Market Commentary 13th January 2025 – from Charlie Hancock

Rising government bond yields reportedly prompted some concerns amongst senior officials in the Labour government. The Treasury attempted to calm markets by confirming they are committed to meeting current fiscal rules. The Times stated that Chancellor Rachel Reeves called on the cabinet to find ideas to boost economic growth.

A survey conducted by the Bank of England (BoE) showed that 54% of firms expected to raise prices following the employer’s National Insurance increase announced in the Autumn 2024 budget. 61% of firms surveyed expected profit margins to decline.

Eurozone economic data was mixed. Data for consumer price inflation showed that price rises accelerated to 2.4% year-on-year during December, up from the 2.2% recorded in November. Germany saw a bigger than expected rise in inflation, with headline prices rising by 2.9% year-on-year in December. Meanwhile, retail sales data indicated that consumer spending was flat in November after posting a decline in October.

A senior European Central Bank (ECB) official, Francois Villeroy, stated during a speech that the central bank expects a pullback in inflation over the coming quarters. Regarding interest rates, Villeroy said that “common sense” would have the ECB heading towards the “neutral rate” by summer.

Headlines regarding policy under President-elect Donald Trump prompted some nervousness amongst investors. On Monday, reports stated that Trump’s stance on trade tariffs was likely to be softer than previously expected, however, Trump pushed back against these reports and tensions with neighbouring Canada escalated, after Trump threatened to use “economic force” to absorb Canada into the United States.

Hotter than expected labour market data prompted rising expectations for the Federal Reserve to cut interest rates at a slower pace than previously anticipated. Friday’s payroll report showed that the US economy added 256,000 jobs during December, significantly higher than the median economist estimate of 155,000.

Inflation data in China indicated that the economy continued to face deflationary pressures in December. Headline consumer price rises slowed from 0.2% year-on-year in November to 0.1% in December. The producer price index (PPI), which measures output costs from producers of goods and services, fell by 2.3% year-on-year. China’s central bank re-affirmed their commitment to stimulative monetary policy in 2025.

Currency weakness prompted headlines in Japan, with the Yen declining against the US Dollar. Japan’s Finance Minister stated that authorities would take action against excessive moves in currency markets. Meanwhile, the Bank of Japan (BoJ)’s governor, Kazuo Ueda, indicated that interest rates will rise if economic data continues to improve. The 10-year Japanese government bond yield reached the highest level since 2011 during the week.

Treasury yields appeared to be driven higher by hotter than expected labour market data in the US, together with minutes from the Federal Reserve’s December policy meeting, which showed that some officials were in favour of keeping rates on hold in January. Comments from Fed governor, Michelle Bowman, may have also fuelled the rise in yields, with Bowman stating that inflation has “held uncomfortably above” the central bank’s 2% target.

GBP / EUR – Current 1.1916 Previous 1.2054

The Pound declined last week, with currency traders turning bearish as investors became nervous about the UK’s public finances. Against the US Dollar, the Pound fell by 1.74%. Against the Eurozone currency, the Pound lost 1.14%.