Market Commentary 21st January 2025 – from Charlie Hancock

UK inflation data showed that headline consumer prices rose by 2.5% year-on-year in December, slowing from the 2.6% recorded for November. Core inflation, which excludes food and energy costs, slowed to 3.2% from 3.5% in November. The data prompted an increase in calls for the Bank of England (BoE) to cut interest rates again at their February policy meeting.

The International Monetary Fund (IMF) increased their forecast for UK economic growth in 2025 to 1.6%, but warned that US President Donald Trump could harm growth if his administration proceeds to implement trade tariffs. Meanwhile, the Office for National Statistics (ONS) stated that the UK economy expanded by 0.1% in November, which was below the median economist estimate of 0.2%.

Germany’s Gross Domestic Product (GDP) data for the 4^th quarter showed that the economy shrank by 0.2% in 2024, marking the second consecutive year of economic decline. There were signs of a mild recovery towards the end of last year, with German industrial production rising by 1.5% in November, which was significantly better than the median economist estimate of 0.5%.

Minutes from the European Central Bank (ECB)’s December policy meeting showed that policymakers were in favour of continuing to reduce interest rates “cautiously and gradually”. Senior figures at the central bank said the economic outlook was uncertain, with trade frictions and rising geopolitical tensions having an impact.

Investors paid close attention to US inflation data released during the week. Headline consumer price increases accelerated to 2.9% in December, up from the 2.7% recorded for November. The increase was in line with economist estimates. Core inflation, which excludes food and energy prices, saw the smallest month-on-month increase since July.

Retail sales data came in weaker than expected, with an increase of 0.4% in December versus economist expectations for a 0.6% rise. Meanwhile, the labour market appeared stable, with continuing unemployment claims declining despite an increase in the number of new weekly jobless claims.

Official data showed that China’s economy expanded by 5% in 2024, meeting the target set by the government. Economic data for December pointed to signs of a recovery from the sluggish momentum experienced for much of the year. Industrial production rose by 6.2% year-on-year, which was stronger than expected. Retail sales grew by 3.7% year-on-year last month, while the property market remained in the doldrums, with investment declining by 10.6% year-on-year.

The Bank of Japan’s (BoJ)’s governor, Kazuo Ueda, re-iterated their intention to continue tightening monetary policy over the coming months. Ueda said that if economic and price conditions keep improving, interest rates will increase, however, it is widely expected that uncertainty around US trade policy will discourage the BoJ from hiking rates at their January policy meeting.

Softening UK inflation data appeared to contribute to government bond yields declining, with investors debating whether the BoE will proceed with a rate cut in February.

Eurozone government bond yields declined during the week as comments from senior ECB officials indicated that gradual interest rate cuts are likely to be implemented in 2025.

US inflation data appeared to ease investor concerns about persistent inflationary pressures. While headline consumer prices rose at a faster pace during December in comparison to the previous month, the core inflation print was relatively soft. It is widely expected that the Federal Reserve will keep interest rates on hold at their January policy meeting, however, further cuts are expected during 2025.

GBP / EUR – Current 1.1849 Previous 1.1916

The Pound declined by 0.31% against the US Dollar last week, with negative sentiment on the Pound amongst currency traders persisting. Against the Euro, the Pound declined by 0.56%.