curve (in both the US and the UK) which is generally a good signal for markets and also that yields are firmly above cash rates.

The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.

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