Markets Last Week - 13/12/2024

Nasdaq Hits Record High Amid Broad Declines
Most major U.S. stock indexes ended the week lower, with the tech-focused Nasdaq Composite edging up and surpassing the 20,000 milestone for the first time. Large-cap stocks outperformed smaller-cap peers, as evidenced by the Russell 2000 Index lagging behind the S&P 500 Index for a second consecutive week. Growth stocks, measured by the Russell 1000 Index, extended their outperformance over value stocks for a third week, driven by gains in Tesla (up 12.08%) and Alphabet (up 8.44%). Alphabet recorded its strongest two-day rally since 2015 on Tuesday and Wednesday.

Monday was highlighted as the weakest day in over a year for momentum strategies—favoring stocks with strong recent performance—though stability returned by week’s end. Sector-wise, only communication services and consumer discretionary posted gains, while most sectors declined. Despite a lack of major market drivers, trading volumes exceeded the six-month average daily. The upcoming week is expected to be eventful, with index rebalances and the Federal Reserve’s year-end meeting on the agenda.

Inflation Remains Stagnant as Labor Market Softens
The Labor Department’s inflation report, released Wednesday, showed headline and core consumer price indexes (CPI) rising 0.3% in November, aligning with expectations. Core inflation held steady at 3.3% year-over-year, while overall inflation ticked up to 2.7% from 2.6% in October. Higher shelter costs accounted for nearly 40% of November's price increases, with few components experiencing declines. Producer price inflation also rose slightly, from 0.3% to 0.4% in November.

Labor market data painted a mixed picture. Weekly initial jobless claims jumped unexpectedly to a two-month high of 242,000, partially influenced by Thanksgiving-related seasonal factors. Continuing claims remained near three-year highs, signaling longer job searches for some unemployed individuals. This follows a previous report indicating a rise in the November unemployment rate, adding to signs of a cooling labor market.

Rate Cut Expectations Strengthen Ahead of Fed Meeting
The week’s economic data reinforced expectations of a rate cut at the Federal Reserve’s upcoming meeting. Futures markets, tracked by the CME FedWatch Tool, showed a 97.1% probability of a December rate cut, up from 86.0% a week earlier. The Fed’s two-day meeting begins December 17, with the rate decision announcement on December 18.

U.S. Treasury yields climbed across most of the curve, delivering negative returns for the week, as bond prices and yields move inversely. Rising yields also weighed on investment-grade corporate bonds. While corporates saw marginal improvement relative to Treasuries after Wednesday’s CPI report, they lost ground in a subdued Thursday session. Meanwhile, high-yield bond trading volumes surged post-CPI as equities rallied, but rising Treasury yields and cautious macro sentiment ultimately pulled the market lower. 

Index	Friday's Close	Week's Change	% Change YTD
DJIA	43,828.06	-814.46	16.29%
S&P 500	6,051.09	-39.18	26.86%
Nasdaq Composite	19,926.73	66.95	32.74%
S&P MidCap 400	3,277.20	-54.17	17.82%
Russell 2000	2,346.90	-62.10	15.78%

UK Economy Unexpectedly Contracts in October
The UK economy has slowed considerably after experiencing a strong start to the year. Real gross domestic product (GDP) unexpectedly contracted by 0.1% in October compared to the previous month, driven by weaker production output. This follows a similar 0.1% contraction in September. The services sector, which dominates the UK economy, showed no growth in either month, remaining flat.

Despite these declines, the Office for National Statistics reported that the economy managed to grow by 0.1% in the three months ending in October compared to the previous three months ending in July. This slight expansion was supported by growth in the services and construction sectors. However, with services inflation remaining stubbornly high, the Bank of England is expected to maintain a cautious approach. The central bank is widely anticipated to hold interest rates steady at its upcoming policy meeting and proceed with care in the coming year.

Industrial production in the UK fell by 0.6% in October on a month-over-month basis, marking a second consecutive monthly decline and defying forecasts for a 0.3% increase. Manufacturing output also dropped by 0.6% during the month, though this was a smaller decline compared to the 1.0% contraction recorded in September.

European Markets: Mixed Performance as STOXX 600 Declines
The pan-European STOXX Europe 600 Index fell 0.77% in local currency terms, as investors questioned whether the European Central Bank (ECB) is easing monetary policy quickly enough to support the region's faltering economy. Performance across major stock indexes was mixed: Germany's DAX rose 0.10%, and Italy's FTSE MIB gained 0.40%, while France's CAC 40 slipped 0.23% and the UK’s FTSE 100 edged down 0.10%.

ECB and SNB Cut Interest Rates
The ECB reduced its key deposit rate by 0.25 percentage points to 3.0%, marking its fourth rate cut this year. In a shift, the ECB dropped language about keeping rates "sufficiently restrictive for as long as necessary" from its statement, signaling openness to further easing. However, it maintained a meeting-by-meeting approach to policy decisions and lowered its growth and inflation forecasts.

The Swiss National Bank (SNB) surprised markets with a larger-than-expected 0.50 percentage point rate cut—the largest since January 2015. The SNB cited the need to counter weakening inflationary pressures and maintain consumer price growth within its target range of 0% to 2%. It also halved its inflation forecast for 2025, lowering it to 0.3% from its previous September projection.

François Bayrou Appointed as New French Prime Minister
French President Emmanuel Macron has named François Bayrou, a centrist politician and former justice minister, as the new prime minister of France. Bayrou takes over from Michel Barnier, who was recently ousted from the position. The appointment reflects Macron’s continued emphasis on fostering centrist policies and political balance within his administration.