All eyes are firmly on the Federal Reserve (Fed) this week as markets brace for the final interest-rate decision of 2025. With signs of a cooling labour market and despite lingering inflation concerns, investors are anticipating a 25 basis point (bp) cut to the federal funds rate, dropping it to a range of 3.50–3.75%. That would mark the lowest level for more than three years, with rates having peaked in this cycle at 5.25–5.50% in mid-2023. Sentiment has firmed in recent weeks, particularly after perceived dovish remarks from several Fed officials and some softer economic data. US equity markets finished last week modestly higher, with the S&P 500 recording a gain of +0.3% (in dollars), while Treasury yields rose across most maturities despite the expected rate cut this week.

European equities on the whole made positive strides last week, with the MSCI Europe ex-UK index rising by +0.6% (in euros), despite an uptick in broader inflation. Beneath the headline level, returns varied, with German equities the pick of the larger economies while French markets lost ground. In the UK, large and mid-cap stocks posted weekly losses amid the ongoing malaise in the wider economy. The FTSE 100 and FTSE 250 declined by -0.6% and -0.5% respectively, with energy and financials lagging. Meanwhile in Asia, the Japanese Nikkei 225 advanced +0.5% (in yen) despite a hawkish update from Bank of Japan Governor Kazuo Ueda, who hinted at a rate hike later this month (1). Chinese equities also made slight gains, with the Shanghai Composite concluding Friday’s trading +0.4% higher (in renminbi) thanks to positive momentum in domestic technology stocks. 

In the commodity space, oil prices made modest gains, helped in part by supply-side nervousness. Brent crude rose by +0.9% to $63.78 a barrel, with further support coming from the expected Fed rate cut later this week. Gold was somewhat directionless, ultimately ending the week +0.1% higher at $4,205 an ounce. The uptick in Treasury yields proved a slight headwind for the precious metal, despite lower Fed rates ultimately being supportive for prices.

(Source 1: Bank of Japan – Japan’s Economy & Monetary Policy, Speech at a Meeting with Business Leaders in Nagoya, 01/12/25)

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