The hope of a Santa Rally was brought to a complete standstill on Wednesday evening following the US Federal Reserve’s meeting. The 25bps (0.25%) rate cut was anticipated by markets; however it was the commentary from US Fed Chair Jerome Powell, that spooked markets.
Wednesday’s meeting marked the final US Fed meeting before Mr Trump’s arrival at the White House. The decision was made to bring interest rates down for the third consecutive meeting to 4.5%. Mr Powell spoke clearly about entering a “new phase”, in which greater caution would be taken regarding further rate cuts, signalling just two cuts in 2025. Discussions around the health of the US economy were positive but caution stemmed from the potential impact of proposed tariffs and policies by Mr Trump. The S&P 500 and Nasdaq fell -2.9% and -3.8%, respectively, on the day. Additionally, Mr Powell shut down talks of a national reserve for cryptocurrencies, triggering a fall in bitcoin, now down -5% for the week.
It is fair to say the US economy has been resilient over the year, and US retail sales reflect this. In November, retail sales increased more than expected to 0.7%, with motor vehicles sales (2.6%) and online shopping (1.8%) leading the way. Black Friday sales provided the perfect opportunity for an online splurge, but strong retail sales have been underpinned by robust wage growth.
On our home turf, UK wage growth rose more than expected. In the three months to the end of October, average earnings rose by 5.2%. We also had inflation data released on Wednesday, which showed inflation had risen, as expected to 2.6% (year-on-year). The data was released before the Bank of England’s (BoE) meeting and had effectively extinguished any last hope of a pre-Christmas cut.
It was Thursday afternoon when the BoE concluded their final meeting of the year. At the beginning of the year, markets expected four base rate cuts from the 16-year high rates of 5.25% but we have ended the year with just two cuts, leaving rates at 4.75%. Policymakers became more divided as three of the nine Monetary policy committee members – Deputy Governor Dave Ramsden, Swati Dhingra and Alan Taylor – voted for a 25bps (0.25%) rate cut. The BoE has been more cautious than US Fed and European Central Bank, and that cautious approach will not change heading into the new year. Governor Andrew Bailiey stated that the central bank will stick to a “gradual approach” following a recent pick-up in inflation and weakened economic growth. Markets responded negatively, with the FTSE 100 heading for its worst week of the year, down -3% and longer dated UK government bonds yields reaching levels not seen since 1998.
All year we have covered the political crisis that the French have been through, and President Macron has now appointed his fourth premier of the year. Mr François Bayrou, the leader of centralist party MoDem, compared the difficulty of his new role to “climbing the Himalayas”. The imminent task he faces include addressing the huge public debt problem and pushing a budget through that pleases all three divisions in parliament.
Until recently mergers and acquisitions in Japan have been muted, however, we have seen a big rise recently, in part driven by the government’s move to improve shareholder returns and force management teams to be more efficient with their balance sheets. The big news this week out of Japan was a potential merger between Nissan and Honda. Together, they would create the third-largest auto group, valued at $54billion behind Toyota and Volkswagen. The firms agreed on a collaboration in electric vehicle development earlier this year, but both have faced struggles. Nissan shares have risen almost 25% for the week while shares of Honda declined 3%.
December has so far been a tough month, with equities and bonds weakening. Volatility and pull backs are normal in markets, especially after a strong period, and we believe provide opportunities to add to favoured areas.
This is the last weekly round-up of 2024. We would like to wish everyone season’s greetings and a happy new year. We very much look forward to working with you through 2025.
Nathan Amaning, Investment Analyst
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