Soft US inflation sparks renewed hopes of a Santa rally

General market commentary

Equity markets experienced a strong rebound on Friday, with the S&P 500 rising 1.1% and the Dow climbing 1.2%, reversing earlier losses. This followed the release of the Federal Reserve's economic projections, which suggested a more cautious approach to rate cuts than initially expected. Despite concerns over a potential U.S. government shutdown and ongoing political uncertainty, markets largely shrugged off these risks. On the economic front, November's core PCE inflation rose by 0.1% month-on-month and 2.8% annually, both below expectations, leading to a decline in bond yields, with the 10-year Treasury yield falling to around 4.53%. However, investor sentiment remained volatile, as Jerome Powell's comments regarding fewer rate cuts in 2025 than previously anticipated triggered a market sell-off midweek.

The U.S. economy continues to show resilience, with solid GDP growth in the third quarter and a robust consumer sector able to withstand the Fed's restrictive policies. Despite market fluctuations following the Fed's meeting, which spurred profit-taking and rebalancing, long-term investors can take comfort in the underlying strength of the economy. With inflation moderating and the central bank's cautious stance, markets are adjusting expectations for slower rate cuts, which could provide support for borrowing and consumption in the coming months. Elevated bond yields, while reflecting economic growth and inflation prospects, may offer investment opportunities for those seeking to diversify into intermediate bonds, while the overall market remains positioned for steady growth despite short-term volatility.

Latest market update

• Asian equities mostly rose on Monday, driven by optimism from softer U.S. inflation data and hopes of interest rate cuts in the year ahead. Japanese shares saw significant gains, supported by speculation of a potential Honda-Nissan merger, while other regional markets, including those in Australia, China, and South Korea, also advanced amid renewed optimism over stimulus measures and economic growth prospects.

• US equity futures were significantly higher on Monday, buoyed by optimism for a potential Santa Claus rally and relief from lower-than-expected inflation data. The positive sentiment was further supported by President Biden's signing of a government funding bill, averting a shutdown and ensuring federal agencies remain funded for the next three months.

• The STOXX 50 index dropped 0.3% on Friday, reflecting a 2% weekly decline, despite a late rally driven by stronger US markets. The losses were mainly due to pressures in financial equities and concerns over potential US tariffs on European goods, while consumer cyclicals like Inditex and Ferrari helped cushion the decline.

• The US dollar remained steady on Monday, supported by modest US inflation data and the Federal Reserve's cautious outlook on rate cuts. Meanwhile, the euro struggled, trading near a two-year low at $1.0441, down 5.4% against the dollar this year, as the US currency benefits from higher yields and the Fed's more measured approach.

• Oil prices rose this morning, supported by lower-than-expected U.S. inflation data, which bolstered hopes for further policy easing, although concerns about a supply surplus in 2025 capped gains. Brent crude rose to $73.30 per barrel, while U.S. WTI climbed to $69.85, despite previous market pressure from slower economic growth, weaker oil demand, and a projected peak in China's oil consumption by 2027.

Equities on the move

The following companies experienced moves in their share price driven by analyst ratings, quarterly earnings, or other news:

• Novo Nordisk's shares plummeted by 18% on Friday after its experimental obesity drug, CagriSema, underperformed in a late-stage trial, with weight loss results falling short of expectations. Despite the disappointing data, analysts suggest the drug could still be commercially viable, though the market's reaction may have been exaggerated.

• NVIDIA plans to build a new headquarters in Taiwan, securing around three hectares of land with assistance from the local city government. The move reflects the company's growing presence in Taiwan, where it relies on TSMC for chip fabrication and collaborates with Foxconn, with plans to expand its research and development activities and hire over 1,000 people.

• Honda and Nissan are aiming to finalise the terms of a merger by June 2025, having already signed a basic agreement, with Mitsubishi Motors also considering joining the deal. The merger could create the third-largest global automaker by sales, as both companies seek to address declining overseas sales, particularly in China, and the growing competition in the electric vehicle market.

• Palantir Technologies and Anduril Industries are in talks with around a dozen competitors to form a consortium aimed at bidding for U.S. government defence contracts. The group is expected to include major tech firms such as SpaceX, OpenAI, and Scale AI, and will focus on leveraging cutting-edge technologies like AI and drones to enhance U.S. defence capabilities.

• Volkswagen has agreed to cut 35,000 jobs by 2030 as part of a major restructuring plan aimed at improving efficiency and reducing capacity. The job cuts, which will not involve compulsory redundancies, are expected to help the company save €15 billion annually while ensuring its long-term competitiveness.

• FIFA and Netflix have signed a deal to broadcast the 2027 and 2031 Women's World Cup tournaments in the U.S. and Puerto Rico, marking the first time Netflix will air an entire competition. The agreement includes live coverage in English and Spanish, as well as a documentary series leading up to both tournaments.

• Carnival Corp forecast strong bookings for 2025, driven by resilient demand and higher spending on experiences, though it projected annual profit below estimates due to rising costs. The company reported better-than-expected quarterly profits and sales, with bookings for 2025 surpassing 2024 in all quarters.

• Guggenheim analysts initiated coverage of Reddit with a Buy rating and a $210 price target, citing strong user growth, improved monetisation, and expanding business initiatives as key drivers. They expect Reddit to outperform its peers, with projected revenue and EBITDA growth significantly exceeding current consensus estimates.

Upcoming data and events

This week, Wall Street faces a quiet period with a shorter trading session on Christmas Eve and a market closure on Christmas Day. However, investors will be looking out for key data, including the latest consumer confidence index and durable goods orders, while also watching for a potential Santa Claus rally despite recent hawkish signals from the Federal Reserve.

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