U.S. Inflation and Rate Path Worries Grip Global Financial Markets

Alexander Garcia
13 Jan, 2025
Miami

Stock market indexes struggled to rise above the flatline amid renewed worries about inflation and a shift in interest rate outlook following a string of hotter-than-expected jobs and other economic reports. 

The S&P 500 index decreased 0.6%, and the Nasdaq Composite declined 1.2% in Monday's trading, and the dollar extended its advance against the euro, the pound, the yen, the Swiss franc, and the Indian rupee. 

Market indexes sold off sharply in Friday’s trading and extended holiday-shortened weekly losses, and the U.S. dollar advanced against major currencies around the world between 2% and 4% last week. 

Wall Street sentiment soured amid changing expectations for interest rates in the near future, and investors have been on the defensive after the sudden and sustained increase in yields over the last three months.

The yield on 10-year U.S. Treasury notes jumped from 3.6% in late September to 4.8% in Monday's trading, and the yields are likely to stay elevated amid a rebound in inflation and a strong jobs market. 

Last week, a private survey on the service sector confirmed expansion in business activities, but participants lifted inflation outlook in the months ahead.

Moreover, December’s nonfarm payrolls expanded more than expected, confirming that the Federal Reserve could keep higher interest rates for longer and may even consider raising them if stubborn service inflation fails to weaken in the months ahead.

On the economic front this week, investors are looking forward to the release of reports on U.S. inflation, housing market activities, industrial production, and retail sales.

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.8% to 5,780.87, the Nasdaq Composite fell 1.6% to 18,861.17, and the Russell 2000 index inched down by 0.9% to 2,169.48. 

The yield on 2-year Treasury notes edged higher to 4.40%, 10-year Treasury notes inched up to 4.77%, and 30-year Treasury bonds increased to 4.95%.

WTI crude oil increased $2.55 to $79.11 a barrel, and natural gas prices edged up 3 cents to $3.95 a thermal unit.

Gold decreased by $24.76 to $2,660.85 an ounce, and silver fell by $0.76 to $29.61. 

The dollar index, which weighs the US currency against a basket of foreign currencies, decreased by 0.23 to 109.92 and traded at a two-year high. 

 

U.S. Stock Movers 

Abercrombie & Fitch jumped 8% to $147.99 despite the apparel retailer revising its holiday sales outlook slightly higher.

The retailer estimated holiday quarter sales to increase between 7% and 8%, compared to the previous estimate between 5% and 7%, but significantly lower than 21% from a year ago. 

Lululemon Athletica increased 1.9% to $403.29 after the specialty apparel retailer lifted its fourth quarter sales outlook. 

The company now estimated sales to increase between 11% and 12% to between $3.56 billion and $3.58 billion, higher than the previous range between $3.48 billion and $3.51 billion. 

The company is now forecasting its earnings per share to range between $5.81 and $5.85 compared to the previous estimate between $5.56 and $5.64. 

American Eagle Outfitters decreased 3.5% to $15.68 despite the retailer raising its fourth quarter outlook. 

The company said comparable sales in the quarter ending on January 4 were up in low single digits compared to the previous estimate of a 1% increase. 

The company also estimated fourth quarter operating profit of $135 million compared to the previous estimate of $125 million. 

 

Sluggish Economic Outlook Contribute to Weakening Euro and Rising Bond Yields

European stock market indexes declined in Monday's trading, and bond yields advanced to seven-month highs amid ongoing political turmoil and a sluggish economic outlook. 

Benchmark indexes in Paris, Frankfurt, Milan, and London declined after bond yields rose and the euro and the pound sank 0.5% and approached two-year lows.

Investors turned cautious and shifted expectations of future U.S. rate cuts after December's payrolls growth accelerated, reducing the possibility of an imminent rate cut and boosting the dollar. 

Moreover, ongoing political turmoil in Germany and France contributed to market anxieties and supported the increase in bond yields in the currency union. 

In the week ahead, investors are looking forward to the release of inflation updates in France, Spain, Italy, and the Euro Area. 

In the UK, investors are anticipating the release of retail sales, international trade data, industrial production, and retail sales.

China's exports and trade surplus soared in December and in 2024, and imports edged up about 1%, indicating a decreasing reliance on manufactured products from the West. 

 

Europe Indexes and Yields

The DAX index decreased by 0.6% to 20,137.22; the CAC-40 index fell by 0.3% to 7,408.64; and the FTSE 100 index inched lower by 0.3% to 8,224.19. 

In the previous week, the DAX increased 2.2%, the CAC-40 index advanced 2.7%, and the FTSE 100 index gained 0.8%. 

The yield on 10-year German bonds edged higher to 2.59%, French bonds rose to 3.43%, the UK gilts increased to 4.86%, and Italian bonds rose to 3.84%.

Currency traders are anticipating the euro to trade below parity with the U.S. dollar as the European Central Bank implements its four rate cuts this year, and the British pound is likely to sink to $1.03 amid worsening economic outlook. 

The euro edged lower to $1.02; the British pound inched lower to $1.204; and the U.S. dollar strengthened to 91.67 Swiss cents.

Brent crude increased $1.55 to $81.32 a barrel, and the Dutch TTF natural gas fell by €2.81 to €48.25 per MWh. 

 

Europe Stock Movers

Energy stocks advanced after the U.S. placed additional and tougher sanctions on Russian oil and gas producers and shipping companies doing business with China and India.

BP plc increased 1% to 429.15 pence, Shell PLC added 1% to 2,653.50, and TotalEnergies SE advanced 0.7% to €55.64. 

Luxury stocks in Paris and Milan struggled to stay above the flatline after China's imports edged up only 1% in December. 

Hermes International SCA increased 1% to €2,335.0, Kering SA decreased 1.1% to €225.15, and LVMH fell 0.8% to €639.80. 

Leading automakers in Europe advanced despite China's 2024 electric vehicle exports surging to 6.04 million units in 2024, an increase of 22% from a year ago. 

Mercedes-Benz Group advanced 0.8% to €55.49, Volkswagen AG increased 0.1% to €92.70, and Ferrari NV fell 0.9% to €406.30. 

Deutsche Bank AG decreased 2.4% to €16.68, Commerzbank AG declined 0.5% to €16.57, Banco Santander eased 1.3% to €4.51, HSBC fell 1.3% to 789.10 pence, and Barclays PLC eased 1%. 

 

 

China and Hong Kong Indexes Sink Further 

Stock market indexes in China and Hong Kong fell and traded at four-month lows after the strong U.S. jobs reports knocked down rate cut expectations and boosted the U.S. dollar.

The Hang Seng index dropped 1.2%, and the CSI 300 index declined 0.5% following the release of December's nonfarm payrolls report. 

The U.S. economy added 256,000 jobs in December, faster than 212,000 in the previous month, and accelerated for the second month in a row, according to a report released by the U.S. Bureau of Labor Statistics. 

The strong labor market report also supported the case for the Federal Reserve to lower rates by a smaller amount and raised prospects of a pivot to a rate increase later in the year. 

The shift in outlook for the U.S. interest rates knocked down market indexes in China, Korea, India, and Australia.

Japan's financial markets are closed for a public holiday. 

Investors reviewed the international trade data for December, and exports soared 10.7% and imports advanced 1%. 

 

China's Exports and Trade Surplus Surge to Record Highs In December and 2024 

Exports advanced for the ninth month in a row and rose at the fastest pace in four years to $335.6 billion as customers front-loaded orders ahead of possible escalation in U.S. tariffs in the second administration of Donald Trump.

Imports increased 1% to a 27-month high of $230.8 billion, reversing a 3.9% fall in November, according to trade data released by General Administration of Customs on Monday. 

China's trade surplus rose to $104.8 billion in December, an increase from $75.31 billion a year ago, and the largest since February after the surge in exports. 

For the full year of 2024, exports advanced 5.9% to $3.6 trillion, and imports increased 1.1% to $2.6 trillion, lifting the full-year surplus to a record high of $992.2 billion from $823.2 billion a year ago. 

China's exports in the year were driven by a surge in demand for electric vehicles, solar panels, and advanced chips. 

Electric vehicle shipments in 2024 soared to a record 6.04 million units, an increase of 22% from a year ago.

In value terms, exports increased 15.5% to a record $117.4 billion from a year ago in 2024. 

 

China Stock Movers 

The Hang Seng Index dropped 1.2% to 18,837.39, and the mainland-focused CSI 300 index decreased 0.5% to 3,714.42. 

Technology stocks continued to decline for the third week in a row following the rise in U.S. bond yields, lowering the appeal of high-growth companies. 

Baidu Inc. declined 3.7% to HK $75.60, Alibaba Group Holding Ltd. dropped 1.9% to HK $78.05, JD.com Inc. fell 2% to HK $128.40, and Meituan closed down 3.2% to HK $135.70. 

Yibin City Commercial Bank traded around HK $2.59 after the company listed its stock on the Hong Kong Stock Exchange. 

The bank priced its initial public offering at HK $2.59 and raised net proceeds of HK $1.71 billion, or $219 million. 

New Gonow Recreational Vehicles plunged 15% to HK $1.10 after the company listed its share on the Hong Kong Stock Exchange and raised HK $305 million, or $39 million. 

The vehicle maker sold 240 million shares at a price of HK $1.27 per share, near the bottom end of its pricing range between HK $1.24 and HK $1.64.