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In the US, a holiday shortened week saw choppy trading, with the major stock indices logging their second consecutive week of losses. Stocks had received a boost on Monday from reports that the Trump administration was considering a less aggressive tariff stance than expected. In addition, semiconductors rallied as Microsoft revealed that it plans to invest $80bn to develop artificial intelligence enabled data centres in fiscal 2025, and stocks were also supported by Foxconn’s record quarterly revenue report. However, as the week progressed the mood grew more cautious, with increasing concerns that the Federal Reserve (Fed) will adopt a slower pace of rate cuts.

While the Institute for Supply Management’s gauge of service sector activity rose to 54.1 in December from 52.1 previously, the prices paid component rose to its highest level in nearly two years. The possibility of sticky inflation prompted traders to reassess their expectations for when the Fed will next cut rates, and Friday’s non-farm payrolls report only added to the cautious view. The US economy added 256,000 jobs in December, much above the 160,000 expected. As a result, data indicated that for 2025, traders are now just expecting a single quarter-point rate cut from the Fed in June. As a result, stocks saw a sharp drop on Friday, cementing weekly losses. The S&P 500 fell 1.9% and the Nasdaq Composite declined 2.3%. Meanwhile the small-cap Russell 2000 slipped into correction territory on Friday, down over 10% from its November high. In the Treasury market, the yield on the 30-year note touched 5% on Friday, its highest level since November 2023, before retreating to end at 4.96%, while the 10-year yield closed up at 4.77%.

The bond market sell-off was also evident in Europe, particularly the UK. The gilt market faced additional pressure from a sharp rise in UK borrowing costs and its impact on public finances. The UK 30-year yield reached its highest level since 1998, and the 10-year gilt rose to 4.93%, its highest level since 2008. The pound extended losses owing to bond market turmoil, while the FTSE 100 was slightly higher, gaining 0.3% for the week. Other regional indices experienced stronger gains and the pan-European STOXX 600 was up 0.7%. While eurozone economic data was mixed, with inflation accelerating to 2.4% in December and the jobless rate held at a record low, the European Central Bank is expected to cut rates again in January.

In China, indices retreated as deflationary pressures remained in the economy. For the week the Shanghai Composite fell 1.3% and the Hang Seng dropped 3.5%. Factory gate prices remained in deflationary territory for the 27th consecutive month, while the consumer price index rose only 0.1% year-on-year in December. Japanese markets were also weaker, with the Nikkei 225 declining 1.8%. The yen was also weaker against the US dollar owing to uncertainty around when the Bank of Japan (BoJ) will next hike its interest rate. BoJ Governor Kazuo Ueda reiterated that rates could go up if the economy continues to improve, however there have previously been comments which have been more cautious owing to the possible impact of US policy.

Weekly macro highlights

US labour market strengthens in December

US non-farm payroll employment rose by 256,000 in December according to data published by the Bureau of Labor Statistics (BLS). The data was above market expectations for a 160,000 increase and the downwardly revised 212,000 recorded in November. The change in total non-farm payroll employment for October was revised up by 7,000 partially offsetting the 15,000 downward revision to November’s data and meaning that employment in October and November combined is 8,000 lower than previously reported. Driving the job gains in December were respective increases of 46,000, 43,000 and 33,000 in healthcare, retail trade, and government. The household survey data collected by the BLS showed a 478,000 increase in employed persons, above the 256,000 increase reported in the establishment survey. This reflected an expansion of the labour force by 243,000 persons and the number of unemployed persons declining by 235,000. As a result, the unemployment rate fell from 4.2% to 4.1% in December.

Eurozone inflation rises in December

Eurozone harmonised index of consumer prices (HICP) inflation rose from 2.2% year-on-year (YoY) in November to 2.4% YoY in December according to flash estimates published by Eurostat. The data was in line with market expectations and represented the third consecutive month that YoY inflation has risen in the eurozone. The increase in headline inflation largely reflected an increase in services inflation, which rose from 3.9% YoY in November to 4.0% YoY in December. Energy prices rose 0.1% YoY, having fallen 2.0% YoY in November, while food, alcohol and tobacco inflation was unchanged in December relative to November at 2.7% YoY. Excluding energy, food, alcohol and tobacco, core HICP inflation rose 2.7% YoY in December, unchanged from the YoY rate recorded in both October and November. This reflected an easing of non-energy industrial goods inflation from 0.6% YoY to 0.5% YoY, offsetting the rise in services inflation.

Swiss inflation declines in December

Swiss consumer price index (CPI) inflation fell 0.1% month-on-month (MoM) in December according to data published by the Federal Statistical Office. December’s data was in line with market expectations as well as the 0.1% MoM decline in the CPI recorded in November. The drop in inflation was a result of several factors including 0.8%, 0.8% and 0.5% respective MoM declines in average prices for food and non-alcoholic beverages, household goods and services, and recreation and culture. Fresh and seasonal products, and energy and fuel inflation were -0.9% and 0.3% MoM respectively. Core inflation, which excludes these factors, was unchanged in MoM terms in December. In year-on-year terms, headline and core inflation rose 0.6% and 0.9% respectively. The data mean that headline inflation averaged 1.1% in 2024, in line with the Swiss National Bank’s (SNB) forecast presented at its Governing Board’s December meeting. The SNB expects inflation to average 0.3% in 2025.