Ukraine Halts Gas Transit to Europe

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• Fed Cuts US GDP Forecast

• US and Europe Diverge on Monetary Policy

• S&P’s strongest back-to-back performance since 1997/1998

• Oil and Gas Prices Spike as Ukraine Halts Russian Gas Transit

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: It was a quiet week for economic data releases due to the New Year’s Day holiday. The Atlanta Fed revised its fourth-quarter GDP forecast downward, from 3.1% to 2.6%, citing recent data from the U.S. Census Bureau that led to a reduction in expected growth for real gross private domestic investment, from 1.3% to -0.7%. On a more positive note, the Labor Department reported that initial jobless claims for the week ending December 28 totaled 211,000, a decrease from the previous week's 220,000, marking the lowest level in eight months. Continuing claims also fell to a three-month low of 1.84 million. A big US data week lies ahead for the global economy and markets, including the monthly jobs report and unemployment, job vacancies and other JOLTS indicators and ISM non-manufacturing services data. We’ll also see the minutes from the December Federal Reserve policy meeting.

• Following the hawkish rate cut in December and the revised upward inflation outlook for 2025 by the Fed, markets now expect only two rate cuts this year, with the first 25bps cut fully priced in for June 18th, the 4th FOMC meeting of 2025. The Fed’s policy continues to diverge from the ECB’s, with a full rate cut expected by the ECB on January 30 as part of its easing cycle, while over 100bps of cuts are priced in through 2025.

• EU: The year began with a light macroeconomic data calendar. Spain released its first estimate of consumer price inflation for December, which came in stronger than expected. Nonseasonally adjusted annual inflation rose to 2.8% from 2.4% in November, driven by higher fuel prices. However, core inflation—excluding energy and food prices—also accelerated to 2.6%, surpassing the forecast of 2.4%. The uptick in Spain’s inflation rate seemed to support arguments from more hawkish policymakers within the European Central Bank (ECB) for a cautious, gradual reduction in borrowing costs. Governing Council member Robert Holzmann told Austrian newspaper Kurier that rate setters might delay further interest rate cuts, citing rising energy prices and the potential for a euro devaluation if the U.S. introduces trade tariffs. Still, ECB President Christine Lagarde reiterated in a video that inflation was on track to meet the 2% target by 2025, suggesting that rates would remain on a downward trajectory.

• Markets are closely watching preliminary data on eurozone inflation, set to be released by Eurostat on January 7, ahead of the European Central Bank's first meeting of the year on January 30. Headline inflation is expected to have risen by 2.4% year over year for December, according to FactSet consensus estimates, slightly up from November's reading of 2.2%. Core inflation, which excludes volatile energy and food prices, is forecast to remain unchanged from last month, with an increase of 2.7% year over year.

Equity Markets

• US: Stock indexes showed mixed results during the holiday-shortened week, although broad gains on Friday helped recover from the worst levels. For the week ending January 3rd, the S&P 500, NASDAQ, and Dow each saw a decline of approximately 1%.

• The S&P 500's 25% total return for 2024 marked the second consecutive year of over 20% gains, the strongest back-to-back performance since 1997/1998. However, last year's rally was narrow, with just seven tech stocks accounting for over 53% of the index's total return. The Nasdaq Composite also finished the year up more than 20%, marking its sixth such gain in the past eight years.

Commodities

• Oil: Brent crude prices increased by 4% for the week, reaching approximately $76.7 per barrel by Friday afternoon. While this marked the highest price since mid-October, it remained relatively unchanged from the beginning of 2024. However, this increase is unlikely to last long, as the uptick stems from several other factors, including lower U.S. crude inventories, two terrorist attacks on U.S. soil, President Trump's expected upcoming "maximum pressure" sanctions on Iranian oil exports as well as a surge in gas prices due to a colder winter and termination of Ukraine's gas transit contract with Gazprom.

• The latest of these factors— a complete halt of gas flows through Ukraine—has put upward pressure on European natural gas prices, marking a major shift in the region's energy markets. Benchmark natural gas futures ended the week also 4% higher, approaching a 14-month high of around €50 per megawatt-hour.

• Despite nearly three years of war, Russian gas continued to flow through Ukraine until Gazprom halted shipments on January 1st after Ukraine declined to renew a key transit agreement. Although transit flows have decreased over the last decade to just 15 bcm, Ukraine's transit capacity remains substantial. The last remaining EU buyers of Russian gas via Ukraine, including Slovakia and Austria, have secured alternative supplies, while Hungary will continue receiving gas via the TurkStream pipeline under the Black Sea. Ukraine will lose up to $1 billion annually in transit fees, and to offset the impact, it will raise domestic gas transmission tariffs, potentially costing its industry over $38 million annually. Meanwhile, Gazprom stands to lose around $5 billion in gas sales.

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Our Further Reading Recommendations

• The End of the Affair? The Transit of Russian Gas Across Ukraine (ICDS)

• IMF to Review $44 Billion Argentina Loan in Key Step Toward New Deal (Bloomberg)