Massive spike in yields and oil prices

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• US inflation and yields surge

• ECB cuts by 25bps again and revises growth down

• Swiss make biggest cut since 2015

• UK economy contracts again

• Brent hits $75 on EU sanctions and higher US inventories

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: The week’s economic spotlight was Wednesday’s Labor Department report on consumer price inflation (CPI). Both headline and core CPI (excluding food and energy) rose 0.3% in November, aligning with expectations. Year-over-year, core inflation held steady at 3.3%, while overall inflation edged higher to 2.7% from October's 2.6%. Shelter costs accounted for nearly 40% of the monthly price increase, with declines in very few components of the index. Producer price inflation also ticked up slightly in November, rising to 0.4% from 0.3%.

• Unsurprisingly, long-term U.S. Treasuries experienced losses this week, with the yields on the 10-year and 30-year benchmark bonds increasing by roughly 25 bps—the steepest weekly gain in over a year. A lackluster 30-year bond auction on Thursday contributed to the rise, but the primary driver was an upward adjustment in terminal rate expectations following higher inflation reading. U.S. rates are now projected to decline gradually to 3.8% by the end of 2025, compared to 1.75% for Europe and 2.7% for Canada. While markets are nearly certain the Federal Reserve will cut rates next week, with an implied probability of 96%, the probability of an additional move in January have fallen to just 20%.

• A wave of rate cuts in recent days, including aggressive 50 bp reductions by Switzerland and Canada and a 25 bps cut by the European Central Bank (read more on this below), has propelled the U.S. dollar higher. It gained 1% against the euro, 1.6% versus the Swiss franc, and 1.8% against the Japanese yen.

• EU: The European Central Bank (ECB) reduced interest rates for the third consecutive meeting, signaling further cuts in 2025 as inflation approaches 2% and the economy weakens. The deposit rate was lowered by 25 basis points to 3%, bringing the cumulative rate reduction since June to 100 basis points. In a notable shift, the ECB dropped its pledge to keep rates "sufficiently restrictive for as long as necessary," adopting a more dovish tone. President Christine Lagarde emphasized that while the direction of rates is clear, the pace of easing decisions will be data-dependent and taken on a meeting-by-meeting basis.

• Growth projections were downgraded for the next years and ECB now expects GDP to grow 0.7% this year and 1.1% in 2025. The inflation forecasts for 2024 and 2025 were also revised lower. Market response was subdued, with modest losses in euro-area bonds and the euro, which dipped 0.2% after the announcement. Traders largely focused on the removal of the “restrictive” language, maintaining bets on an additional 125 basis points of easing next year. Lagarde also acknowledged that the neutral rate was not discussed but hinted at future deliberations on the topic. An ECB report estimates the neutral rate between 1.75% and 2.5%.

• Switzerland: The Swiss National Bank (SNB) surprised markets with a sharper-than-expected 50 basis-point rate cut, its largest reduction since January 2015. The move aims to counter subdued inflationary pressures and maintain consumer price growth within its defined range for price stability of 0% to 2%. Alongside the cut, the SNB slashed its inflation forecast for 2025 to 0.3%, halving its September projection.

• UK: The economy has lost momentum after a strong start to the year. In October, real GDP unexpectedly contracted by 0.1% month-on-month, mirroring September’s decline, as production output weakened. The services sector, the largest contributor to the economy, showed no growth in either month. Despite this, the economy expanded 0.1% over the three months through October. With persistently high services inflation, the Bank of England is expected to keep interest rates unchanged at its upcoming meeting and adopt a cautious approach in 2024.

• Japan: Investor expectations for the Bank of Japan’s (BoJ) next rate hike have shifted, with consensus now favoring a 25-basis-point increase at its first meeting of the new year. This timing likely reflects the BoJ’s preference to assess additional data, including two more inflation reports and the quarterly economic outlook. The central bank has reiterated that any rate hike will depend on meeting its projections for economic growth, inflation, and wage increases. Japan’s final GDP data revealed a 0.3% quarter-on-quarter expansion in the third quarter, slightly exceeding the 0.2% consensus forecast and preliminary estimate. Further optimism stemmed from the BoJ’s tankan survey, which showed improved sentiment among large manufacturers in the fourth quarter, with more firms optimistic than pessimistic about business conditions.

Equity Markets

• US: The S&P 500 saw a slight decline of 0.5%, ending a three-week winning streak, while the Dow fell nearly 2%. Meanwhile, the NASDAQ edged higher, bolstered by strong performance in communication services stocks. For the second consecutive week, U.S. large-cap growth stocks outpaced their value counterparts by a significant margin, further widening their year-to-date lead. As of Friday's close, the growth index gained approximately 3.9% over the past two weeks, while the value index declined by an equivalent 3.9%.

• With just over two trading weeks remaining in 2024, the S&P 500 is set to achieve consecutive annual gains of over 20% for the first time since 1999. As of Friday, the index's total return stands at nearly 29% year to date, following a 26% return in 2023.

Commodity Markets

• Oil: Brent crude oil prices climbed 4.5% to $74.35 per barrel as of the end of the trading week on Friday after EU sanctions targeted Russian oil exports and the US EIA reported U.S. crude-oil inventories fell for a third consecutive week as imports declined, offsetting a rise in domestic production to a record level. Commercial crude oil inventories, excluding the Strategic Petroleum Reserve, fell by 1.4 million barrels to 422 million barrels for the week ending December 6, placing them approximately 6% below the five-year seasonal average.

• Goldman Sachs offered a mixed oil outlook, highlighting upward pressure from geopolitical concerns in Syria and China’s monetary policy, alongside demand growth in India, which saw a 400k b/d increase in 2024 and is expected to add another 300k b/d in 2025, accounting for 30% of global growth.

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