Global Markets Weekly Wrap KW 51 : Markets End Year Mixed as Inflation Cools and Central Banks Pivot

Global Markets Weekly Wrap KW 51 : Markets End Year Mixed as Inflation Cools and Central Banks Pivot 

The final full trading week of the year offered a fitting snapshot of the broader market environment that has defined much of this cycle: uneven performance beneath the surface, shifting narratives around growth and inflation, and investors constantly recalibrating expectations as fresh data collided with entrenched positioning. U.S. equity markets ended the week mixed, reflecting both lingering caution and selective optimism. Smaller capitalization stocks struggled the most, with the Russell 2000 finishing lower, while the Dow Jones Industrial Average also posted a modest decline. By contrast, the S&P 500 and the S&P MidCap 400 ended the week essentially flat, and the Nasdaq Composite managed to eke out a gain, underscoring the continued leadership of growth-oriented and technology-heavy segments despite rising scrutiny of valuations.

The week began under a cloud, as the weakness seen in technology shares during the prior period carried over into the opening sessions. Concerns around stretched valuations and the sheer scale of capital being deployed into artificial intelligence infrastructure remained a focal point. Investors appeared increasingly sensitive to the question of whether future earnings growth would be sufficient to justify the aggressive spending plans that many large technology and semiconductor firms have embraced. This hesitation was reinforced by a series of mixed economic data releases, most notably the November employment figures, which added another layer of ambiguity to the outlook for growth and monetary policy.

As the week progressed, however, sentiment began to stabilize and eventually improved. A cooler-than-expected inflation report and a strong earnings release from Micron Technology played an important role in shifting the tone, particularly within the AI-linked segment of the market. These developments helped investors reassess some of the more pessimistic assumptions that had weighed on equities earlier in the week, allowing major indexes to recover part of their losses as the trading period drew to a close.

The labor market data released during the week encapsulated the broader theme of mixed signals. According to the Bureau of Labor Statistics, U.S. employers added 64,000 jobs in November, exceeding consensus expectations and representing a notable rebound from October's sharp contraction. That earlier decline, which was also reported during the same release due to delays caused by the federal government shutdown, was heavily influenced by a significant reduction in federal government employment. In November, hiring was concentrated in sectors such as health care and construction, both of which continue to show resilience even as other areas of the economy exhibit signs of cooling.

At the same time, the unemployment rate rose to 4.6%, marking its highest level in more than four years. This increase has fueled debate about whether the labor market is finally beginning to loosen in a more meaningful way or whether it simply reflects short-term distortions tied to seasonal factors and government-related disruptions. For policymakers and investors alike, the coexistence of job growth and rising unemployment underscores the difficulty of drawing firm conclusions from any single data point.

Inflation data later in the week provided a clearer and more encouraging signal. The consumer price index showed that inflation cooled more sharply than expected in November, with headline prices rising at a slower year-over-year pace than economists had forecast. Core inflation, which strips out food and energy costs, also surprised to the downside and reached its lowest level since early 2021. Particularly notable was the continued deceleration in shelter cost inflation, a key component of the CPI that has been stubbornly elevated for much of the past two years. While some caveats remain due to data collection issues related to the recent government shutdown, the overall message from the report was one of easing price pressures.

Markets reacted favorably to the inflation release, with equities opening higher as investors interpreted the data as reinforcing the case for a more accommodative monetary stance in the months ahead. The report added to the growing sense that inflation is moving sustainably toward central bank targets, even if the path forward remains uneven.

Additional insight into the health of the U.S. economy came from the latest purchasing managers' surveys. S&P Global's Flash U.S. Composite PMI showed that business activity growth slowed in December to its lowest level in six months. Both manufacturing and services sectors experienced a deceleration, and business confidence for the year ahead weakened. Companies also reported that price pressures intensified, suggesting that while inflation is cooling at the consumer level, cost dynamics within certain parts of the economy remain challenging. According to S&P Global, the data point to an economy that is losing momentum after a period of stronger growth, with firms becoming more cautious in their hiring and investment decisions.

In fixed income markets, U.S. Treasuries delivered positive returns, benefiting from declining yields across much of the curve. The move followed the Federal Reserve's rate cut in the prior week and reflected growing confidence that the tightening cycle has firmly ended. Municipal bonds were broadly stable but underperformed Treasuries, while activity in the secondary market remained subdued. High yield credit displayed relative resilience, particularly after the inflation data release, even as trading volumes stayed below average and issuer-specific developments drove much of the price action.

Across the Atlantic, European equity markets posted solid gains in local currency terms. The pan-European STOXX Europe 600 Index advanced meaningfully, supported by signs of steady economic growth and the perception that monetary policy across the region is becoming more supportive. Major national indexes also moved higher, with particularly strong performances in Italy and the United Kingdom. Investors appeared encouraged by a combination of easing inflation pressures and central banks signaling greater flexibility as they navigate an uncertain outlook.

The European Central Bank left interest rates unchanged at its latest meeting, marking the fourth consecutive pause. President Christine Lagarde emphasized that policy remains appropriately positioned while acknowledging the uncertainty surrounding future economic developments. The ECB reiterated its commitment to data-dependent decision-making and revised its growth forecasts modestly higher for the coming years. Inflation is now expected to dip slightly below the ECB's target in the middle of the forecast horizon before gradually returning to target levels, a trajectory that supports the case for patience rather than urgency.

In the United Kingdom, the Bank of England took a more decisive step by cutting its policy rate. The decision was narrowly split, highlighting internal debate over the appropriate pace of easing. The move followed a sharp slowdown in inflation and further signs of softening in the labor market, including rising unemployment and slower wage growth. While the BoE signaled that rates are on a gradual downward path, policymakers also cautioned that future decisions will be finely balanced, reflecting the delicate trade-off between supporting growth and ensuring inflation remains under control.

Elsewhere in Europe, central banks in Sweden and Norway opted to keep rates unchanged. Both institutions signaled a preference for stability in the near term, with policymakers emphasizing the need to maintain restrictive conditions until inflation risks are fully contained.

Japanese equity markets moved in the opposite direction, with stocks declining over the week. Technology shares led the losses, echoing concerns seen in U.S. markets around valuations and AI-related spending. Monetary policy developments also captured investor attention, as the Bank of Japan delivered a widely expected rate hike, lifting its benchmark rate to the highest level in decades. While the move itself was anticipated, investors were left wanting more clarity on the future pace of normalization.

Governor Kazuo Ueda reiterated that policy decisions would remain contingent on economic conditions and wage developments, offering little guidance on when the next rate increase might occur. This lack of forward direction contributed to weakness in the yen, which depreciated against the U.S. dollar. Inflation data in Japan continued to support the case for further tightening, with core prices rising at a steady pace and export growth exceeding expectations, aided by the weaker currency.

In China, equity markets ended the week mixed amid fresh evidence of economic softness. Key indicators pointed to subdued domestic demand, with retail sales growing at their slowest pace since the pandemic and fixed asset investment on track for its first annual contraction in decades. Industrial output also disappointed, reinforcing concerns that the economy remains heavily reliant on exports at a time when global growth is moderating.

Chinese policymakers have signaled a cautious approach to stimulus, emphasizing targeted measures rather than large-scale interventions. Recent communications suggest that Beijing intends to maintain its current manufacturing-led growth strategy while making incremental efforts to support consumption. For investors, the message is one of gradual adjustment rather than dramatic policy shifts, which has tempered expectations for a near-term acceleration in growth.

Beyond the major developed and emerging markets, several smaller economies also made notable policy moves. In Chile, the central bank cut interest rates following a faster-than-expected decline in inflation. Policymakers cited supportive global conditions, stronger commodity prices, and improved financial conditions as factors underpinning the decision, even as they acknowledged ongoing challenges in the labor market and the mining sector. Inflation is now expected to return to target in early 2026, giving officials confidence to continue easing.

Mexico's central bank also lowered rates, extending its easing cycle in response to weak economic activity. While inflation has ticked higher in recent months and forecasts have been revised upward, policymakers remain confident that price pressures will converge toward target over the medium term. The decision was not unanimous, reflecting differing views on the balance between inflation risks and growth concerns, but the overall direction of policy remains clear.

Taken together, the week's developments highlight a global economic landscape in transition. Inflation is easing across many regions, central banks are cautiously shifting toward accommodation, and growth is showing signs of slowing rather than collapsing. Markets are grappling with this nuanced environment, rewarding resilience and earnings visibility while penalizing excess and uncertainty. As the year draws to a close, the dominant question is no longer whether inflation will fall, but how smoothly economies can adjust to a world of lower but still positive growth, and how investors should position themselves for the next phase of the cycle.