Market overview
2025 may have just weeks left to go but there’s still time, it seems, for one last bout of interest rate fever this year. The Federal Reserve (Fed) is due to meet this week with a quarter-point rate cut the overwhelming expectation. Futures traders are pricing in around a 90% chance that the Fed Funds Rate will be cut to 3.50%-3.75%, while 85% of 40 economists surveyed by the Chicago Booth Clark Center are expecting the same move.
Stock markets are also believers, with global benchmarks last week modestly building on strong end of November gains, supported by a soft reading from the Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) and more weak labour market data. These only strengthen the case for a cut. Over to the Fed then, surely, Jerome Powell and co will not want to be the Grinch that ruins Christmas?
Fevers, like the flu, are catchy. Interest rate fever is no different. Last week saw global bond markets catch a sniffle after Kazuo Ueda, governor of the Bank of Japan (BoJ), hinted that interest rates could rise this month - the market-based probability of a rate hike at the BoJ’s next meeting on 19 December increased to 75%, compared to 60% prior to the speech.
The comments propelled two-year Japanese government bond yields to a 17-year high, while yields on 10-year paper rose 13 basis points (0.13%) to 1.94% over the course of the week – last time it reached that level was back in 2007. The yen also strengthened against the US dollar, rising to 155.3 compared to JPY156.2 the previous week.
International bond markets were impacted too – 10-year German Bunds and US Treasuries both saw their respective yields edge higher on the day of Ueda’s speech and the week as a whole. The worry here is that domestic Japanese investors could repatriate capital held in overseas assets back home – Japan is the largest holder of US Treasuries. Central banks are not the strong buyers of bonds they once were and with no let-up in debt issuance in the US and elsewhere, there are concerns that demand could struggle to match supply were Japanese investors to scale back significantly their US government debt purchases.
It’s not just the Fed and BoJ due to meet in December. The Bank of England is meeting on 18 December, with a quarter-point cut in the Bank Rate to 3.75% expected. Meanwhile the European Central Bank (18 December) and the Swiss National Bank (11 December) are both likely to hold their respective rates at current levels. As is the Australian central bank when it meets on 8/9 December and the Bank of Canada on 10 December. There is a case to be made that, overall, the global interest-rate cycle could be set for a pivot from cutting to raising mode in 2026. For now, all eyes on the US this week and Japan the next to see if the current bout of interest rate fever is going to be starved and then fizzle out, or is it set to be Fed some more going into the festive break?
Weekly economic announcements:
Last week, the MSCI All Country World Index (MSCI ACWI) added 0.6%, bringing the year-to-date (YTD) figure up to +22.3%.
United States:
US stocks lagged the global benchmark but still managed to eke out a 0.4% weekly rise (+18.2% YTD) – all the more impressive given the previous week’s strong gains. Small caps were once again the standout with a 0.9% rise compared to growth stocks’ +0.5% and value’s +0.3%. That brings the YTD numbers to +14.5% for the small caps, +15.4% for value and +19.8% for growth.
It was a different story in the US Treasury market where prices declined as yields rose across most maturities. The 10-year Treasury yield moved 12 basis points higher to finish the week at 4.14% (YTD down 44 basis points); while 2-year Treasury yields tacked on seven basis points to 3.56% (YTD down 68 basis points).
United Kingdom:
UK stocks gave back some of the post-Budget gains made the previous week – markets’ focus perhaps shifting from relief that the chancellor kept to her fiscal rules to concerns over the lack of growth initiatives. UK large caps edged 0.5% lower (+22.3% YTD), while mid caps fared marginally better, falling 0.4% (+10.7% YTD). Sterling meanwhile strengthened against the US dollar, finishing the week at US$1.33 compared to US$1.32 previously. Yields on gilts followed global benchmarks higher, with the 10-year UK gilt yield rising an albeit modest four basis points to 4.48% (YTD down nine basis points).
Europe ex UK:
European equities were the week’s outperformers with the MSCI Europe ex-UK Index adding 0.6% (+17.1% YTD). Positive data supported the gains with an upwards revision to euro area Q3 gross domestic product (GDP) growth to 0.3% from 0.2%. Also German factory orders rose 1.5% in October, a second consecutive monthly increase, and far higher than 0.5% consensus forecasts. Aircraft, ship, train, and military vehicles orders were key drivers, positive signs that Germany’s planned step-up in government spending is starting to find its way into cold hard numbers. In line with this, at the national level, German stocks were among the stand outs with a 0.8% weekly gain (+20.7% YTD), a rise matched by the Swiss market (+15.1% YTD). France was a laggard with a flat performance (+13.7% YTD), as was Italy with a 0.2% rise (+33.5% YTD).
As for government bonds, the yield on the 10-year German Bund rose 11 basis points to 2.80% (up 43 basis points YTD). Finally, the euro was unchanged against the US dollar at US$1.16.
