Market Update: Positive End to the Year

December Market Update

Stock and bond markets are lifted by optimism as interest rate hikes appear to be on hold.

In the U.S., stocks saw gains following the announcement that the Federal Reserve would maintain unchanged interest rates for the third consecutive meeting, holding at 5.25% to 5.50%, the highest in 22 years. Bonds rallied as the central bank signaled a potential rate cut in 2024 if inflation continues to decrease.

While U.S. inflation dropped to 3.1% in November, the cost of living crisis in America is gradually easing. However, core inflation, excluding food and energy, remains stubbornly high at 4%. Despite elevated inflation and borrowing costs, the U.S. economy remains robust, with a 5.2% GDP increase in the third quarter.

November saw an addition of 199,000 jobs in the U.S., and unemployment declined, fostering hopes for a soft economic landing. The robust labor market supported consumer spending, although some retailers reported weaker sales.

Bank of England Maintains Rates

Stocks rose as the Bank of England decided to keep interest rates at a 15-year high for the third consecutive month at 5.25% in December. Inflation in the UK continued its decline, reaching 3.9% in November from 4.6% the previous month.

UK wage growth fell from 7.8% to 7.3% in the three months to October, and a decrease of 45,000 vacancies indicated a cooling labor market. High interest rates and inflation continue to weigh on consumers and businesses, leading to stagnant growth in the three months to October. The UK economy contracted by 0.3% in October, with contractions in services, manufacturing, and construction.

House prices in the UK rose for the second consecutive month in November, up 0.5% according to Halifax, signalling a potential market improvement. However, prices remain lower than a year ago, and pressures are expected to persist. There are indications that mortgage rates are beginning to ease after the summer highs.

Eurozone Sees Slower Inflation

European stocks experienced an upturn amid optimism about potential interest rate cuts by central banks. Eurozone inflation held steady at 2.4% in November, reflecting concerns about the region's economic strength following a significant rise in interest rates.

The headline inflation rate in the Eurozone has cooled from its peak of 10.6% in October 2022, with Germany and France reporting inflation rates of 2.3% and 3.4%, respectively. In light of the slowing inflation, the European Central Bank (ECB) kept interest rates at 4% for the second consecutive time.

China Grapples with Deflation

China's deflation situation intensified as consumer prices dropped by 0.5% in November, marking the sharpest decline in three years. This adds to China's economic challenges, including a property crisis, weak trade data, and a slow recovery from three years of Covid lockdowns. Consumer demand struggled to rebound in 2023, and the 5% annual GDP growth target is the lowest in decades.

Figure 1: Inflation is fading around the world

Price Indices