Markets in a Minute – December 2024:

Home | Markets in a Minute – December 2024:

Navigating Changing Economic Winds

Unlike last year’s festive period, markets did not enjoy the same December ‘Santa rally’. Instead, risk asset prices retreated after a sharp change in commentary from key central banks on 2025 interest rate decisions. The main takeaway from both the US and UK was the mention of “inflation persistence”, ensuring neither central bank could commit to previously-expected levels of interest rate cuts. An additional consideration was the inauguration of US President-elect Donald Trump in January 2025, whose proposed policies compounded inflationary concerns. Consequently, these factors led to a broad-based decline in valuations as some investors sought to cash in on strong gains this year. China’s economic recovery remained uneven, as speculation over a looming trade war with the US mounted, but offered some respite for multi-asset investors as hopes of further economic stimulus from the Chinese government grew.

Federal Reserve checks investor expectations of 2025 interest rate cuts

The Federate Reserve (Fed) voted to lower interest rates by 0.25% at its 17^th December meeting. The move brought the total cut in rates to 1.0% over 2024. The US equity market experienced profit-taking toward the end of December following Fed comments after the announcement.
Fed Chair Jerome Powell noted its forecasts for core inflation in 2025 had risen from 2.2% in September to 2.5%, and suggested the central back is “going to be cautious about further cuts.” Most Fed officials now expect up to two rate cuts in 2025, down from four in September.
The core Personal Consumption Expenditures (PCE) index – the Fed’s preferred inflation measure – increased 2.8% year-over-year in November, matching October’s reading and reinforcing the Fed’s outlook. The reading was lower than the 2.9% that was expected. Headline PCE inflation increased to 2.4%, below estimates of 2.5%, but higher than October’s reading of 2.3%.

Bank of England held its meeting the following day, readjusting expectations for UK rates

In a response similar to the Fed, the Bank of England (BoE) held interest rates at 4.75%, a decision that sparked a sell-off in UK equity markets, with investors fearing the central bank may not cut rates as fast as expected in 2025. Three of the nine members of the Monetary Policy Committee (MPC) voted for a 0.25% reduction given the weak labour market and subdued economic activity.
Most MPC members voted to keep rates on hold due to recent increases in wages and prices that “added to the risk of inflation persistence.” Governor Andrew Bailey said “a gradual approach to future interest rate cuts remains right.” He added the BoE “can’t commit to when or by how much we will cut rates in the coming year.”
November’s UK Consumer Prices Index (CPI) inflation reading evidenced this, with prices rising as expected from 2.3% in October to 2.6% in November, partly due to higher fuel and clothing costs.
The Office for National Statistics revised its estimate of third quarter economic growth – as measured by gross domestic product (GDP) – down from the previously expected 0.1% to zero. Third quarter real GDP figures (adjusted for inflation) declined 0.2%, and were 0.2% lower compared with July-September one year ago. Data suggested restaurants, legal services firms, and advertising led the decline.

Political risk dominated Eurozone markets, raising questions on the outlook for the bloc

In Germany, Chancellor Olaf Scholz lost a vote of confidence in his coalition government, paving the way for an early federal election on 23^rd February. Concerns over a weak coalition created uncertainty about the ability to successfully pass future policies, and with further borrowing to invest being halted by “debt brake,” future growth remains uncertain.
French lawmakers passed a no-confidence vote against Prime Minister Michel Barnier in December, which pushed the eurozone’s second-largest economy deeper into its current economic crisis. The French economy has been fighting economic challenges for some time, including rising public debt, slow economic growth, and the need for major pension and energy reform.
The European Central Bank (ECB) lowered its key deposit rate by 0.25% to 3.0%, which marked the fourth reduction this year. The ECB also left the door open to ease monetary policy in future meetings, referencing rates being “sufficiently restrictive for as long as necessary” in its statement.

In summary

Despite a material decline across global markets in December, there is no disputing the strong performance of global equities in 2024, spearheaded by technology stocks and the continued Artificial Intelligence (AI) spending frenzy. Some end-of-year profit-taking in developed markets was therefore to be expected. Japan was a regional outperformer, with strong returns both in December and over the year. The country has taken positive steps to improve its corporate culture, with significant corporate restructuring, an attractive merger & acquisition environment, improving economic data, and could likely further benefit from fiscal stimulus. A similar case can be made for China, with investors anticipating additional economic stimulus in 2025, while hoping that US President-elect Trump’s tariff threats are all talk and no action.

Global bonds were more volatile than average in the fourth quarter, largely driven by central bank policy decisions and rising geopolitical tensions. Similar to equity markets, major government bond markets sold off after US and UK central banks indicated fewer interest rate cuts in 2025 due to persistent inflation concerns. The 10-year US Treasury yield spiked to a high of 4.57% at the end of the year, indicating uncertainty over the Fed’s response should Trump’s policies prove inflationary, adding to already persistent inflation. In a similar vein, the 10-year Gilt yield spiked after the Autumn Budget, where concerns over projected borrowing became apparent.

As one would expect given the sharp readjustment of interest rate expectations, property as an asset class declined in value in December. Property remains highly sensitive to central bank actions as the underlying companies rely on financing for future projects. With strong operational performance, growing rents and healthy balance sheets, specialist property assets have the potential to deliver long-term capital appreciation plus a growing income, despite the recent volatility. With the macroeconomic headwinds facing the property market over the past three years beginning to abate, current valuations continue to offer potentially a very attractive entry point to this asset class which we will be keeping an eye on and discussing with our investment partners.