US stocks advanced in a holiday-shortened trading week, although gains were mainly concentrated in growth sectors such as tech. Semiconductors rallied, in particular Nvidia and Advanced Micro Devices which touched record highs, following an upbeat earnings report from Taiwan Semiconductor Manufacturing Co, boosting optimism around artificial intelligence. For the week the S&P 500 ended 1.2% higher and managed to set a fresh record high, last set in January 2022. The Dow Jones also touched a record and added 0.7% while the Nasdaq Composite rose 2.3%, although remains shy of its all-time peak.
Equity gains came even as investor enthusiasm over interest rate cuts faded, as recent comments from policymakers have indicated that the Federal Reserve may not move as fast as markets expected. According to CME Group’s FedWatch tool, traders are now pricing in a 56% chance of a quarter point rate cut in March. Treasury yields drifted higher for the week in response, with the yield on the 10-year note ending back up above 4%.
The prospect of rate cuts not coming as soon as expected weighed on European markets. European Central Bank president, Christine Lagarde signalled that rate cuts would likely begin in the summer. For the week the pan-European STOXX 600 ended 1.6% lower, with regional indices facing declines. Germany’s DAX was down 0.9%, with a preliminary reading of GDP indicating that the economy contracting 0.3% in the fourth quarter, although an upward revision to the third quarter figure meant that the economy avoided a technical recession. The UK FTSE 100 dropped over 2%, with the inflation rate unexpectedly picking back up in December, while retail sales saw their steepest monthly drop since January 2021.
In Japan, the Nikkei 225 managed to hit a fresh 34-year high and was up 1.1% on the week, supported by a weak yen. The currency moved lower against the US dollar as odds for the Bank of Japan to move away from its negative interest rate policy diminished amid easing inflation. Chinese markets were once again lower. The Shanghai Composite lost 1.7%, down three consecutive weeks, while the Hang Seng sank over 5%. China’s economy expanded 5.2% for the fourth quarter and also for the full year, meeting the government’s growth target, however, there remains areas of weakness in the economy.
Weekly macro highlights
UK inflation rises in December
UK headline CPI inflation rose 4.0% year-on-year (YoY) in December according to data published by the Office for National Statistics (ONS). December’s inflation reading was above the 3.9% YoY registered in November and market expectations for a 3.8% increase. The pickup in price pressures was largely attributed to increases in alcohol and tobacco and transport prices. These two divisions saw price changes of 12.9% and -1.1% YoY respectively, above the 10.2% and -1.5% reported in November. Partially offsetting this was a slower rate of food and non-alcoholic beverages inflation, at 8.0% YoY in December compared to 9.2% in November. Core CPI inflation, which excludes food and energy prices, rose 5.1% YoY in December. The data was unchanged from November’s reading but above market expectations for a decline to 4.9% YoY. Recreation and culture prices made the largest positive contribution to core inflation in December, rising 5.7% YoY compared to a 5.3% increase in November.
China’s GDP expands in Q4
China’s GDP expanded 1.0% quarter-on-quarter (QoQ) in Q4 according to data published by the National Bureau of Statistics (NBS). The data was in line with market expectations but below the 1.5% QoQ growth registered in Q3. Q4’s data contributed to a 5.2% year-on-year (YoY) GDP expansion. In turn, this contributed to China’s economy growing by 5.2% in the whole of 2023, above the government’s target of “around 5%”. 82.5% of this growth was attributed to final consumption expenditure, with 28.9% coming from gross capital formation and net exports of goods and services making a -11.4% contribution. The NBS also published monthly activity data for China last week. Notably, retail sales rose 7.4% YoY in December, below the 10.1% registered in November and market expectations for an 8.0% increase. Youth unemployment numbers were also published for the first time since June 2023, with the rate falling from a record high of 21.3% to 14.9%.
Japanese inflation falls in December
Japanese headline CPI inflation rose 2.6% year-on-year (YoY) in December, according to data published by the Statistics Bureau of Japan. December’s inflation was below the 2.8% YoY registered in November, with the decline attributed to a faster drop in energy prices. Average energy prices fell 11.6% YoY in December compared to 10.1% in November, with a government subsidy package for households partially responsible for the drop. Core CPI inflation, which excludes fresh food but includes energy, fell from 2.5% YoY in November to 2.3% in December. The decline leaves core inflation just 0.3 percentage points above the Bank of Japan’s 2% objective ahead of its meeting on 23 January. Markets expect the central bank to leave interest rates unchanged at that meeting, with the BoJ having previously noted it is watching for a greater contribution of services inflation to the overall headline index. In December, services inflation was unchanged at 2.3% YoY.
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