Fed Signals, Inflation Data, and Global Trends Reshape Market Dynamics (23 - 27 December)

The dollar index hit a two-year high of 108.5 on hawkish Fed signals but eased after core PCE prices rose just 0.1% in November, sparking hopes for disinflation.

The euro dropped to $1.0340 on weak Eurozone data, and the pound fell below $1.25 amid rising UK inflation. The yen rebounded slightly after Japan's inflation data fueled hawkish BOJ expectations but stayed pressured by a strong dollar.

Gold fell to around $2,600, weighed down by the Fed's hawkish stance and limited 2025 rate cuts, while silver dropped to $29 on weak industrial demand from China. Both metals remain up for the year on safe-haven demand and central bank purchases.

U.S. Treasury yields rose, with the 10-year yield hitting 4.50%, while the 2-year yield ended at 4.27% after an early-week surge.

S&P Global US Manufacturing PMI

The US Manufacturing PMI fell to 48.3 in December, marking the sixth consecutive contraction. Output dropped to its lowest since August 2009, excluding the pandemic slump, as new orders continued to decline. Inflationary pressures persisted due to rising raw material costs, while tariff concerns under the Trump administration added to uncertainty.

S&P Global US Services PMI

The Services PMI climbed to 58.5 in December, the strongest growth since October 2021. New orders rose at their fastest pace since March 2022, and employment grew for the first time since July. Cost growth slowed to its lowest in four and a half years, supported by weaker wage growth. Optimism surged on expectations of a business-friendly environment under the Trump administration.

U.S. Retail Sales (Nov)

Retail sales grew 0.7% in November, surpassing expectations of 0.5%. Gains were led by motor vehicles (+2.6%) and nonstore retailers (+1.8%), while declines were seen in miscellaneous retail (-3.5%) and food services (-0.4%). Excluding autos, food services, building materials, and gas, sales rose 0.4%, reflecting strong consumer spending during the holiday season.

UK CPI

UK inflation climbed to 2.6% in November, its highest in eight months, driven by higher recreation and housing costs. Services inflation held steady at 5%, and core CPI rose by 3.5% YoY. Monthly CPI growth slowed to 0.1%, matching forecasts, while core prices were flat.

EU CPI

Eurozone inflation edged up to 2.2% in November, below preliminary estimates of 2.3%. Energy prices declined at a slower pace (-2%), while service inflation eased to 3.9%. Core inflation remained stable at 2.7%, with the monthly CPI falling by 0.3%.

FED Interest Rate Decision

The Fed cut rates by 25bps to 4.25%-4.5%, its third cut this year. Projections for 2025 were revised to just 50bps in cuts, down from 100bps. GDP forecasts for 2024 and 2025 were raised, while inflation expectations for core PCE were increased to 2.8% in 2024.

BOJ Interest Rate Decision

The BoJ kept rates at 0.25%, citing uncertainties over wage growth and global policies. Inflation ranged between 2%-2.5%, with core CPI expected to rise gradually. Despite weak exports, private consumption and business spending supported economic recovery.

BOE Interest Rate Decision

The BoE maintained its benchmark rate at 4.75%, as inflation and wage growth increased risks of persistent inflation. Three MPC members supported a 25bps rate cut, citing weak demand. The Bank emphasized the need for a gradual approach to easing.

U.S. GDP Growth Rate

The US economy expanded by 3.1% in Q3, exceeding estimates. Consumer spending rose 3.7%, driven by goods consumption and services. Fixed investment grew by 2.1%, while government spending was revised up to 5.1%.

Initial Jobless Claims

Jobless claims fell to 220,000 in the first week of December, beating expectations of 230,000. Ongoing claims also declined to 1.874 million. The data alleviated concerns of labor market weakness, aligning with the Fed’s projections.

Core PCE Price Index

Core PCE prices rose 0.1% in November, marking the smallest increase since May. Year-over-year, core PCE grew 2.8%, while overall PCE inflation stood at 2.4%. Disposable personal income and consumption rose 0.2% and 0.3%, respectively.

Currencies

The dollar index reached a two-year high of 108.5 but eased slightly on disinflation hopes. Core PCE prices increased by 0.1%, raising expectations for more rate cuts in 2025. The euro fell to $1.0340, pressured by weak Eurozone data and political instability. The pound dipped below $1.25 as UK inflation rose to 2.6%, while the yen dropped to a five-month low after the BoJ left rates unchanged. The Australian dollar hit its lowest since October 2022 amid expectations of RBA rate cuts.

Commodities

Gold fell to $2,600 per ounce this week, weighed down by the Fed’s hawkish stance and weaker physical demand in India. Silver dropped to $29 per ounce, pressured by weak industrial demand and concerns over China’s looser monetary policy.

Equities

U.S. indices mostly closed the week lower. The S&P 500 finished the week down by approximately 1.5%, while the Dow Jones also dropped by 1.5%, marking its third consecutive week of losses. The Nasdaq ended the week with a modest gain.