Year-on-year US inflation data weakened in the month of December, falling to 6.5%, down from 7.1% recorded the month before. This, combined with softer average hourly earnings data released last Friday, which came in at 4.6% for the year to December versus 4.8% in the previous month, set markets up for a rally. Expectations rose for a smaller, quarter of a point rate rise at the Federal Reserve’s January meeting, with the expected peak in rates falling beneath 5%. European industrial production for the month of November exceeded forecasts, rising by 1.0%, easing fears over the severity of any impending recession. Whilst UK GDP growth for November eked out an increase of 0.1%, beating estimates of a fall of 0.2%. A sharp fall in European energy costs, helped by a mild winter, has no doubt been a significant contributing factor.
As of 12pm on Friday, London time, the US market rose by 2.3% over the week, whilst the US technology sector recorded an increase of 4.1%. European and UK stocks rose by 1.6% and 1.8% respectively, whilst Japanese equities rose by 1.5%. The Australian market increased by 3.1%, supported by rising metal prices, a result of the relaxation of Covid restrictions in China. Emerging markets were up 3.0%, with the Latin American component increasing by 4.8%, also benefitting from the rebound in commodity prices. Hong Kong and Chinese stocks continued their recent recovery, rising 3.6% and 1.2% respectively, with the former having risen by 48% since their 2022 low point hit at the end of October.
On the back of the decline in inflation, government bond markets also rallied, with 10-year US Treasury yields, which move inversely to price, falling to 3.47%. German bund and UK gilts also rallied, with 10-yields falling to 2.13% and 3.33% respectively.
Gold continued its steady ascent, rising 2.0%, now trading at $1,907 an ounce, having risen over 15% since its low in November. Whilst copper prices leapt up to $9,169 a tonne, an increase of 7.0%. Iron ore increased by 5.7%, and crude oil rose by 7.8%, with Brent crude now trading above $80 a barrel at $84.7. All beneficiaries of the relaxation of Covid rules in China and a weakening in the US dollar as US interest rate expectations are dialled down.
The US dollar index, which is a measure of the US dollar against a basket of internationally traded currencies, fell by 1.4% over the week, with the Euro worth $1.08, and Sterling close to $1.22. However, the biggest move amongst the more actively traded currencies was reserved for the Japanese Yen, which strengthened by 2.6% versus the Dollar, 1.9% versus Sterling and 1.0% versus the Euro as markets applied pressure to the Bank of Japan to further relax their yield control measures on the 10-year JGB (Japanese Government Bond). Japanese inflationary pressures have gradually increased in recent months, with core inflation, that is, excluding food and energy, hitting 3.7% in November, a high number by Japan’s standards!
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