Market update December 2024 - Markets react to economic shifts and political changes

The FTSE 100 climbed higher towards the end of the month, buoyed by a weaker pound, which supported returns from companies with earnings in other currencies. Sterling fell to its lowest against the dollar since May, after data showed British business output in November shrank for the first time in more than a year. Retail sales also fell by much more than expected in October.

Inflation reached a six-month high in October, driven by rising energy bills. The annual inflation rate climbed to 2.3%, up from 1.7% in September and exceeding forecasts. Meanwhile, the Bank of England provided relief for borrowers by lowering interest rates from 5% to 4.75%. However, it warned that measures outlined in the Budget, such as raising the cap on bus fares and VAT on private school fees, could push up prices at a faster rate.

The UK’s job market showed further signs of cooling. Unemployment rose, hitting 4.3% in the three months to September, up from 4% in the previous quarter. Wages outpaced inflation, with annual pay growth increasing by 4.8%.

Britain’s economy contracted by 0.1% in September, marking an unexpected dip. Quarterly growth stalled at 0.1% as the services sector slowed. Yet consumer confidence has shown signs of recovery ahead of Christmas. Improved expectations about personal finances and the economy have led to an uptick in planned spending.

Stocks soar after Trump win

US stocks surged after Republican Donald Trump secured a second term as US President, boosting hopes for accelerated domestic growth. The rise was driven by investor optimism about potential tax cuts and deregulation. The dollar strengthened, while government bond yields rose. However, there are concerns Trump’s tariff proposals on goods from China, Mexico and Canada could stoke inflation.

Inflation, which had been slowing, ticked higher in October, rising to 2.6% from September’s three-year low of 2.4%. Meanwhile, the labour market showed signs of strain. Jobs growth fell to its lowest since December 2020, with only 12,000 new positions added in October, largely due to hurricanes and strikes. The unemployment rate remained stable at 4.1%. The latest figures have raised concerns that the US Federal Reserve (Fed) might not lower rates as much as had been expected in the months ahead.

The US economy has been cooling after years of robust growth. Many economists now expect it to achieve a so-called soft landing – where the economy slows without going in to recession. US consumer confidence has also rebounded as perceptions about the broader economy and labour market prospects improved.

Euro area inflation rises

Inflation across the euro area rose to 2% in October, reaching the European Central Bank's (ECB) target, up from 1.7% in September. The increase was driven mainly by energy and food prices. Core inflation, which excludes volatile items like fuel and food, held steady at 2.7%. The ECB reduced its main interest rate by a quarter percentage point to 3.25% in October – its third reduction this year.

Economic growth across the region surprised analysts, rising by 0.4% in the third quarter compared with the previous one. The jobless rate remained at a record low of 6.3% in September, unchanged from August. Germany narrowly escaped a recession in the third quarter, offering some relief to Europe’s biggest economy, which has seen its fortunes dip in recent years. Spain and France growth exceeded expectations, while Italy underperformed forecasts.

Purchasing managers’ indices indicate that the manufacturing sector remains in a slump, while services activity has slowed and is relatively weak. With high savings rates persisting and the effects of lower interest rates expected to take time to feed through to the economy, growth is likely to slow slightly in the coming quarters.

China ramps up stimulus

Chinese markets fell after a $1.4 trillion stimulus plan to support local governments struggling with debt failed to impress investors. It is the second stimulus package in recent weeks, but economists say it is unlikely to be enough to address China’s economic issues. Chinese authorities have stepped up stimulus efforts in recent weeks to boost demand to help meet the 5% economic growth target for this year.

It has been a rough year for the Chinese economy, which is struggling to rebound from the pandemic. The country continues to be weighed down by a persistent property slump, low consumer spending and high unemployment. Consumers hit by the property crisis are now putting their savings aside as a way to cope with future uncertainties.

Official data revealed a steep fall in real estate investment, which dropped over 10% year-on-year in September. Meanwhile, consumer prices in China rose at their slowest rate in four months in October, while producer price deflation worsened. Exports grew at their fastest pace in 19 months, rising 12.7% year-on-year, but imports fell more than expected, dropping 2.3%. Adding to the uncertainty are mounting concerns over a potential trade war with the US following Donald Trump's election victory.