Market Update

It was a shortened trading week for US markets, as they were closed on Thursday, January 9, to honor a national day of mourning for former President Jimmy Carter. On Wednesday, the Federal Reserve released minutes from its December meeting, during which it implemented a 25-basis-point rate cut. The minutes revealed that officials foresee a significantly slower pace of rate cuts in 2025, with the median projection indicating a total of 75 basis points for the year. While avoiding direct mention of Trump, policymakers voiced concerns about inflation and the potential impacts of forthcoming immigration and trade policies, suggesting a cautious approach as more details of the Trump administration’s plans emerge. Nonetheless, Fed projections suggest that economic growth will moderate, the labor market will remain strong, and inflation is on track to reach the 2% target.
On Friday, labor market data exceeded expectations, with the US adding 256,000 jobs in December, well above the forecast of 155,000. The unemployment rate held steady at 4.1%, and wages grew by 3.9% year-over-year. While this robust job growth underscores the resilience of the labor market, it also bolsters the case for a slower pace of rate cuts in the future. Stocks dipped slightly following the report, contributing to modest losses for the week.
In the UK, government bond yields rose above levels last seen during the turmoil following Liz Truss’s Mini Budget in October 2022. However, this time the increase in yields is part of a broader global trend, with bond yields also climbing in the US, Japan, and Germany. A major driver of this trend is uncertainty surrounding President-elect Donald Trump’s policy agenda, particularly plans to cut taxes and raise tariffs. These proposals have stoked inflation fears among investors, potentially complicating the Federal Reserve’s efforts to curb inflation and moderate the pace of rate cuts.
This week, the yield on 10-year UK gilts reached 4.8%, raising concerns about the growing cost of servicing government debt. This could strain public finances and reduce the fiscal flexibility outlined in Rachel Reeves’s Autumn Budget. Meanwhile, the pound weakened—a departure from its typical behavior when borrowing costs rise. Despite this volatility, the FTSE 100 provided stability for UK investors, as 75% of the index’s revenue is generated internationally. This makes the FTSE 100 less sensitive to domestic economic challenges and more influenced by global market trends, offering a degree of protection in uncertain times.
In China, deflationary pressures persisted, with December’s consumer price index rising just 0.1% year-over-year, largely due to lower food and fuel costs. However, there were signs of improvement in the services sector, as the private PMI rose to 52.2, its highest level since May. The People’s Bank of China pledged to maintain accommodative monetary policy, support critical industries, and consider further rate cuts to stimulate consumption. While these measures aim to bolster economic recovery, their impact may take time to manifest and will be closely monitored by investors.