Markets Weigh Policies & Risks (22-26 December)

Global markets faced a volatile week as investors balanced softening US economic data against tightening signals from other major central banks.

While US inflation eased to 2.7%, its lowest level since July, providing the Federal Reserve room for potential 2026 cuts, the BOJ and BoE adopted more hawkish-than-expected stances. Geopolitical tensions in Venezuela and Eastern Europe further rattled sentiment, driving safe-haven demand.

Gold reached a fresh record high of $4,380/oz, and silver maintained its bullish momentum, surging more than 120% this year.

Market Drivers & Catalysts

• Softening US Macro Picture: Easing CPI to 2.7% and a rising unemployment rate to 4.6% (the highest since Sept 2021) reinforced expectations for a more accommodative Fed path.
• Hawkish Central Bank Surprises: A BOJ rate hike to 0.75% and a narrow 5–4 vote for the BoE’s cut signaled that global tightening cycles may not be over.
• Geopolitical Risk Premium: US-Venezuela maritime tensions and Ukrainian strikes on Russian tankers provided a sharp bid for energy, with Brent climbing to $60.8.
• Debasement Trade & Industrial Demand: Silver’s 120% year-to-date surge is supported by tight supply in London and robust consumption from solar, EV, and data center sectors.
• Fiscal Policy Drag: Anticipated contractions in US payrolls (exit of 150,000+ federal employees) due to government cost-cutting measures added to labor market caution.

Fixed Income

• United States 10‑Year Treasury: The 10‑year Treasury yield climbed toward 4.2%, its highest since early September. Fed officials Goolsbee and Schmid warned against front-loading cuts, while Philadelphia Fed’s Paulson cited labor-market risks following the Fed’s third 25 bps cut.
• United Kingdom 10‑Year Gilt: The gilt yield slipped to just below 4.49%, a two-week low, after the BoE delivered a 25 bps rate cut. However, the 5–4 vote split led traders to price in only 62 bps of easing by the end of next year.
• Japan 10‑Year Government Bond: The JGB yield surged toward 2.1%, reaching its highest level since 1999. This followed the BOJ raising its benchmark rate to 0.75% (a high since 1995), with headline inflation sitting at 2.9%.
• Germany 10‑Year Bund: Bund yields rose to 2.89%, gaining 4 bps in a single session. Yields have increased by 17 bps over the past month and are 61 bps higher than a year ago.

Commodities

• Gold surged to a record high of $4,380/oz on Monday. Markets are pricing in two additional Fed cuts next year. Gold is up more than 60% this year, marking its strongest annual performance since 1979.
• Silver rose above $65.5/oz, marking a fourth straight weekly gain. The metal is up over 120% this year, driven by falling rates and industrial demand. Supply tightness in London is expected to persist through 2026.

Currencies

• U.S. Dollar Index (DXY): The DXY hovered near 98.5, ending the week little changed. Investors assessed the impact of inflation easing to 2.7% and the unemployment rate rising to 4.6%.
• Euro: EUR/USD rose to around $1.1733 after the ECB left the main refinancing rate at 2.15% and the deposit facility at 2.0%. Updated projections showed inflation near the 2% target.
• British Pound: GBP/USD strengthened to around $1.34, approaching two-month highs. Despite the BoE’s 25 bps cut, the narrow vote split limited expectations for aggressive future easing.
• Japanese Yen: USD/JPY recovered to 157 from its eleven-month lows. The rebound was supported by the BOJ rate hike to 0.75% and official warnings against excessive currency moves.

Economic Data Highlights

• U.S. Unemployment Rate (Nov): Rose to 4.6% (expected 4.4%), with 7.8 million individuals unemployed. The U-6 rate increased due to a rise in involuntary part-time employment; labor participation remained at 62.5%.
• U.S. Non-Farm Payrolls (Forecast): Expected to add 50,000 jobs in November, following a projected October contraction. This reflects the exit of over 150,000 federal employees. Hourly earnings are projected to increase by 0.3%.
• U.S. Inflation Rate (Dec): Eased to 2.7% (expected 3.1%). Energy rose 4.2% (fuel oil 11.3%, natural gas 9.1%), food rose 2.6%, shelter rose 3%, and used vehicles climbed 3.6%.
• ECB Interest Rate Decision: Rates remained unchanged; the main refinancing rate sits at 2.15% and the deposit facility at 2.0%. President Lagarde noted that neither hikes nor cuts were discussed.
• Euro Area Inflation Rate (Nov): Revised down to 2.1%. Services inflation accelerated to 3.5%, while energy declined by 0.5%. Regional rates varied from 0.1% in Cyprus to 4.7% in Estonia, with Germany at 2.6%.

Macro Calendar Highlights

• U.S. Consumer Price Index (CPI) Report
• ECB Interest Rate Decision
• Bank of England Policy Meeting
• Bank of Japan Rate Announcement
• U.S. Employment Situation (Non-Farm Payrolls)