Market Commentary 29th January 2025 – from Charlie Hancock

Data from the Office for National Statistics (ONS) showed that UK government borrowing rose by more than expected in December, with the deficit being £17.8bn for the month. In response to the data, the UK’s chancellor, Rachel Reeves, re-iterated her pledge to go “further and faster” to deliver economic growth. Reeves suggested the government will push for greater infrastructure investment, adding that she will support expansion plans at both Heathrow and Gatwick airports.

Data on wage growth showed that average pay (excluding bonuses) rose by 6% in the three months to November 2024. The unemployment rate during the same period rose to 4.4%, with the number of employees on UK payrolls experiencing the sharpest decline since November 2020. The data indicated that the labour market continued to weaken in late 2024, despite relatively strong wage increases.

Initial readings for Purchasing Mangers’ Indices (PMIs) in Europe pointed to improving economic momentum during January. The composite PMI for the Eurozone, covering both the services and manufacturing sectors, moved into expansionary territory for the month. Although manufacturing continued to see a decline in activity, the level of indicated contraction was much shallower than it was during the last quarter in 2024.

Senior officials at the European Central Bank (ECB) continued to indicate that interest rates will see gradual cuts during 2025. The head of France’s central bank, Francois Villeroy, stated during the World Economic Forum gathering that rates could fall quickly because the ECB is confident about inflation slowing to its 2% target.

The President moved quickly to implement a series of executive orders during the week. Trump ordered a ban on working from home for all Federal government employees, a freeze on any new Federal hiring (excluding the military) and a new ‘Department of Government Efficiency’ which is expected to be led by Tesla’s CEO, Elon Musk.

Trump also announced increased support for US developed Artificial Intelligence (AI), with the President stating he wants to remove barriers to innovation and make the US “the global leader in AI”.

Economic data in China continued to point to recovering momentum during the final months of 2024. The youth unemployment rate declined to 15.7% in December after hitting 18.8% in August. Investors paid close attention to US-China relations following President Trump’s inauguration, with Trump stating that his administration is considering increased Tariffs on Chinese imports. In response, China’s foreign ministry stated that it sought to promote stable and sustainable ties with the US.

The Bank of Japan (BoJ) hiked interest rates by 0.25% following their policy meeting last week, with the central bank’s main policy rate of around 0.50% now at the highest level seen since 2008. The BoJ revised their inflation forecasts for 2025 higher, with the central bank expecting inflation will exceed their 2% target. Data on consumer price increases in Tokyo showed that year-on-year inflation was 3.0% in December, accelerating from the 2.7% recorded for November.

UK government bond yields were relatively stable despite data showing that government borrowing in December was higher than expected.

Data pointing to improving economic momentum in Germany and the broader Eurozone appeared to contribute to Eurozone government bond yields moving higher.

President Trump told attendees at the World Economic Forum event that he will “demand that interest rates drop immediately” and added that “they should be dropping all over the world”. Trump argued that he understands monetary policy better than central bank policymakers.

GBP / EUR – Current 1.1894 Previous 1.1849

The Pound gained 2.59% against the US Dollar last week, with the Greenback weakening against most major currencies. Against the Euro, the Pound gained 0.38%.