Shaw and Partners

After two weeks of declines, US stocks sprang back into action and saw their best week since November’s post-election rally. Stocks found support from consumer price index (CPI) data released on Wednesday, with core inflation rising 0.2% in December, its smallest rise since July. For the week the S&P 500 rose 2.9%, the Dow Jones Industrial Average climbed 3.7% and the Nasdaq Composite added 2.5%.

The financials sector was one of the best performers, as big banks delivered their earnings reports. JP Morgan, Citigroup and Goldman Sachs saw stock gains after posting solid fourth quarter profits. Another sector also seeing strong gains was energy, with Brent crude rising 2.8% for the week due to US sanctions on Russia causing supply tightness. US Treasury yields were lower for the week, pressured by the inflation data, with the 10-year yield ending down at 4.61%.

European markets also found support in the US inflation data, as well as from declining bond yields, a welcome relief after having surged earlier in the month. For the week the pan-European STOXX 600 rose 2.4%, its fourth consecutive weekly rise, with regional indices also gaining. The UK FTSE 100 added 3.1% and closed at an all-time high. The latest UK CPI figure unexpectedly slowed to 2.5% in December, boosting the case for the Bank of England to cut interest rates again next month.

The mood was also lifted by better-than-expected GDP from China, with the economy growing 5.4% in the fourth quarter. For the year, GDP rose 5%, matching Beijing’s growth target. For the week the Shanghai Composite rose 2.3% and the Hang Seng index added 2.7%. Bucking the wider upbeat trend, Japanese equities declined, with the Nikkei 225 losing 1.9%. The yen strengthened against the US dollar, weighing on exporters. The moves came as there were growing expectations that the Bank of Japan will raise interest rates at its policy meeting this week following hawkish comments from governor Ueda.

Weekly macro highlights

US CPI inflation rises in December

US CPI inflation rose 2.9% year-on-year (YoY) in December according to data published by the Bureau of Labor Statistics. The data was in line with market expectations and above the 2.7% YoY increase registered in November. In month-on-month (MoM) terms, inflation rose 0.4% in December. The data was driven by a 2.6% MoM increase in energy inflation, with the gasoline, natural gas, and electricity indices rising 4.4%, 2.4% and 0.3% respectively over the month. Food prices rose 0.3% MoM in December, reflecting identical moves in the food at home and food away from home indices. Excluding food and energy, core CPI inflation rose 0.2% MoM in December, contributing to a 3.2% YoY increase. This was below the 3.3% YoY rise recorded in each of the prior three months. The data represents the final CPI inflation release in the US ahead of the Federal Reserve’s next meeting on 29 January, with markets expecting no change in rates.

UK CPI inflation declines in December

UK CPI inflation rose 2.5% year-on-year (YoY) in December according to data published by the Office for National Statistics. The data was below market expectations for headline inflation to remain unchanged from the 2.6% YoY registered in November. The easing of inflation was driven by a decline in restaurants and hotels inflation, which dropped from 4.0% YoY in November to 3.4% YoY in December. Alcohol and tobacco inflation eased from 6.9% YoY to 5.3% YoY, also making a significant downward contribution to the monthly change in YoY inflation. Excluding food, energy, alcohol and tobacco, core CPI inflation rose 3.2% YoY in December, below the 3.5% YoY increase in November. Services inflation, which the Bank of England (BoE) has been monitoring closely, dropped from 5.0% YoY to 4.4% YoY, its lowest level since March 2022. The BoE next meets on 06 February and markets assign around an 80% probability to a 25 basis point rate cut.

China’s GDP expands in Q4

China’s GDP rose 5.4% year-on-year (YoY) in Q4 according to data published by the National Bureau of Statistics. The data was above market expectations for 5.0% YoY GDP growth and the 4.6% registered in Q3. Q4’s growth was driven by exports and manufacturing. Data published by China Customs showed exports rose an average of 10% YoY in Q4. Responses to the S&P Global Purchasing Managers’ Index survey indicated that the boom in new export orders reflected frontloading of orders ahead of tariffs that could potentially be imposed by the Trump administration following his inauguration on 20 January. Industrial output rose 5.4% YoY in Q4, partially reflecting the higher export demand. Overall, China’s economy grew 5% in 2024, in line with the growth target set by the government. The GDP growth target for 2025 will be set at the National People’s Congress on 05 March, which will also outline stimulus measures such as quotas for government bond issuance in 2025.