US Treasuries faced negative returns this week as the 10-year yield climbed to its highest level since May, surpassing 4.50%. On Thursday, the Federal Reserve implemented an expected 0.25% rate cut, lowering the federal funds target range to 4.25%-4.50%. However, the Fed signalled a more cautious stance on future cuts, emphasizing it will carefully assess the timing and scale of any additional rate adjustments, a hawkish shift from its prior statement.
Federal Reserve Chair Jerome Powell emphasized the more cautious approach to easing interest rates following a cumulative 100 basis points in rate cuts. Persistent inflation concerns and a robust labour market remain key considerations for policymakers.
Looking ahead, the Federal Open Market Committee (FOMC) now anticipates two quarter-point rate cuts in 2025, a reduction from four in its September projections. Assuming quarter-point adjustments, officials project two additional cuts in 2026 and one more in 2027.
Over the long term, the FOMC projects the “neutral” federal funds rate to stabilise at 3%, a slight increase from the 2.9% forecasted in September. The committee also raised its outlook for inflation and economic growth, with the median forecast suggesting inflation will not return to the Fed’s 2% target until 2027.
On Thursday, the third quarterly revision of Q3 US GDP data revealed the economy expanded at a 3.1% pace, outpacing the prior estimate of 2.8%. Meanwhile, the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose 0.1% in November, slightly below expectations. On a year-over-year basis, PCE increased to 2.4%, up from 2.3% in October, while the core rate held steady at 2.8%. The better-than-feared report supported gains in stocks on Friday, while Treasury yields eased slightly to end the week off their lows.
Early Saturday morning, the U.S. Senate approved a bipartisan federal spending bill, averting a government shutdown. The bill extends federal funding at current levels for three months and allocates additional disaster relief and farm aid. The decisive vote highlighted bipartisan urgency to avoid a costly shutdown just days before Christmas.
In Europe, broad based indices ended the week lower, impacted by Trump’s tariff threats and ongoing uncertainty about regional interest rates. The Euro Stoxx 50 Index ended the week 2.13% lower. In the UK, the Bank of England (BoE) left its key interest rate unchanged at 4.75% in a 6-to-3 vote. Headline annual inflation accelerated as expected in November to 2.6% from 2.3% in October due to higher gasoline and clothing costs, informing the BoE’s more gradual approach to rate cuts. The UK’s FTSE 100 Index slid 2.60% for the week, following other European indices lower.
In Germany, Chancellor Olaf Scholz lost a vote of confidence in his coalition government, paving the way for an early federal election on February 23.
The Bank of Japan held rates steady at 0.25%, a surprise to some who expected a quarter point rate hike. The BOJ cited high uncertainty surrounding Japan’s economy and inflation. The benchmark Nikkei 225 Index ended the week 2% lower as the market digested a slower pace of monetary policy normalisation.
In South Korea, political turbulence intensified as President Yoon Suk Yeol was impeached, with Prime Minister Han Duck-soo stepping in as acting president.
Chinese equities were also weaker for the week with the Shanghai Composite Index declining 0.7%. Economic data for the week was softer with retail sales expanding by a below-consensus 3% from a year ago, down from October’s 4.8% rise and highlighting Chinese consumers’ unwillingness to spend. Last month, China suffered its biggest outflow on record from its financial markets amid concerns about U.S. trade tariffs and broader economic risks under the incoming Trump administration.
Market Moves of the Week:
President Cyril Ramaphosa has officially signed all sections of the Basic Education Laws Amendment (Bela) Act into law this week with the approval of parties within the government of national unity (GNU) following a three-month consultation period. Ramaphosa did so despite earlier attempts by the Democratic Alliance and trade union Solidarity to prevent the implementation of two contentious clauses of the Act, relating to admissions and language policies.
SA has experienced no load shedding for more than six months and Eskom expects to pencil in a profit of more than R10bn by the end of March 2025. On Thursday, Eskom released its financial results — nine months late. The power utility reported a loss of R55-billion for the year ending 31 March 2024. The financial loss reflects complexities tied to accounting standards and the restructuring of Eskom into three separate entities: generation, transmission, and distribution — starting with its transmission business being sold off in July 2024.
The JSE firmed marginally on Friday after the release of key US inflation data, which provided some relief and a slight improvement in risk sentiment after Wednesdays hawkish tone surrounding the Feds interest rate outlook for the year ahead. However, the all-share index was down 2.9% for the week with all the major sectors posting losses.
The rand, in line with most emerging market currencies experienced significant volatility this week, closing at R18.31 to the US dollar, over 2% weaker on the week.
Chart of the Week:
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