Market Review 20th January 2025

Everything you need to know, Simplified!

Summary

• December inflation in both the UK and US came in below expectations, sparking a rally in global asset prices and reducing pressure on equity and bond markets

• Services inflation, a critical focus for markets and central banks, slowed more than anticipated, reinforcing confidence in the global disinflationary trend

• UK services inflation fell from 5.0% to 4.4%, contributing to a headline Consumer Price Index (CPI) reading of 2.5%, though core services inflation remains elevated at 5.2%

• While the Bank of England (BoE) foresees a temporary uptick in inflation before moderation, the Federal Reserve (Fed) remains wary of upside inflation risks tied to strong US economic performance and fiscal uncertainty

• Global equities gained 2.9%, with the UK FTSE 250 index rising 4.4% to return to positive territory for the year. All sectors contributed positively, led by real estate, utilities, and cyclical sectors

• US equities rebounded with value stocks leading gains, supported by rising oil prices and strong bank earnings

• Chinese equities also performed well, bolstered by surprisingly robust Gross Domestic Product (GDP) data and mid-sized company strength

• Falling inflation drove bond yields lower, with UK 10-year gilt yields dropping 20 basis points to 4.64% and US 10-year treasury yields declining 16 basis points to 4.6%

• The week ahead: Trump is inaugurated today, could his presidency be one of ‘high implied volatility, low realised’? The Bank of Japan (BoJ) are likely to hike rates on Thursday.

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Markets last week

Economic summary

December inflation figures in the UK and US came in below expectations, alleviating the downward pressure that had built on equity and bond markets since early December. Negative positioning had felt crowded in recent weeks, and the data sparked a remarkable bounce in global asset prices.

Services inflation, a key concern for markets and central bankers, slowed more than anticipated, reinforcing confidence in the global disinflationary trend. In the US, services inflation eased to 3.4%, while headline inflation rose by 0.2% to 2.9%. Markets looked past the headline figure to focus on the moderation in services price growth.

In the UK, services inflation slowed from 5.0% to 4.4%, significantly contributing to the softer-than-expected headline CPI reading of 2.5%. However, core services inflation, which excludes volatile components, remains elevated at 5.2%.

While these data points indicate gradual progress in curbing inflation, both the BoE and the Fed remain cautiously dovish. The BoE anticipates a temporary uptick in headline inflation before a more enduring decline later this year. Meanwhile, the Fed has grown increasingly concerned about upside inflation risks, given the strength of the US economy and uncertainty around fiscal policy directions.

On Friday, markets found further support from Trump’s statement on Truth Social, where he detailed a “very good” phone call with Chinese President Xi Jinping. Trump suggested that the two leaders would work immediately to address global challenges and pursue peace. This was interpreted as a positive signal for US-China relations, helping to calm concerns about trade tensions.

Equities

The improving inflation picture and easing bond yields supported risk assets, particularly equities. Global equities gained 2.9%, with the UK mid-cap FTSE 250 index performing particularly well, rising 4.4%. This gain brought the index back into positive territory for the year-to-date. The broader UK market logged a 3.3% increase, with all sectors contributing positively. The best-performing sectors were real estate and utilities, supported by declining bond yields, alongside cyclical sectors such as financials, materials, and industrials.

US equities ended the week higher, rebounding from last week’s losses. Value stocks led the rally, supported by rising oil prices that bolstered the energy sector. Financials also posted strong gains as major banks delivered upbeat earnings reports, setting a positive tone for the earnings season.

Chinese equities performed well, with domestically focused smaller and mid-sized companies outperforming on the back of surprisingly robust GDP data. China’s economy grew at a 5.4% annualised rate in the final quarter, pushing economic growth just above the Chinese Communist Party’s strategically significant 5% growth target for the year.

Bonds

The fall in inflation drove bond yields lower, with UK gilts leading the charge. The UK 10-year yield declined 20 basis points to 4.64%, while the US 10-year yield fell 16 basis points to 4.6%.

Credit markets also performed well in a week of heavy issuance. The market is currently well-supported technically as investors look beyond the tightness of spreads and focus on the attractive opportunities presented by all-in yields. For instance, all-in yields in UK investment-grade credit are near the 90th percentile for this century so far, despite spreads being close to all-time tights. Such high yields imply attractive forward returns.   

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The week ahead

Monday: US Presidential inauguration

Our thoughts: Trump is inaugurated today, but he has been the main influence on the political landscape since 5 November. He is expected to begin signing executive orders shortly after his inauguration. While his approach is often unpredictable, as a seasoned negotiator, it is unlikely that his policy threats will be implemented in full. Instead, global leaders are likely to engage in conciliatory measures to temper potential disruptions. A Trump presidency could be characterised by ‘high implied volatility, low realised volatility’, but time will tell.

Thursday: Bank of Japan rate decision

Our thoughts: A healthy dose of wage growth and inflation support the BoJ in continuing with their policy normalisation – the markets expect a 0.25% rate increase taking the target to 0.5%.

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