9 min readWeekly Recap
US stocks came under pressure last week, and the US dollar gained another week amid expectations that the Federal Reserve would cut rates at a slower pace in 2025. U.S. data was stronger last week. US nonfarm payrolls smashed expectations, with 254k jobs added in December ahead of the 164k forecast. Unemployment unexpectedly fell to 4.1% from 4.2%. Meanwhile, the prices paid subcomponents in the ISM reports also raised concerns over a revival in inflation. The global bond sell-off pushed the US 10-year treasury yield to 4.74%, a notable increase from the previous quarter. This reflects rising term premiums and inflation concerns. The USD tracked yields higher, rising for a sixth straight week. The S&P 500 fell over 1%, and the Nasdaq underperformed, falling almost 2% across the week.
Earnings season
Q4 and full-year earning season is set to begin this week, led by banking giants JP Morgan, Wells Fargo, and Citigroup. According to the data group’s Factset, earnings growth is expected at 11.9% year over year for S&P 500 companies, which would mark the highest year-over-year earnings growth reported by the index since Q4 2021.
Breaking this down into sectors, financial stocks are leading projected growth at an impressive 38.9% increase thanks to the banking industry’s favorable comparisons. Communications firms are expected to post 20% growth, and the tech sector is expected to see 13% growth. Meanwhile, healthcare, consumer discretionary, and utilities are all projected to achieve double-digit growth of 12%.
Revenue expectations see the S&P 500 on track to maintain its revenue growth streak for the 17th straight quarter with a 4.6% increase. Tech firms are expected to lead revenue growth thanks to the ongoing digital translation.
The S&P 500 trades at a 2-month low ahead of earnings season.
UK CPI (Wednesday)
UK inflation is expected to rise to 2.7% YoY in December after rising to 2.6% in November, up from 2.3% in October. Service sector inflation remains well above levels that the BoE is comfortable with, as wage growth holds strong at 5.2% for now. Sticky inflation prevented the BoE from cutting interest rates in December when policymakers voted to leave rates unchanged at 4.75%. Policymakers want to see signs that inflation is back on a cooling trajectory in order to cut interest rates in the February meeting. The data comes after a volatile week for the pound and UK bond market last week as investors fretted over the inflationary and fiscal outlook. A source of uncertainty is whether companies front-run increases in labour costs following the Autumn Budget by rising prices. From a policy perspective, the February rate cut is 65% priced in.
GBP/USD has fallen to a fresh 13-month low at the start of the week.
US CPI (Wednesday)
The Fed continues to emphasize inflation progress to proceed with further rate cuts, as highlighted by Federal Reserve governor Christopher Waller last week. For this reason, the market will be closely watching this week’s CPI data for clues about what the Fed may do next. US CPI is expected to rise 0.3% MoM in December, which is in line with November. Some inflation gauges have increased recently, unnerving the market. Last week, the services ISM PMI prices paid subcomponent showed prices had risen sharply. The latest Fed minutes also revealed that policymakers noted upward risks to inflation. Weaker than forecast inflation data could trigger a more significant market reaction, particularly given the quick rise in treasury yields over the past few months. Cooler inflation could support the stock market and lead to more gains. However, another hot inflation report could trigger another stock sell-off and boost the USD. The market is expecting just one 25 basis point rate cut this year. Hotter inflation could support this view.
Interestingly, XAU/USD rose last week despite higher yields and a stronger USD, suggesting investors could be buying Gold as a hedge against inflation. In this case, hotter inflation data could lift XAU/USD.
ECB minutes (Thursday)
In line with expectations, the ECB cut rates by 25 basis points to 3% in its December meeting. The central bank said it will continue to follow a data-dependent meeting-by-meeting approach. However, the accompanying macro projection saw a reduction in the inflation forecast for 2024 and 2025, whilst the 2026 forecast remained below target at 1.9%. Great forecasts were also revised lower. In the following press conference, ECB president Christine Lagarde was careful to declare victory on inflation; however, she also noted that all members agreed we’re seeing a decision to cut rates. A 50 basis point move was also discussed at the meeting, although the idea failed to gain traction. While the ECB is not pre-committing to a specific policy path, the direction for rates is clear. The minutes are unlikely to move the market much, given they could be considered stale with the next ECB rate decision at the end of the month.
The minutes will be released as EUR/USD trades around 2-year lows.
US Retail sales (Thursday)
US retail sales have continued to highlight the ongoing resilience of the US consumer. Expectations are for US retail sales to rise 0.5% MoM, down from 0.7% in November. Industry data has shown solid spending across the holiday season. According to Mastercard, the Christmas season was a merry one for US retailers, with sales increasing 3.8% from November 1st to December 24th compared to the previous year. The data shows a consumer who was willing and able to spend. Solid retail sales will add to the view that the US economy remains firm, potentially giving the Federal Reserve fewer reasons to cut interest rates. The market is only expecting one rate cut from the central bank this year, which has lifted USD to a 2-year high against its major peers.
As seen on the weekly chart, AUD/USD trades at a 4-year low ahead of the data.
UK Retail sales (Friday)
UK retail sales are expected to rise 0.3% MoM in December, up from 0.2% in November. The market hopes for an upbeat December print following figures from the British Retail Consortium, which showed that Black Friday spending lifted retail sales in December. Given the timing of Black Friday this year in early December, retail sales could be boosted by the favourable comparison. However, the Q4 sales reading was disappointing, marked by weak consumer confidence and difficult economic conditions. The outlook for retail sales has become more gloomy following last week’s market developments. The sharp rise in the government’s borrowing cost has wiped out Chancellor Rachel Reeves’s buffer, meaning that the UK government will likely hike taxes or cut spending to gain control of public finances. Confidence looks unlikely to bounce back soon, which, combined with fewer BoE rate cuts, means discretionary consumer spending may struggle in the coming months.
The FTSE has recovered from its 8000 recent low, up above 8300, boosted by the weaker GBP. Soft retail sales could pull GBP lower lifting the FTSE 100 higher.
China GDP & industrial production (Friday)
Expectations are for Q4 GDP to rise 1.7% QoQ, up from 0.9% in Q3. The full-year GDP is expected to expand by 5.1%, according to President Xinping, who signaled that the world’s second-largest economy is on track to meet its official target. Whilst the precise full-year figure isn’t available till next month, the outlook for the economy has improved considerably after policymakers rolled out a slew of stimulus steps since late September to support the economy. This is expected to continue into 2025, shoring up the economy as Trump moves back into the White House. Maintaining a 5% growth target to counter trade tariff threats will be important.
Aside from GDP, retail sales are expected to rise 3.5% from 3% previously and industrial output is set to rise 5.4% in line with 5.4% previously. Although the main focus will be the GDP reading. Sign of solid Chinese data could help boost the Hang Seng, which is threatening to create a lower low.
Author
Risk Disclaimer
