2025 Weekly Update

Market update

The S&P 500 closed the week at 6,834.5, +0.10% higher. The Dow Jones closed at 48,134.89, -0.67%, with the Nasdaq higher by +0.48%. The volatility index VIX closed the week at 14.91, down from 15.74. The Euro Stoxx 600 rose +1.60%.

The 10-year UST closed at 4.15%, down from 4.18% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 53bps. US Corporate Bond spreads: Investment Grade spreads widened +3bps at 81bps and High Yield spreads widened +7bps at 340bps. German 10-year Bunds yield closed at 2.89% up from 2.86% a week before. In Europe, Corporate Investment Grade spreads narrowed -1bp at 90bps and High Yield remained unchanged at 303bps.

The US Dollar Index (DXY) appreciated +0.20% last week and closed at 98.6. The Euro closed at 1.171 (-0.26%); the Yen depreciated -1.25%, closing at 157.75 and the Swiss Franc appreciated +0.03%, closing at 0.7956. Gold closed at $4,338.88, appreciating +0.91%. Oil was lower, Brent closed at $60.47 (-1.06%) and WTI at $56.66 (-1.36%).

Macroeconomy

US prices

The November CPI report came in much lower than expected, with headline inflation falling to 2.7% and core inflation to 2.6% in November, the lowest since early 2021. However, the BLS cancelled the release of the October CPI because prices could not be collected during the shutdown, and this has introduced a lot of noise and mismeasurement issues in the November data. The measurement issues were particularly obvious for housing inflation as rents and owner-equivalent rents are not collected but estimated based on growth rates over a six-month window. The BLS decided to assume zero growth in OER in October, applying the standard procedure of carrying forward indices, which in that case clearly biased the data downward. Moreover, given that the collection of prices for November started later than usual, it is likely to have been biased lower for goods too because of the Black Friday sales period and other discounts. Lastly, some specific CPI items contributed to the downside surprise to a larger extent than usual, including airfares and other tourism-related components, which may have a relatively smaller impact on PCE metrics. Still, the report also included some evidence of genuine disinflation so that market participants and the Fed will be looking for evidence of confirmation or information of this trend in the next CPI print due on 13 January.

Jobs report

The jobs report was marked by the DOGE cuts coming effect and the government shutdown. Payrolls were down by -105k in October, before rebounding by +64k in November (vs. +50k expected). That October decline was driven by a collapse in government payrolls of -157k, marking their biggest monthly slump since the pandemic-driven losses in May 2020. The unemployment rate ticked up to 4.6% (vs. 4.5% expected), and the broader U6 measure (which adds in the underemployed and those marginally attached to the labor force) hit 8.7%, the highest since August 2021. Positively, the higher unemployment was driven by re-entrants to the labor market rather than permanent job losses. Also, we saw some resilience of private payrolls, up by +52k in October and +69k in November, suggesting that things were a bit stronger away from the DOGE cuts and the shutdown. The 3-month moving average for private payrolls is in fact now at a 6-month high.

European Central Bank

The ECB left their deposit rate at 2% as expected. Nevertheless, there was a hawkish tone, and the updated forecasts showed stronger growth and stickier core inflation (at 2.2% for 2026), so that was seen as outweighing the expected undershoot of headline inflation, which wasn’t mentioned at all by President Lagarde. Yet despite recent speculation around an ECB hike next year, this shifting macro tone didn’t translate into a more hawkish policy signal, with Lagarde repeating the line that they were keeping all policy options open. And later in the day, Bloomberg reported that ECB officials expected that the cycle of rate cuts was most likely done, with talk of rate hikes seen as premature.

Bank of Japan

The BoJ delivered a 25bps hike that’s taken rates to a 30-year high of 0.75%, as expected. They also pointed to more cuts ahead. Their statement said that real interest rates were “at significantly low levels”, and if their outlook was realized, they would “continue to raise the policy interest rate”. Before the announcement, we had the latest CPI print for November, which showed headline CPI at 2.9% as expected, having now been above 2% consistently since April 2022. That landscape of above-target inflation has provided the BoJ the space to deliver multiple rate hikes now, and they said that “it is highly likely that the mechanism in which both wages and prices rise moderately will be maintained”.

Bank of England

The BoE announced a 25bps cut as expected, taking their own policy rate down to 3.75%. Yet even though the decision was a cut, it was interpreted in a hawkish light by markets. First, because it was only passed on a narrow 5-4 vote, with the rest wanting to leave rates unchanged. And second, in the statement they added that “further policy easing will become a closer call.” So that suggested the bar was rising to further cuts. Prior to the BoE meeting, the data has been significantly more dovish overall. The labor market continues to weaken, with the unemployment rate rising to 5.1%, while regular wages (excluding bonuses) have continued to decline in the private sector. Headline inflation surprised notably to the downside, dropping to 3.2% due to decreases in services, food, and core goods prices, while energy prices remained unchanged.

Global PMIs

Flash US composite S&P Global PMI said slipped to 53.0 this month from a final reading of 54.2 in November - readings above 50 indicate activity is expanding. The data showed the smallest rise in incoming new business in 20 months, and new orders for goods fell for the first time in a year. Services S&P PMI, which accounts for two-thirds of U.S. economic output, slid to 52.9 in December from 54.1 in November, also a six-month low. Its manufacturing gauge fell to 51.8 from 52.2 in November, the lowest since July. Both readings were weaker than estimates from economists polled by Reuters. In Europe, the Euro Area composite flash PMIs for December fell back from its two-year high in November to 51.9 (vs. 52.6 expected). In the UK, the flash composite PMI moved up to 52.1 in December (vs. 51.5 expected). Japan's manufacturing sector showed improvement in December, with the S&P Global flash manufacturing PMI rising to 49.7 from 48.7. This indicates a move closer to expansion, supported by better domestic and international demand for industrial goods and automobiles. Japan's services sector remains strong, with the flash Services PMI at 52.5, slightly down from 53.2 but still showing solid growth driven by domestic consumption and resilient demand in service industries. In Australia, the S&P Global flash services PMI decreased to 51.0 from 52.8, impacted by increased competition and a more moderate rise in new export business. The manufacturing sector proved more resilient, with its preliminary PMI increasing to 52.2 from 51.6, thanks to stronger goods demand and improved export orders.

Highlights

On rates

Sovereign yields rose across the globe following several central bank decisions. However, the main exception to this trend was US Treasuries, which declined across the curve. The 2-year yield fell by -3.9bps to 3.48%, while the 10-year yield dropped by -3.7bps to 4.15%, and the longer 30-year yield decreased by -2bps to 4.82%. This movement was driven by a softer-than-expected US CPI report, which sustained the momentum for additional rate cuts and led investors to price 60bps of further rate reductions, by the December 2026 meeting. This sentiment was further bolstered by ongoing speculation regarding the next Federal Reserve Chair, as former President Trump stated last week that it would be “someone who believes in lower interest rates”. Meanwhile in Europe, the European Central Bank (ECB) left its deposit rate unchanged at 2%. However, hawkish signals suggested that the ECB might have concluded its easing cycle, with ongoing speculation about a potential rate hike next year, particularly after the ECB upgraded its forecasts for growth and core inflation. This contributed to a rise in 10-year Bund yields, which increased by +3.8bps to 2.89%, marking their highest level since the German fiscal stimulus announcements in March. Elsewhere, French OATs rose by +3.5bps to 3.61%, and Italian BTPs climbed by +3.7bps to 3.59%. In Japan, one of the most significant market movements occurred last week, with sharp losses in government bonds following the Bank of Japan’s decision to hike rates by 25bps. This hike pushed Japan’s 10-year yield up by +6.9bps last week, closing above 2%. As of this morning, yields have risen another +6.9bps to 2.08%, their highest level since 1999.

What to watch

• Monday: US September Chicago Fed Activity Index; UK Q3 GDP; Italy PPI
• Tuesday: US Q3 GDP, November Industrial Production, Consumer Confidence Index; Canada October GDP
• Wednesday: US Initial Jobless Claims
• Thursday: Japan Housing Starts, Tokyo CPI, Industrial Production
• Friday: no major announcements