Dear Friends,
Looking back on 2024, it clearly echoed many of the themes from 2023. There were some brief economic growth scares along the way, but the broader economy continued to defy expectations and surprised once again to the upside. As 2025 approaches, there are reasons to remain cautiously optimistic. Cautious because no market environment is ever permanent, and change is always potentially around the corner. Optimistic because constructive long-term macroeconomy trends are recognizably in place. Plus, potential tax policy and deregulation efforts in 2025 could provide some semblance of a tailwind — particularly from an economic perspective. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. Key Fed Inflation Measure Shows 2.4% Rate in November, Lower Than Expected
Prices barely moved in November but still held higher than the Federal Reserve’s target when looked at a year ago, according to a Commerce Department measure released Friday. The personal consumption expenditures price index, the Fed’s preferred inflation gauge, showed an increase of just 0.1% from October. The measure indicated a 2.4% inflation rate on an annual basis, still ahead of the Fed’s 2% goal, but lower than the 2.5% estimate from Dow Jones. The monthly reading also was 0.1 percentage points below the forecast.
Excluding food and energy, core PCE also increased 0.1% monthly and was 2.8% higher than a year ago, with both readings also being 0.1 percentage points below the forecast. Fed officials generally consider the core reading to be a better gauge of long-run inflation trends as it excludes the volatile gas and groceries category. The annual core inflation reading was the same as in October while the headline rate rose 0.1 percentage point. The readings reflected little increase in goods prices and a 0.2% rise in services prices. Food and energy prices both posted 0.2% gains as well.3
2. Powell Signals Fed’s Focus Has Returned Firmly to Inflation
Federal Reserve officials capped 2024 with a third-straight interest-rate cut and a strong signal that inflation concerns are back in the fore. Officials now see it taking much longer for inflation to reach their 2% target, which they have missed for nearly four years. As a result, they dialed back expectations for rate cuts next year, and Powell made clear that any adjustments would hinge on further progress in cooling price increases.
The stronger focus on inflation is a significant shift in strategy from September when officials saw labor market softening as the greater risk. But recent data have reignited concerns about inflation stalling above the central bank’s 2% goal — as have policy proposals from President-elect Donald Trump. The median policymaker now sees just a half-percentage point of reductions next year, half of what was expected in September. Markets reacted swiftly and violently to the Fed’s new projected path. US Treasury markets and stocks tumbled, while the US dollar rallied to the strongest level in more than two years.2
3. The Fed Cut Rates. Mortgage Costs Went Up
Hopes were high that the Federal Reserve could make homes more affordable by cutting interest rates. So far, mortgage rates are rising instead. Average 30-year mortgages have climbed to around 6.7% from roughly 6.1% since the Fed started lowering rates in September, according to Freddie Mac. And they are only poised to rise further. That is because mortgage rates move with the yield on the 10-year Treasury, which has surged this week.
Mortgage rates are based on long-term Treasury yields. Those are mostly driven by expectations for where short-term interest rates will be in the future, rather than where they are now. And those expected rates have been going up, even as actual rates have been dropping. A big reason why rate expectations have been rising is inflation: After falling steadily back toward the Fed’s 2% target, the pace of price increases has recently stalled out above that level. Most analysts still expect inflation to fall a little further next year, but the recent trend has become hard to dismiss. Longer-term Treasury yields are set not just by investors’ calculations about where short-term rates will go over the next couple of years, but also by their broad assessment of the risks of holding on to bonds for an extended period. Factors such as stubborn inflation, elevated budget deficits, and the prospect of tariffs and tax cuts in a second Trump administration have all helped turn investors against longer-term Treasurys in recent weeks. As a result, the 10-year yield has climbed more than the two-year yield.1
4. BOJ’s Ueda Hints at Chance of Later Rate Hike, Sending Yen Lower
Bank of Japan Governor Kazuo Ueda opened up the possibility of waiting longer for his next interest rate hike in comments that lowered expectations of a January move and hammered the yen. Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. His comments, made at a briefing after the central bank stood pat on rates, extended the yen’s losses against the dollar, with the currency breaching the 157 mark, the lowest level since July.
The governor is searching for the right moment for the third rate hike since the bank ended its negative rate policy in March this year, and appears to be guiding the debate toward a decision in either January or March 2025. The Japanese currency was already weaker after the central bank left its benchmark rate at around 0.25%, an outcome expected by more than half of economists surveyed by Bloomberg.2
5. Bank of England Holds Rates but Vote Split Surprises Markets
The Bank of England on Thursday ended its last meeting of the year with a decision to leave interest rates unchanged, after U.K. inflation rose to an eight-month high. Analysts had widely expected a rate hold at the December meeting, as policymakers remain concerned with stubborn services inflation and wage growth. The BOE has already taken its key rate from 5.25% to 4.75% this year in two quarter-percentage-point moves.
In a deviation from expectations, three members of the Monetary Policy Committee voted to reduce rates, while six were in favor of a hold. Economists polled by Reuters had forecast only one member would vote to cut. Sterling pared gains against the U.S. dollar directly following the BOE announcement, trading 0.25% higher at 12:40 p.m. The greenback staged a broad rally on Wednesday after the U.S. Federal Reserve cut interest rates by a quarter point but signaled a more hawkish outlook for 2025. It gave up some gains on Thursday morning. In a statement, the BOE said the increase in U.K. headline inflation in November to 2.6% was slightly higher than previously expected, adding that services inflation remained “elevated.” BOE staff also downgraded their economic forecast for the fourth quarter of 2024, now predicting no growth, compared with the 0.3% expansion predicted in its November report. U.K. growth figures have come in weaker than expected in recent months, with the economy posting a surprise 0.1% contraction in October.3
6. A Special Week: Gretchen Walsh Achieves Greatest Short Course Performance Ever
Surprised by the sheer dominance that Gretchen Walsh imposed on the world’s best sprinters at the Short Course World Championships? Then you haven’t been paying close enough attention to the 21-year-old’s trajectory over the past three years since she arrived at the University of Virginia.
Walsh was destined for greatness in Budapest — but to this extent, this flair for record-breaking fireworks? Seven gold medals could have been foreseen, perhaps more if Walsh competed in backstroke or on additional relays. But nine individual world records in six days? Simply, that has never been done in swimming history. The summer of 2024 was Walsh’s long-course breakout, Walsh breaking Sarah Sjostrom’s world record in the 100-meter butterfly before winning five Olympic medals in Paris. But she had dominated the college ranks long before that. Walsh has developed underwater dolphin kicks superior to any other female swimmer in the world, and short-course racing allows that skill to mask any stroke flaws.5
Financial Markets
1. Dow Closes Nearly 500 Points Higher on Cooler Inflation Data
The Dow Jones Industrial Average bounced on Friday to close out a tough week that saw the index plunge 1,100 points in a single day and complete its longest losing streak since the 1970s. Some cooler-than-expected inflation data helped fuel the session’s bounce. The 30-stock Dow gained 498.02 points, or 1.18%. The S&P 500 added 1.09%, while the Nasdaq Composite advanced 1.03%.
November’s reading of the personal consumption expenditures price index – the Federal Reserve’s preferred inflation metric – increased 2.4% year-over-year. That was a tad less than economists expected and helped defuse some of the bearishness that arose earlier this week when the Fed said it would dial back future rate cuts in part because of stubborn inflation. It’s a positive end to a tumultuous week. During Thursday’s trading session, the Dow eked out a 15-point gain and ended a 10-day losing streak — its longest since 1974. The small gain came a day after the Dow plunged 1,100 points on Wednesday. The Fed’s indicating just two cuts next year, instead of the four it originally forecast, was the catalyst for the decline.3
2. VW, Union Agree to Cut Capacity and Keep German Plants Open
Volkswagen AG reached an agreement with labor leaders to cut capacity at its namesake brand while avoiding factory closures, capping three months of tense negotiations and preventing further union walkouts. VW agreed to keep the brand’s 10 German factories operational and reinstate job security agreements until 2030, the works council said Friday, confirming an earlier Bloomberg report. In exchange, workers agreed to forego some bonuses, reduce the number of trainees who get permanent employment, and cut capacity at five sites by several hundred thousand units.
The measures hammered out in five rounds of negotiations, are a far cry from the drastic savings that VW originally proposed. Labor leaders pushed back hard against plans to lay off thousands of workers, cut monthly wages, and close three German factories to make the VW brand more competitive. Still, the deal hands Chief Executive Officer Oliver Blume a fresh start to turn around Europe’s biggest carmaker as it confronts dwindling market share in China and slowing demand for electric vehicles in Europe and the US. Both sides had aimed to strike an agreement by Christmas. VW shares rose 1.7% earlier Friday in anticipation of an agreement, though they’re down roughly 21% this year.2
3. Lilly Rises After Novo Setback Cements Its Weight Loss Lead
The fierce battle between weight-loss drug makers has led to sky-high Wall Street expectations, with investors anticipating new medicines that are incrementally more powerful and easier to take. Now the industry may be hitting a ceiling.
Novo Nordisk A/S posted study results Friday that found patients using its experimental obesity shot CagriSema lost 20.4% of their body weight over 68 weeks. That was less than the 25% drop Novo had predicted and sent the company’s shares plummeting. The disappointing results led to investors giving the edge to its competitor, Eli Lilly & Co. The findings were roughly in line with the performance of Lilly’s Zepbound shot, which is already on the market and competes with an existing Novo treatment, Wegovy. The two companies have been developing next-generation versions of their weight-loss drugs that work slightly differently. Lilly shares advanced 7% when markets opened on Friday, while Novo’s stock fell as much as 29%.2
4. Boeing Resumes Production of Airplanes, Including 737
Boeing has resumed production across its 737, 767, 777/777X airplane programs. The jet maker’s factories in the Pacific Northwest have come back online using a safety-management system to identify and address potential issues and ensure an orderly restart, Chief Operating Officer Stephanie Pope said on LinkedIn. “In particular, we have taken time to ensure all manufacturing teammates are current on training and certifications while positioning inventory at the optimal levels for smooth production,” said Pope, who also serves as executive vice president, president, and chief executive of Boeing commercial airplanes.
Boeing earlier in the month said it had restarted production of its bestselling 737 MAX jets, nearly three months after the company’s machinists union began a debilitating strike. Some 33,000 machinists returned to work in November after securing a new four-year labor deal.1
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
(5) www.swimmingworldmagazine.com
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
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