Week ending 20th December 2024.

It was a bumpy week for markets, with major indexes finishing broadly lower as investors reacted to central bank interest rate decisions and key economic updates. However, despite this short-term pullback, 2024 has been another strong year for equities, with solid performance in risk assets overall.

In the US the Federal Reserve delivered a widely expected 25-basis-point rate cut on Wednesday bringing the fed funds rate to 4.25% – 4.5%, marking a total reduction of 100 basis points (1%) since September. But the accompanying commentary put a damper on the mood. Fed Chair Jerome Powell warned of the need for caution moving forward, noting that inflation forecasts for 2025 had ticked up to 2.5%. Plans for future rate cuts were dialled back, with officials’ dot plot showing just two in 2025, down from four estimated in September. However, Powell noted “overall, the economy continues to grow at a solid pace […] The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

A potential US government shutdown loomed as lawmakers tried to reach a funding agreement on Friday. “If there is going to be a shutdown of government, let it begin now, under the Biden Administration,” Trump said on social media early Friday. While markets have faced the threat of a shutdown multiple times before, neither Biden nor Trump wants to bear the blame. As a result, both sides have a vested interest in avoiding one, and the government ultimately reached a last-minute deal to prevent the shutdown.

Friday brought a glimmer of hope, with US equities rebounding somewhat. The core PCE inflation report—the Federal Reserve’s preferred inflation measure—showed a reassuring 2.8% year-over-year increase in November, matching October’s pace and slightly beating expectations. Investors welcomed the positive news, helping indexes recover some of their weekly losses.

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Across the pond, the Bank of England (BoE) held its key interest rate at 4.75%, a move that came as no surprise. However, three members of the Monetary Policy Committee pushed for a small cut, citing weak demand and a cooling labour market. BoE Governor Andrew Bailey stuck to a cautious tone, saying it’s too soon to commit to when—or by how much—rates might be reduced in 2025.

The eurozone’s economic activity remained in the doldrums, with private sector output ending the year in contraction territory. While services showed some improvement, sluggish growth in Germany and France weighed on the region. Adding to the uncertainty, German Chancellor Olaf Scholz lost a vote of confidence, triggering early elections in February. Separately, Trump on Friday threatened the EU with tariffs if the bloc does not reduce its ‘tremendous’ trade gap with Washington through oil and gas purchases.

As the year draws to a close, economic data and news tends to quieten, consequently, our next scheduled update will be 6th January although we will still be working and managing your investments over the Christmas period and of course will provide a market update should any major market moving events occur.

Finally, we would like to wish you and your family a very Merry Christmas and a happy New Year.

Kate Mimnagh, Portfolio Economist