2025 Weekly Update

Market update

The S&P 500 closed the week at 6,827.41, -0.63% lower. The Dow Jones closed at 48,458.05, +1.05%, with the Nasdaq lower by -1.62%. The volatility index VIX closed the week at 15.74, up from 15.41. The Euro Stoxx 600 fell -0.09%.

The 10-year UST closed at 4.18%, up from 4.14% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 56bps. US Corporate Bond spreads: Investment Grade spreads narrowed -3bps at 78bps and High Yield spreads narrowed -1bp at 333bps. German 10-year Bunds yield closed at 2.86% up from 2.80% a week before. In Europe, Corporate Investment Grade spreads remained at 89bps and High Yield narrowed -3bps at 303bps.

The US Dollar Index (DXY) depreciated -0.60% last week and closed at 98.4. The Euro closed at 1.174 (+0.84%); the Yen depreciated -0.31%, closing at 155.81 and the Swiss Franc appreciated +1.12%, closing at 0.7958. Gold closed at $42,99.63, appreciating +2.43%. Oil was lower, Brent closed at $61.12 (-4.13%) and WTI at $57.44 (-4.39%).

Macroeconomy

Fed meeting

The FOMC delivered a third consecutive cut taking the target range for the Fed funds rate down to 3.50-3.75%. This was a 9-3 decision, with Governor Miran again advocating for a larger 50bps cut, whereas regional Fed presidents Goolsbee and Schmid favored no change. The cut was accompanied by implicit signals that the Fed could remain on hold in early 2026. For instance, the dot plot showed the median participant only expecting one more rate cut in 2026, while new wording on “the extent and timing” of further rate adjustments signaled a possible pause ahead. Powell also emphasized that the FOMC was “well positioned to wait and see how the economy evolves” as recent easing had brought the policy stance “within a broad range of estimates of neutral”. However, this cautious guidance was accompanied by several dovish-leaning elements. Notably, the updated economic projections struck a sanguine tone, with real GDP revised higher across the 2025-27 period, whilst 2026 headline and core PCE inflation were revised -0.1pp and -0.2pp lower to 2.4% and 2.5% respectively. The statement also dialed up the tone on the recent uptick in unemployment while Powell sounded a bit more sanguine on upside inflation risks, saying that “inflation has come in a touch lower” recently and that “most of the inflation overshoot is from tariffs”. The Fed also announced they’ll begin reserve-management purchases of Treasury bills. Those will start at $40bn a month from this week and are expected to “remain elevated for a few months” before slowing significantly after the April tax payment window. This will mark the first sustained increase in the size of the Fed balance sheet since the Fed ended QE in spring 2022. It was a slight surprise even if a shift towards more active liquidity management had been expected by early 2026.

Upcoming US data

This week attention will center on tomorrow’s twin employment reports for October and November, delayed by the recent government shutdown. October’s headline payrolls are expected to show a decline of around -60k, largely due to federal layoffs with all the early year buy-out offers coming off payroll in October. November should rebound modestly with a gain of +50k. Private sector hiring is likely to remain steady in both months at around +40k, slightly below the recent trend. The unemployment rate is forecast to rise to 4.5% in November from 4.4% in September (October data will not be published), while average hourly earnings should increase by 0.3% in both months, keeping y-o-y nominal compensation growth near 4.4%. Hours worked are expected to stabilize at 34.2. Given the distortions caused by the shutdown, the household survey could be noisy, echoing patterns seen after the 2013 episode. For a cleaner read on labor market conditions, Thursday’s jobless claims will be important: investors expect +225k, with underlying hiring trends remaining intact. Inflation will also be in focus with Thursday’s US CPI release. Because October data were not collected, the report will center on y-o-y changes. Headline CPI is expected to hold broadly steady at 3.1%, while core inflation remains at 3.0%. Monthly headline gains across October and November should average +0.24%, slightly below September’s pace with core slightly above at +0.26%. Within the details, core goods prices are likely to show modest increases in household furnishings and apparel, while used car prices continue to decline. Core services will attract particular attention, especially rents, which are expected to rebound after September’s anomalous weakness. Airline fares and lodging should soften from their recent highs, though health insurance may surprise on the upside. Beyond jobs and inflation, Tuesday’s retail sales report will offer insight into consumer spending. Friday’s final reading of University of Michigan consumer sentiment is expected at 53.5, with inflation expectations likely to matter more than the headline figure.

Swiss National Bank

As widely expected, the SNB looked past the recent weakness in inflation and maintained its policy rate at 0%, viewing the current monetary policy stance as expansionary, appropriate for the current environment, and supportive of both inflation and growth. Their communication continues to signal a high threshold for the reintroduction of negative rates. A rate cut would likely require a significant catalyst, such as a persistent and strong appreciation of the Swiss franc, a notable deterioration in the economic outlook, or a substantial narrowing of the SNB–ECB rate differential due to renewed ECB easing. Investors expect the SNB to maintain the policy rate at 0% throughout 2026. The improving economic picture, particularly in Europe, may provide some relief for the SNB in the coming year.

Bank of Japan

The BOJ is widely expected to raise rates by 25bps, with traders assigning a 93% probability due to hawkish official comments. This move would precede January’s annual wage negotiations, where compensation is projected to rise over 3% year-on-year for three consecutive years, potentially pushing rates to 1% by October 2026, according to futures markets.

Bank of England

Markets expect the BoE to cut its policy rate by 25 basis points during its December meeting, bringing the policy rate down to 3.25%. During the last meeting, the Bank signaled that it stands ready to cut further if the data allows. Since then, there has been further disinflationary progress, with both inflation and wages falling, alongside additional signs of labor market weakness, supporting the case for further rate cuts, provided there are no last-minute surprises in this week’s inflation and employment reports. In addition, the latest UK budget did not introduce significant inflationary measures, unlike last year’s, with some measures potentially easing headline inflation. Given how divided the committee is regarding the economic outlook, the voting outcome will likely remain tight.

European Central Bank

The ECB is expected to hold rates steady at 2% during its meeting on Thursday. President Lagarde is likely to continue describing the current policy stance as being “in a good place”. This meeting is expected to be slightly more eventful, as President Lagarde will likely face questions about potential rate hikes. Lagarde is expected to emphasize the two-sided risks to growth and inflation, reiterating the ECB’s data-dependent, meeting-by-meeting approach with no predetermined policy path. A key focus will be the new staff projections, which will now extend to 2028. Near-term growth projections are expected to be revised higher, while headline inflation forecasts may see minor adjustments: slightly higher for 2026 due to recent core inflation momentum, slightly lower for 2027 due to the delay in new carbon pricing, and at target for 2028. Overall, the staff projections are expected to support the view that rates will remain on hold for an extended period.

Other central banks

RBA maintained its cash rate target at 3.60% in a unanimous decision, marking the third consecutive meeting in which rates have been held steady, following 75bps of cuts in 2025. The press conference was hawkish and emphasized that they are considering a hike and suggested February was under consideration. This week, the Swedish Riksbank and Norwegian Norges Bank will also decide on policy with both likely to stay on hold.

China data

The economic slowdown intensified in November, with retail sales increasing by only +1.3% last month compared to the same period last year, significantly below Bloomberg's forecast of +2.9% growth, and a decrease from the +2.9% rise recorded in the previous month. Industrial production rose by 4.8% in November y-o-y, falling short of the anticipated 5% increase and marking the weakest growth since August 2024. Business investment remained weak in November, with fixed asset investment declining by -2.6% y-o-y, exceeding expectations of a -2.3% drop. This decline has worsened from the -1.7% decrease observed from January to October, representing the most significant downturn since the pandemic began in 2020. A separate report indicated that new home prices in China continued to fall, decreasing by -0.39% m-o-m in November, compared to a -0.5% decline in the previous month, suggesting that we're still waiting for a recovery in demand even with government assurances that they will stabilize the sector.

Highlights

On rates

The rates market experienced significant curve steepening bringing the 2s10s slope to its steepest level since January 2022—just before the Fed began its post-Covid hiking cycle. On the front-end Treasury yields declined, with the 2-year yield falling by 3.8bps to 3.52%. In contrast, the 10-year yield rose by 4.9bps to 4.18%, and the 30-year yield increased by 5.3bps to 4.84%. Such movements occurred as the FOMC delivered a third consecutive 25bps rate cut. While the Fed's decision was widely anticipated, markets closely monitored the committee's messaging, which signaled a potential pause in early 2026. The market now prices the next rate cut for March at 54%, following dovish hints. The Fed funds pricing for December 2026 remained relatively unchanged over the week, with 56bps of rate cuts now priced for 2026. Meanwhile, recent money market tightness eased as the Fed announced the commencement of reserve-management purchases of Treasury bills, which it does not refer to as quantitative easing. In Europe, government bonds sold off amid rising global term premia and hawkish comments from the ECB’s Isabel Schnabel. In Germany, 10-year Bund yields rose by 5.9bps to 2.86%, Italian BTP yields also climbed by 6.3bps, while French OATs outperformed, rising by 5.3bps, as the French parliament approved the social security budget. In Japan, the recent surge in JGB yields has fueled expectations of a rate hike at this week’s BoJ meeting. Governor Ueda noted that the recent rise in long-term JGB yields has been “somewhat rapid” and suggested that the central bank could increase bond purchases to curb borrowing costs if necessary. Expectations for tighter monetary policy have been supported by robust economic data, including consumer inflation, which remains above historical levels at 1.95%.

What to watch

• Monday: US Empire Manufacturing; Canada CPI; Japan Tankan Survey; China November Data; India Exports
• Tuesday: US Nonfarm Payrolls, Retail Sales, PMI; UK Earnings and Unemployment Rate; Eurozone and UK PMI; Germany ZEW Survey; Japan, Australia and India PMI
• Wednesday: UK CPI and PPI; Eurozone CPI; Germany IFO; Japan and Singapore Exports; Indonesia Policy Rate
• Thursday: US Initial Jobless Claims and CPI; ECB, Riksbank, Norges Bank decisions; New Zealand Q3 GDP
• Friday: US University of Michigan Survey; UK Public Finances and Retail Sales; Japan CPI and BoJ decision