S&P Futures Plunge as U.S. Government Shutdown Looms, PCE Inflation Data in Focus

Stocks

Summary:

S&P 500 E-Mini futures fell 0.80% amid U.S. shutdown concerns and inflation data. Key economic reports showed strong GDP and lower jobless claims.

December S&P 500 E-Mini futures are trending down -0.80% this morning as risk sentiment took a hit on worries about a possible U.S. government shutdown, while investors awaited the Federal Reserve’s first-line inflation gauge for fresh clues on its policy outlook.

The United States faced renewed political uncertainty on Thursday evening after the Republican-led House rejected a temporary funding plan supported by President-elect Donald Trump. Dozens of Republican lawmakers opposed the deal to fund the government for three months and suspend the U.S. debt ceiling for two years, with less than 24 hours remaining before a U.S. government shutdown.

In yesterday’s trading session, Wall Street’s major indices ended mixed. Lamb Weston Holdings tumbled over -20% and was the top percentage loser on the S&P 500 after the company posted downbeat FQ2 results and cut its annual adjusted EPS guidance. Also, Micron Technology plunged more than -16% and was the top percentage loser on the Nasdaq 100 after the memory maker issued below-consensus FQ2 guidance.

In addition, Lennar slid over -5% after the homebuilder reported weaker-than-expected FQ4 results and offered a soft FQ1 new orders forecast. On the bullish side, Darden Restaurants surged more than +14% and was the top percentage gainer on the S&P 500 after posting upbeat FQ2 results and boosting its 2025 sales guidance.

The U.S. Commerce Department said Thursday that the Q3 GDP growth estimate was revised upward to 3.1% (q/q annualized) in its final print, stronger than expectations of no change at 2.8%. Also, U.S.

November existing home sales rose +4.8% m/m to an 8-month high of 4.15M, stronger than expectations of 4.09M. In addition, the Conference Board’s leading economic index for the U.S. unexpectedly rose +0.3% m/m in November, stronger than expectations of -0.1% m/m and the largest increase in 2-3/4 years.

At the same time, the U.S. Philadelphia Fed manufacturing index unexpectedly fell to a 20-month low of -16.4 in December, weaker than expectations of 2.9. Finally, the number of Americans filing for initial jobless claims in the past week fell by -22K to 220K, compared with the 229K consensus.

“This week’s data show the economy is set to end 2024 on a solid note, which is fortunate since we’ll have to contend with heightened policy uncertainty and possibly greater challenges in 2025. We think the Fed maintains an easing bias, but the bar for rate cuts just got higher,” Oren Klachkin, an economist at Nationwide, said in a note.

U.S. rate futures have priced in an 89.3% probability of no rate change and a 10.7% chance of a 25 basis point rate cut at the conclusion of the Fed’s January meeting.

Meanwhile, Wall Street is preparing for a quarterly event known as triple witching, during which derivatives contracts linked to equities, index options, and futures expire, prompting traders collectively to either roll over their current positions or initiate new ones.

About $6.5 trillion worth of options tied to individual stocks, indexes, and exchange-traded funds are set to expire today, according to an estimate from derivatives analytical firm Asym 500.

Today, all eyes are focused on the U.S. core personal consumption expenditures price index, the Fed’s preferred price gauge, which is set to be released in a couple of hours. Economists, on average, forecast that the core PCE price index will stand at +0.2% m/m and +2.9% y/y in November, compared to the previous figures of +0.3% m/m and +2.8% y/y.

U.S. Personal Spending and Personal Income data will also be closely monitored today. Economists anticipate November Personal Spending to be +0.5% m/m and Personal Income to be +0.4% m/m, compared to October’s figures of +0.4% m/m and +0.6% m/m, respectively.

The University of Michigan’s U.S. Consumer Sentiment Index will be released today as well. Economists estimate this figure to arrive at 74.1 in December, compared to 71.8 in November.

In addition, market participants will be looking toward a speech from San Francisco Fed President Mary Daly.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note is at 4.547%, down -0.50%.

The Euro Stoxx 50 futures are down -1.24% this morning as U.S. President-elect Donald Trump’s tariff threat to the European Union dampened sentiment in the region. Bank and mining stocks led the declines on Friday. Data from the Office for National Statistics released Friday showed that Britain’s monthly retail sales rebounded in November, albeit at a slower-than-anticipated rate.

Separately, the Federal Statistical Office reported that Germany’s annual producer prices rose in November for the first time since June 2023. Meanwhile, U.S. President-elect Donald Trump issued a new trade warning to the EU, suggesting on social media that he might impose additional tariffs on the bloc unless it increased its purchases of oil and gas from the United States.

Investors are now awaiting the Eurozone’s consumer confidence data for December due later in the day. In corporate news, Zealand Pharma A/S slid over -10% after the U.S. Food and Drug Administration declined to approve the Danish pharmaceutical company’s drug glepaglutide for treating bowel disease.

U.K.’s Retail Sales, U.K.’s Core Retail Sales, and Germany’s PPI data were released today.

U.K. November Retail Sales arrived at +0.2% m/m and +0.5% y/y, weaker than expectations of +0.5% m/m and +0.8% y/y.

U.K. November Core Retail Sales came in at +0.3% m/m and +0.1% y/y, compared to expectations of 0.0% m/m and +0.7% y/y.

The German November PPI has been reported at +0.5% m/m and +0.1% y/y, stronger than expectations of +0.3% m/m and -0.3% y/y.

Asian stock markets today settled in the red. China’s Shanghai Composite Index (SHCOMP) closed down -0.06%, and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.29%.

China’s Shanghai Composite Index ended marginally lower today as investors awaited Beijing’s next steps to bolster the economy. The benchmark index suffered a weekly loss. Telecom and consumer stocks lost ground on Friday. At the same time, semiconductor stocks outperformed as signs of fresh Sino-U.S. tensions in technology spurred bets on domestic chip manufacturers.

This followed a report by The Information stating that the U.S. Department of Commerce had recently requested Nvidia to look into how its products ended up in China over the past year. Meanwhile, China kept its benchmark lending rates steady at the monthly fixing on Friday, in line with expectations.

The one-year loan prime rate was maintained at 3.1%, and the five-year rate stayed at 3.6%, according to the People’s Bank of China. Despite this, investors continue to expect more policy support in 2025, including additional rate cuts, reduced reserve requirements for banks, and stronger fiscal measures. I

n other news, local media reported that banks in several Chinese cities unexpectedly raised mortgage rates, signaling that the industry’s net interest margin might be approaching its bottom. In corporate news, Tencent rose over +2% in Hong Kong after the tech giant announced plans to roll out a gifting feature on its WeChat platform.

Japan’s Nikkei 225 Stock Index closed lower today as investors digested stronger-than-expected inflation data from the country. Bank stocks led the declines on Friday as domestic bond yields dropped across the yield curve. The benchmark index posted its steepest weekly decline since early November.

Government data released Friday showed that Japan’s core inflation accelerated for the first time in three months in November, driven by increasing food and fuel prices, boosting expectations for a rate hike. Still, the Bank of Japan decided to keep its policy rate unchanged on Thursday, citing the need to monitor wage trends and overseas uncertainties as well as gather further evidence of domestic economic recovery.

Meanwhile, the yen strengthened against the dollar on Friday following remarks from Japan’s Finance Minister Katsunobu Kato, who expressed concern over recent currency fluctuations and warned of potential intervention if speculative trading is considered excessive. In other news, S&P Global Ratings noted in a release on Thursday that potentially higher U.S. tariffs on Japanese imports could weaken earnings prospects for the nation’s corporates.

In corporate news, Kadokawa plunged about -16% after Sony Group’s plan to increase its stake dashed market hopes for a potential buyout. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed down -3.01% to 23.18.

The Japanese November National Core CPI stood at +2.7% y/y, stronger than expectations of +2.6% y/y.

Pre-Market U.S. Stock Movers

FedEx climbed over +7% in pre-market trading after the delivery services giant reported better-than-expected FQ2 adjusted EPS and announced plans to spin off its freight division into a separate publicly traded company.

Nike slid more than -3% in pre-market trading as cautious FQ3 revenue guidance overshadowed stronger-than-expected FQ2 results.

U.S. Steel slumped over -4% in pre-market trading after cutting its Q4 adjusted EBITDA guidance.

Source: Barchart

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Warren Takunda

Economic

New data from the ONS shows the UK consumer remains cautious and retail businesses are under pressure, providing fresh evidence the economy has entered a downturn.

Retail sales recovered from -0.7% month-on-month in October to record growth of 0.2% m/m in November; however, the figure disappointed market expectations (0.5%).

The Pound to Euro (GBP/EUR) exchange rate fell 0.60% on Thursday and is slightly softer following the retail numbers at 1.2049 on Friday. The Pound to Dollar (GBP/USD) exchange rate this morning hit its lowest level since May at 1.2474.

On an annual basis, retail sales fell from 2.0% year-on-year in October to 0.5% in November, which is less than the consensus expectation of 0.8%.

Retail sales are a major driver of the UK's service sector-based economy and signal how demand and sentiment is evolving. Therefore, the undershoot in the numbers offers yet another disappointment and confirms the economy has lost significant momentum into year-end.

In fact, the Bank of England said on Thursday it had slashed its growth forecast for the final quarter of 2024 from 0.3% to 0%.

"The pound sold off on the back of the announcement," says Dean Turner, Economist at UBS AG. "While there may be further adjustment, it is hard to see that the pound will make much ground in the short term."

Sensing a slowdown, three members of the Bank's nine-strong Monetary Policy Committee voted to cut interest rates. This surprised the Bank and suggests that it thinks it will need to cut interest rates further in the coming months to support a struggling economy.

These members can now point to the soft retail sales data as evidence of weak demand, potentially limiting fears of another spike in inflation.

"The UK consumer appears to be limping towards the finish line in 2024 - retail sales volumes came in slightly below expectations in November, with a good performance from food the only real highlight," says Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club.

"The Autumn Budget leaves UK retailers between a rock and a hard place. The significant increase to national insurance contributions and the National Living Wage means they will have little option but to put up prices, and margins across the sector are likely to come under pressure," he adds.

Source: Poundsterlinglive

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Goldman Sachs

Economic

Germany’s economy, which has lagged behind its peers in recent years, faces a series of headwinds in 2025, including trade uncertainty with the US, still-high energy prices, and growing competition from China. Elections in February will provide an opportunity to tackle the country’s challenges.

Europe’s largest economy is forecast to expand 0.3% in 2025, which is slower than the estimate for the euro area of 0.8% and for the UK of 1.2%, according to Goldman Sachs Research. The country’s real (inflation adjusted) GDP is unchanged since the fourth quarter of 2019.

When Will the German Economy Bounce Back?_1

For all the challenges, there are also signs of German industry finding ways to adapt. “Even though industrial production is down significantly over the last few years, the amount of value added has actually been much more stable,” says Goldman Sachs Research Chief European Economist Jari Stehn. “German companies have been able to respond by moving out of relatively low-margin production in chemicals or paper, and so on, into higher value production. I think the way forward essentially is for German companies to continue to do that.”

We spoke with Stehn and analyst Friedrich Schaper about Goldman Sachs Research’s forecast for GDP growth in Germany, competition from China, and the prospect for some easing of high energy prices.

Why has Germany’s economy underperformed other advanced economies in recent years?

Jari Stehn: Since the end of 2019, the statistics are quite striking. GDP in Germany has been flat over that period while the rest of the euro area has grown by 5%, and the US has grown 11%.

There are a few obvious reasons for that. One is the energy crisis that hit Germany particularly hard since it was so reliant on Russian pipeline gas. Germany has a lot of energy-intensive production, and its economy is quite heavily focused on manufacturing activity. So it’s natural that the increase in energy prices had a bigger effect on Germany than on other countries.

Second, Germany is highly exposed to China. This has been a big asset in the past because China has grown a lot. But over the last few years growth in China has slowed, so Germany has sold fewer goods into China. Also, China has become more of a competitor over time, particularly over the last two to three years. China now produces goods that are more like the goods that Germany produces. So essentially, China has transitioned from a key export destination to a key competitor, and it has gained market share, particularly in sectors where Germany has seen big cost increases.

Third, Germany has a number of broader structural issues, such as the degree of regulation that business startups face and public underinvestment. Cumulatively over the last few years, they have put Germany in a less competitive position.

When you take all of that together, it explains a good chunk of the of the underperformance.

Your GDP growth forecast of 0.3% for 2025 is below the consensus. What explains the difference?

Jari Stehn: First, we think that many of the structural headwinds that we just talked about will continue. But then, on top of that, we also expect significant trade tensions from the second Trump administration. Germany is likely to be particularly exposed to those tensions because it's a very open economy. It's heavily focused on industrial activity. When you look back at the first Trump term, we saw a very sharp growth slowdown in 2018 and 2019. The day after the US election we downgraded our forecast for all of Europe, but particularly for Germany.

Are you expecting most of the economic impact to come from tariffs or the mere possibility of them?

Jari Stehn: The takeaway from the first Trump term was you didn't actually see many tariffs implemented on Europe, but you saw a lot of discussions around tariffs that created a lot of uncertainty, a lot of trade tension. In the end, those had big effects on investment, on confidence, and on growth in Germany.

We have set out two scenarios. One, which is our base case, is that you get a sharp increase in trade tensions, but ultimately the actual tariffs that you see are relatively limited and targeted on the auto sector. The auto sector is obviously big in Germany, so you still see a significant hit. Our estimate is a 0.6% hit to the level of GDP. The downside scenario involves an across-the-board tariff on all European imports into the US. In that scenario, we think the negative effects would be significantly bigger — about twice as large.

Either way, we think there is going to be a pronounced period of uncertainty, and that uncertainty will weigh on confidence and investment.

What are the market implications, particularly for Bunds, of the February election in Germany?

Friedrich Schaper: The market is focused on the potential for a looser fiscal stance in Europe and for Germany in particular, and the elections could be a catalyst for such loosening. However, we argue that even at the upper end of our range of expectations about higher fiscal spending, the increase in duration supply of German Bunds is relatively modest compared to the notable increase in safe asset supply that we are already observing. That’s mainly because of a structural shift in the fiscal stance in Europe and the European Central Bank, which is reducing its balance sheet. That has made an impact already, and it’s showing up in higher Bund yields and higher interest rates for euro assets.

So the additional impulse of higher spending after the elections is already well reflected in pricing, in our view. Coupled with the outlook for slowing economic growth, which we expect will lead to a sustained cycle of interest rate cuts from the ECB, Bunds remain our favorite long position among G-10 bonds.

Going back to the energy situation in Germany, are you expecting any relief on the cost front next year?

Jari Stehn: Energy prices have come down significantly from the peak days of the summer of 2022. So we've seen a lot of relief and there's probably some more relief in the pipeline in the sense that contracts in Germany are relatively long and don't reset very frequently. We do think there's some drag on the energy-intensive sectors that is still likely to lift.

We also think that ultimately a lot of liquid gas will flow into Europe and into Germany. Germany has built many liquid gas terminals, and from the end of 2025 onwards, a huge amount of liquid gas will be coming from the US and from Qatar. That should be helpful in normalizing prices.

The caveat is that, on a relative basis, energy costs are likely to stay high. They are still notably higher than before the energy crisis — about twice as high. And they are three to four times higher than in the US.

Do you see competition with China remaining a growth obstacle for the foreseeable future?

Jari Stehn: Yes, I think it will continue to be a headwind. China has moved up in the value chain in terms of the goods that it produces. It used to be more that China would produce lower-value manufactured goods that Germany would import and use as an input for creating high-value manufactured goods that they could sell and capture a big margin in the process. Cars are an obvious example. China is now producing a lot of cars itself that are in direct competition with German-made cars. I don't really see a good reason why that should change anytime soon.

I would also say, though, that Germany has managed to adapt. So even though industrial production is down significantly over the last few years, the amount of value added has actually been much more stable. In other words, German companies have been able to respond by moving out of relatively low-margin production in chemicals or paper, and so on, into higher-value production. I think the way forward essentially is for German companies to continue to do that.

You also write that Germany has by far the most fiscal space amongst major advanced economies. Is it likely to use some of that capacity for additional spending in the next year?

Jari Stehn: In terms of the debt levels, government debt accounts for 64% of Germany’s GDP, almost half of what you're seeing in the US. And the trajectory is very different because that figure is falling in Germany while it’s rising in the US. So there clearly is space.

That said, Germany is constrained by the constitutional debt brake, which allows only for a small bit of borrowing when you adjust the deficit for the cycle. This has led to very tight policy over the last few years, particularly now that you have significant costs related to defense, to Ukraine, and then also to all of these challenges that we talked about, which all need investment to be addressed.

The outgoing government was not able to find a compromise around changing the debt break rule. The issue is that you need a two-thirds majority to do that because it's a constitutional amendment. But we do think that there's a good chance under the new government that you could get agreement on a modification of the rule that would open up some fiscal space.

The economic boost would probably be relatively modest — about half a percent of GDP, or about 20 billion euros a year. We would not expect this amount of investment to immediately turn around the growth picture or affect our 0.3% GDP forecast for next year. It’s probably more of a 2026 or 2027 story.

What else do you expect in terms of new policies once the February elections take place?

Friedrich Schaper: Much of the focus has been on what a government led by the CDU (Christian Democratic Union), which is currently leading in the polls, might prioritize. First, we think a CDU-led government would focus on passing some reforms to improve the competitiveness of the economy. That could include rolling back some of the most recent legislation, including climate-related regulations, to lower taxes for businesses, and especially to focus on lowering energy prices for industry.

Second, we think there will be a push to increase labor market participation. On the one hand, there has been some talk about limiting immigration. But, on the other hand, we think a CDU-led government would focus on improving work incentives, for example, by toughening eligibility criteria for welfare recipients, reducing welfare spending overall, and potentially also raising the retirement age.

Third, we would expect the incoming government to continue to fulfil the 2% NATO target on military spending. We would expect strong support for close transatlantic relations.

Lastly, we would expect some further European integration given the very pro-European agenda of the CDU as a party. However, we would note that the CDU is very skeptical of any further integration that involves some joint liabilities, such as a common deposit insurance scheme or any improvements of the capital markets that would imply joint borrowing.

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Pepperstone

Economic

Central Bank

As expected, the Bank of England’s Monetary Policy Committee stood pat on policy at the final meeting of the year, maintaining Bank Rate at 4.75%, in line with the outcome that money markets had fully discounted in advance of the announcement.

December 2024 BoE Review: Steady As She Goes_1

The lack of policy shifts means that the ‘Old Lady’ has delivered just 50bp of easing in total this year, a considerably more gradual pace of removing policy restriction than that of the Bank’s G10 peers, and some way off the over 150bp of cuts that the GBP OIS curve had discounted at the beginning of the year.

In any case, December’s decision was not a unanimous one. Once again, external MPC member Dhingra dissented in favour of an immediate 25bp cut, cementing her place as the Committee’s resident ‘uber-dove’. Dhingra was, surprisingly, joined in dissent by Deputy Governor Ramsden, and external member Taylor, resulting in a tighter than expected 6-3 vote in favour of a 25bp cut.

Accompanying the decision, as always, was the MPC’s updated policy statement. Largely, this statement was a repeat of that issued after the November meeting. As such, the Committee reiterated that a “gradual” approach to removing policy restriction remains appropriate, and that policy must remain “restrictive for sufficiently long” in order to reduce the risks of inflationary pressures becoming embedded within the economy. Furthermore, the MPC repeated that a ‘data-dependent’ and ‘meeting-by-meeting’ approach will continue to be followed, with particular focus on the “risks of inflation persistence”.

In reaction, the GBP OIS curve repriced marginally in a more dovish direction, as a result of the tighter than expected vote split. As such, money markets now see around a 72% chance of a cut in February, up from around 55% at Wednesday’s close. Furthermore, 22bp of easing is now priced by the end of Q1, from 18bp yesterday, while two 25bp cuts in 2025 are now fully priced back into the curve.

December 2024 BoE Review: Steady As She Goes_2

These policy expectations, and the Bank’s continued reluctance to deliver a more rapid pace of normalisation, are reinforced by this week’s economic data.

While unemployment held steady at 4.3% in the three months to October, both regular pay, and earnings including bonuses, rose by 5.2% YoY over the same period, boosted by the summer’s above-inflation public sector pay awards, which will further boost earnings growth in the November figures. Setting that aside, broader pay pressures remain intense, with earnings growth running at a rate roughly double that which would be compatible with a sustainable return towards the 2% inflation aim.

December 2024 BoE Review: Steady As She Goes_3

Meanwhile, price pressures remain persistent. Headline CPI rose 2.6% YoY in November, 0.2pp above the Bank’s most recent forecast, while core prices rose 3.5% YoY, and services CPI rose by 5.0% YoY, having now been north of that level for the last two and a half years. Progress in eradicating these persistent underlying price pressures has been glacial of late, with some of this progress seemingly starting to be undone. In order to unlock another rate cut, policymakers will be seeking convincing evidence of faster disinflation during the winter months.

December 2024 BoE Review: Steady As She Goes_4

Looking ahead, providing said evidence does indeed present itself, my base case is for the MPC to deliver the next 25bp Bank Rate cut at the February meeting. Beyond this, policymakers are likely to deliver further such cuts on a quarterly basis, likely at meetings which coincide with the release of an updated Monetary Policy Report.

Risks to this base case, though, are tilted towards a more dovish outcome, amid increasing signs of overall economic momentum stalling, and with risks to the labour market tilted to the downside, amid the upcoming changes to National Insurance. Were a greater degree of labour market slack to dramatically reduce overall demand, thus leading to an easing in stubborn services inflation, this could lead to a faster pace of normalisation from the BoE, though firm hints in this direction are unlikely until the second quarter, at the earliest.

The MPC will likely be reluctant to pivot away from the current ‘slow and steady’ stance too soon, particularly as the UK economic backdrop becomes an increasingly stagflationary one, lending further support to the case for ‘gradual’ rate cuts for the time being.

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Warren Takunda

Economic

The U.S. economy grew faster than previously estimated in the third quarter, driven by robust consumer spending.

Gross domestic product increased at an upwardly revised 3.1% annualized rate, the Commerce Department's Bureau of Economic Analysis said in its third estimate of third-quarter GDP on Thursday. The economy was previously reported to have expanded at a 2.8% pace last quarter.

Economists polled by Reuters had forecast GDP would be unrevised. The revision reflected upgrades to consumer spending and export growth, which offset a downward revision to private inventory investment and upward revision to imports.

The economy grew at a 3.0% pace in the April-June quarter. It is expanding at a pace that is well above what Federal Reserve officials regard as the non-inflationary growth rate of around 1.8%.

The U.S. central bank on Wednesday delivered a third consecutive rate cut, but projected only two reductions in borrowing costs next year compared to the four it had forecast in September, citing continued economic resilience and still-elevated inflation.

There are also concerns that some of the incoming Trump administration's policies, including tax cuts, mass deportations of undocumented immigrants and tariffs on imported goods, would be inflationary.

The Fed's policy rate was reduced by 25 basis points to the 4.25%-4.50% range. It was hiked by 5.25 percentage points between March 2022 and July 2023 to tame inflation.

Fed Chair Jerome Powell told reporters on Wednesday that "it's pretty clear we've avoided a recession," adding that "the U.S. economy has just been remarkable, I feel very good about where the economy is ... and we want to keep that going."

Consumer spending, which accounts for more than two-thirds of economic activity, grew at a 3.7% pace. That was revised up from the previously estimated 3.5% rate.

A measure of domestic demand that excludes government spending, trade and inventories increased at a 3.4% pace. Final sales to private domestic purchasers were previously estimated to have risen at a 3.2% rate. Domestic demand increased at a 2.7% pace in the second quarter.

National after-tax profits without inventory valuation and capital consumption adjustments decreased $15.0 billion, or 0.4%. They were previously estimated to have risen $0.2 billion, or unchanged in percentage terms.

When measured from the income side, the economy grew at a 2.1% rate last quarter, lowered from the initially estimated 2.2% pace. Gross domestic income (GDI) increased at a 2.0% rate in the second quarter.

In principle, GDP and GDI should be equal, but in practice they differ as they are estimated using different and largely independent source data. Annual benchmark revisions have sharply narrowed the gap between GDP and GDI.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.6% rate. That was revised up from the 2.5% rate reported last month. Gross domestic output grew at a 2.5% pace in the April-June quarter.

Source: Reuters

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Warren Takunda

Economic

Global stock markets ended Thursday in a sea of red following the Fed's hawkish pivot, leading to a broad-based selloff not seen since August.

The souring sentiment caused major benchmarks on both sides of the Atlantic to tumble, dimming hopes for a Santa Rally.

Yields on major benchmark government bonds in the Eurozone rose, mirroring their US counterparts, as the Fed projected fewer rate cuts in 2025.

The German 10-year government bond yield climbed 6 basis points to 2.3%, the highest in nearly a month.

The US 10-year government bond yield surged to 4.56%, the highest since May, rising by 17 basis points over the past two days.

The bond market turmoil continued to weigh on equity markets, with all regional stocks likely ending the week lower, just days before Christmas.

Europe

Major European benchmarks all recorded weekly losses, with the pan-European Stoxx 600 index falling 2.32%, the DAX declining 2.14%, the CAC 40 slipping by 1.55%, and the UK’s FTSE 100 dropping 2.35%.

All sectors were in negative territory, with energy and industrial stocks leading the week’s losses. The two sectors continued to underperform due to falling oil and metal prices.

Over the past five trading days, shares of Shell and BP slumped more than 4%, while Rio Tinto and Glencore’s stocks fell nearly 9%, particularly weighing on British stock markets.

Meanwhile, technology stocks declined following the Fed’s hawkish rate cut, with ASML down 3.69% and SAP falling 1.35% on Thursday.

On the economic front, December’s flash manufacturing Purchasing Managers’ Index (PMI) data came in lower than expected in Germany and France, indicating that the sector’s downturn deepened.

On a brighter note, services PMIs in Germany and the eurozone returned to growth this month, according to S&P Global’s estimates.

However, this expansion was insufficient to offset the broader economic challenges.

In the UK, the Bank of England kept interest rates on hold at 4.75%, as widely expected.

However, Governor Andrew Bailey stated: “With heightened uncertainty in the economy, we cannot commit to when or by how much we will cut rates in the coming year,” while reiterating a gradual approach to future rate cuts.

The dovish tone contrasted sharply with the Fed’s hawkish stance, causing the British pound to weaken significantly against the dollar, hitting its lowest level since May.

Wall Street

The US stock markets experienced a significant retreat this week following the Fed’s hawkish rate cut.

Over the past five trading days, the Dow Jones Industrial Average fell 3.39%, the S&P 500 slid 3.04%, and the Nasdaq Composite slumped 2.8%. The small cap, Russel 2000, tumbled 5.5% due to expectations of a slow pace of rate cuts.

In the S&P 500, all eleven sectors ended in negative territory, with the interest-rate-sensitive real estate sector leading losses, down 6.84% for the week.

The energy sector followed, dropping 6.76%, while industrials fell 5.67% compared to last week.

Most of the "Magnificent Seven" stocks declined on a weekly basis, with Nvidia down 4.85% and Meta Platforms falling 5.58%. Tesla, however, bucked the trend, rising 4.32% week-on-week.

The Fed cut interest rates by 25 basis points, bringing the total reduction this year to one full percentage point.

However, its dot plot projected just two cuts next year, down from four in its previous forecast. The final third-quarter GDP growth came in at an annualised pace of 3.1%, higher than the first two estimates.

This data further evidenced a resilient economy, reinforcing expectations of a gradual easing cycle by the Fed.

Asia

The Bank of Japan (BOJ) kept its policy rate unchanged this week and provided little guidance on future rate decisions.

Markets interpreted this as dovish, reducing the likelihood of a January rate hike. The Japanese yen weakened sharply against the dollar, reaching its lowest level since July.

In China, the People’s Bank of China (PBOC) kept the 1-year and 5-year Loan Prime Rates unchanged, as expected.

The Fed’s hawkish pivot may have influenced the PBOC to slow its pace of rate cuts, helping to stabilise the tumbling yuan. The Chinese yuan weakened against the dollar to its lowest level since November 2023 on Thursday.

Elsewhere, New Zealand’s economy slipped into a technical recession once again. Third-quarter GDP contracted by 1% compared to the previous quarter, following a 1.1% contraction in Q2.

Two consecutive quarters of negative economic growth constitute a technical recession.

Source: Euronews

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Silver price (XAG/USD) trades in a tight range around $29.00 in Friday’s European trading session. The white metal consolidates as investors await the United States (US) core Personal Consumption Expenditure Price Index (PCE) data for November, which will be published at 13:30 GMT.

Economists expect the US annual core PCE inflation data to have accelerated to 2.9% from 2.8% in October. On month, the underlying inflation data is estimated to have grown steadily by 0.2%. Signs of mild slowdown in price pressures are unlikely to impact market expectations that the Federal Reserve (Fed) will pause the policy-easing spell in the policy meeting in January 2025. However, a sharp deceleration could weigh on them. On the contrary, a mild or sharp acceleration in price pressures would strengthen them.

In the policy meeting on Wednesday, the Fed reduced its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% but signaled fewer interest rate cuts for 2025. The Fed dot plot showed that officials collectively see Federal Fund rates heading to 3.9% by 2025 against 3.4% projected in September.

Ahead of the US PCE inflation data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower after posting a fresh two-year high at 108.50. 10-year US Treasury yields tick lower to 4.56% from a fresh six-month high of 4.60%. Higher yields on interest-bearing assets increase the opportunity cost of holding an investment in non-yielding assets, such as Silver.

Silver technical analysis

Silver price slides below the 200-day Exponential Moving Average (EMA), which trades around $29.35. The white metal weakens after a breakdown of the upward-sloping trendline around $30.20, which is plotted from the February 29 low of $22.30.

The 14-day Relative Strength Index (RSI) drops inside the bearish range of 20.00-40.00 range, guiding a downside momentum ahead.

Looking down, the September low of $27.75 would as key support for the Silver price. On the upside, the 50-day EMA around $30.90 would be the barrier.

Silver daily chart

Silver FAQs

Why do people invest in Silver?

Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.

Which factors influence Silver prices?

Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.

How does industrial demand affect Silver prices?

Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.

How do Silver prices react to Gold’s moves?

Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.

Source: FXSTREET

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