Record Metals and Diverging CB Signals (29 Dec – 02 Jan)

Global markets concluded the year with the US dollar hitting its weakest point since early October, as expectations for the Federal Reserve easing in 2026 intensified.

Despite a strong 4.3% annualized GDP growth rate in Q3, the greenback remains down nearly 10% for the year, which is its worst annual performance since 2017. Rising geopolitical tensions in Venezuela, Nigeria, and Eastern Europe have further shifted capital toward precious metals, with gold and silver reaching record highs not seen since the 1980s.

While the Fed maintains a cautious outlook, the ECB and BOJ are signaling policy divergence. The euro remains resilient above $1.17, and the yen is strengthening as markets factor in further BOJ tightening despite slowing inflation in Tokyo.

Market Drivers & Catalysts

• Persistent Dollar Weakness: The DXY hit 97.9, pressured by trade tensions and a 10% annual decline, as markets look past strong GDP to anticipate two Fed cuts in 2026.
• Precious Metals Breakout: Gold hit a record $4,530/oz and silver surged past $75/oz, driven by a "debasement trade" and safe-haven demand amid conflicts in Nigeria and Ukraine.
• Central Bank Divergence: The ECB signaled a prolonged pause at current rates, while the BOJ signaled readiness to hike further from its current 0.75% level.
• Geopolitical Volatility: Blockades on Venezuelan oil and strikes in Nigeria are balancing out renewed optimism for Ukraine peace talks, leaving energy markets in a tug-of-war.
• Mixed US Real Economy: A sharp 2.2% drop in Durable Goods orders and weakening Consumer Confidence (89.1) contrast with the strong Q3 GDP and low jobless claims.

Fixed Income

• United States 10‑Year Treasury: The 10‑year yield ticked up to 4.15%. While Q3 GDP grew at 4.3%, investors remain focused on the Fed's projection of only one rate cut in 2026, creating a tug-of-war between strong data and easing expectations.
• United Kingdom 10‑Year Gilt: Yields slipped to just under 4.49%, a two-week low. Following the BoE's December move to 3.75%, a narrow vote has led markets to trim expectations for aggressive future cuts.
• Japan 10‑Year Government Bond: The yield hovered near 2% despite Tokyo inflation slowing to 2%. The market is pricing in further hikes after last week’s move to 0.75%, even as Japan plans to trim ultra-long bond issuance.
• Germany 10‑Year Bund: The yield hovered near 2.87%, easing from recent two-year peaks. Fiscal concerns remain high after the approval of a large 2026 budget with substantial borrowing, drawing warnings from the Bundesbank.

Commodities

• Gold climbed to a fresh record of $4,530/oz on Friday. Up more than 70% this year, the metal is seeing its strongest annual performance since 1979, fueled by Nigerian military actions and Russia-Ukraine tensions.
• Silver surged past $75/oz for the first time, marking a 158% year-to-date gain. Safe-haven demand and the appeal of non-yielding assets amid lower projected rates continue to drive aggressive buying.

Currencies

• U.S. Dollar Index (DXY): The index hovered near 97.9, marking its lowest level since October. Trade tensions and concerns over policy independence have contributed to a nearly 10% decline in 2025.
• Euro: EUR/USD held above $1.17. Support comes from the ECB’s prolonged pause and resilient growth projections, which contrast with cooling inflation trends in the United States.
• British Pound: GBP/USD climbed above $1.35, a three-month high. The pound is up 8% this year, its best performance since 2017, supported by narrowing yield differentials.
• Japanese Yen: USD/JPY moved above 155. Despite Tokyo inflation easing to 2%, the yen is supported by expectations of further BOJ hikes and the government's record-sized fiscal 2026 budget.

Economic Data Highlights

• U.S. GDP (Q3 Final): Growth accelerated to a 4.3% annualized pace, driven by promising consumer spending and a rebound in government outlays, marking the strongest expansion in two years.
• U.S. CB Consumer Confidence (Dec): Fell to 89.1, reflecting deepening concerns over business conditions and jobs. Expectations remain at levels historically associated with recession risk.
• U.S. Initial Jobless Claims: Fell by 10,000 to 214,000 (week ending Dec 20), the lowest level since January (excluding holiday dips). Continuing claims rose slightly to 1.92 million.
• U.S. Durable Goods Orders (Oct): Dropped 2.2% to $307.4 billion, missing expectations. The decline was largely due to a steep fall in transportation equipment and aircraft.
• Tokyo CPI (Dec): Inflation in the capital slowed to 2%, a one-year low, primarily due to easing food and energy costs, though BOJ policy remains on a tightening bias.

Macro Calendar Highlights

• U.S. Third Quarter GDP Final Revision
• U.S. Durable Goods Orders Report
• U.S. Consumer Confidence Index
• Tokyo Consumer Price Index (CPI)
• U.S. Weekly Initial Jobless Claims