The markets this week

The FTSE 100 added a measly 0.29% this week despite hitting 6,700 on Thursday.

The Index ended the week at 7,576 after falling nearly 1% on Friday.

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The Bank of England kept its benchmark interest rate at 5.25% for a third month running in November, as expected. However, policymakers reiterated their willingness to increase borrowing costs again if evidence of more persistent inflation were to emerge.

Official data showed that the UK economy shrank in October by 0.3% sequentially, after rising 0.2% in September. Relative to the three months to July, UK gross domestic product was flat in the three months to October.

Markets in Europe this week

The STOXX Europe 600 Index ended the week 0.92% higher as financial markets appeared to increasingly expect key central banks to cut interest rates in 2024. Major stock indexes were mixed. France’s CAC 40 Index gained 0.93%, but Germany’s DAX and Italy’s FTSE MIB were modestly lower.

The European Central Bank left its key deposit rate unchanged at a record high of 4.0% but cut its inflation and growth forecasts for 2023 and 2024. The bank called for inflation to slow to just below its 2% target by 2026, a move widely seen as paving the way for a reduction of interest rates. It expects the economy to grow 0.6% this year, a tick below the previous projections, and 0.8% in 2024, down from 1.0%.

US Markets this week

The S&P 500 Index, Nasdaq Composite, and Dow Jones Industrial Average recorded their seventh consecutive week of gains — the longest streak for the S&P 500 since 2017. The gains lifted the first two benchmarks to 52-week highs and the Dow to an all-time record. Continuing a recent pattern, the week’s gains were also broadly based. The equally weighted index of S&P 500 stocks outpaced its market-weighted counterpart by 1.31 percent. Small-caps also outperformed, and the 5.55% surge in the Russell 2000 Index lifted it out of bear market territory (down 20% or more) for the firstt ime in over 20 months.

The primary factor driving sentiment appeared to be amore benign inflation environment in the eyes of both investors and policymakers. Tuesday’s report on consumer price inflation was roughly in line with estimates coming in at 0.1% month over month.

Federal Reserve’s final policy meeting of the year. Officials left rates unchanged, as expected, but the quarterly “dot plot” summarisingi ndividual policymakers’ rate expectations indicated that the median projection was for 75 basis points of rate cuts coming in 2024, up from the 50 basis points of easing in their previous projection.

Retail sales data on Thursday arguably disrupted the disinflation narrative, but investors appeared to take it in stride. Retail sales unexpectedly rose 0.3% in November, while October’s decline was revised lower, indicating a strong start to the holiday shopping season. Other data released during the week indicated some surprising weakness in the manufacturing sector

Markets in Asia this week

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.1% and the broader TOPIX Index up 0.3%. Shares were supported by the U.S. Federal Reserve giving the clearest sign yet that it will pivot away from monetary policy tightening, as it held interest rates steady and projected more aggressive rate cuts in 2024. Yen strength posed a headwind for Japan’s exporters, however.

The yield on the 10-year Japanese government bond fell to 0.70%, from 0.77% at the end of the previous week, as speculation about the Bank of Japan (BoJ) ending its negative interest rate policy sooner than anticipated waned amid the focus on the Fed’s policy pivot.

Chinese equities declined as persistent deflationary pressures weighed on the economic outlook. The Shanghai Composite Index fell 0.91% while the blue-chip CSI 300 gave up 1.7%. In Hong Kong, the benchmark Hang Seng Index rose 2.8% amid a global stock rally after the Fed kept interest rates steady on Wednesday and signalled it may start cutting them next year. China’s consumer price index fell 0.5% in November from the prior-year period, accelerating from October’s 0.2% contraction and marking the steepest drop since November 2020 as lower pork prices weighed on food prices. Meanwhile, the producer price index dropped a bigger-than-expected 3% from a year ago, marking the 14th monthly decline. Deflation is concerning for China since economists worry it could unleash a downward spiral of economic activity.

What to look for next week

It’s a much quieter week leading up to the Christmas holiday. We do have UK inflation on Wednesday which could move the FTSE - fingers crossed it’s another low reading. The consensus is for 0.2% month over month after last month's 0.0%. Anything between 0.1% and 0.2% suggests that inflation is actually on target.

The stark difference between the US and the UK economies will be highlighted this week as the final QoQ GDP numbers are released. The US is expected to have grown 5.2% and the UK is likely to have flatlined at 0.0%.

The final thing to watch before the close on Friday is the PCE price index. This is another inflation indicator which will likely tell us that price increases are moderate, and under control.

Have a great final week of trading before Christmas. Volumes are always down around the holiday season but there can also be plenty of volatility due to less liquidity.