Key events
Markets no longer fully price in Fed rate cut this year
Traders are no longer fully pricing in an interest rate cut from the US Federal Reserve by the end of the year, Fed fund futures show.
Bets on further interest rate cuts have been scaled back sharply since Friday’s blockbuster labour market report underscored the strength of the US economy.
Economists had forecast that the economy added 155,000 jobs in December, but a reading of 256,000 blew past estimates, while the unemployment rate fell to 4.1%, while analysts had expected it to stay at 4.2%.
On Wednesday, the latest monthly figures are expected to show the inflation in the United States rose to an annual rate of 2.8% in December from 2.7% in November. Core inflation, which strips out volatile food and energy costs, is forecast to have stayed at 3.3%. Markets will also be watching producer price data, out tomorrow.
The US Federal Reserve has voiced concerns about core inflation trends, as Philip Shaw, chief economist at Investec, noted.
Note that the FOMC [Federal Open Market Committee] minutes last [week] contained the observation that core inflation trends had been disappointing recently and that several members feared that the disinflation process might have stalled.
UK rate cut expectations have also receded, with traders now pencilling in nearly 42 basis points of reductions by year-end. Until recently, they had fully priced in two 25bp rate reductions this year, which would take the Bank of England’s base rate from 4.75% to 4.25%.
The UK’s inflation rate is expected to have edged up to 2.7% in December from 2.6% the month before, followed by a bigger acceleration in price pressures in coming months. The figures will be released first thing on Wednesday.
China exports jump, pushing trade surplus to a new record
China’s exports in December grew at a faster pace than expected, as manufacturers rushed to fill orders, faced with the threat of higher tariffs from the new Donald Trump administration.
Exports rose by 10.7% from a year earlier, according to official customs data. Economists had forecast that they would grow by about 7%. Imports also rose, by 1% year-on-year, against expectations of a 1.5% decline. With exports outpacing imports, China’s trade surplus grew to $104.8bn, and to just under $1 trillion for 2024 as a whole.
Lynn Song, ING’s chief economist for Greater China, said:
December’s trade balance data ended the year on a positive note, with both the monthly and annual data ($992.2bn) marking new record highs. The monthly trade surplus cleared the $100bn barrier for the first time on record, though the annual trade surplus fell a little shy of reaching the $1 trillion mark.
China’s consumption could see a modest recovery in 2025, depending on how effective policy support is, but it remains uncertain how much of this will translate into stronger import demand as policies look likely to benefit domestic producers more.
External demand has been an important contributor to growth momentum in 2024, not only through the record trade surplus but also the impact on manufacturing. However, with the looming prospect of increased tariffs and expectations for generally moderating global growth, external demand looks likely to soften in 2025. Our ING scenario currently has tariffs starting to take effect in the second quarter of this year, with tariffs on China potentially coming earlier.
Chris Turner, ING’s head of markets, has looked at the moves in currency markets:
Friday’s strong US jobs release has provided another leg higher for the dollar. It is hard to see the dollar trend changing this week given the prospect of another strong set of US inflation data, which will increasingly raise the question of whether the Fed needs to cut rates this year at all. Focus will also remain on the beleaguered pound, where Wednesday sees new inflation figures and a 10-year gilt auction.
Friday’s better-than-expected US December jobs data drove the dollar cleanly higher across the board. This feeds into the narrative of US exceptionalism and has now pared back expectations of the Federal Reserve’s easing cycle to barely one 25bp rate cut this year.
The big question for the market now is whether the Fed really needs to cut at all this year.
At the same time, dollar strength and firm US yields are pressure-testing the financial system. UK assets markets are starting to creak, but perhaps the most significant battleground today is in China.
The People’s Bank of China (PBoC) has announced more measures in an attempt to support the renminbi, which has fallen to 16-month lows. China’s onshore yuan traded at 7.3318 per dollar, not far from a 16-month low of 7.3328 hit on Friday.
The yuan has lost more than 3% to the dollar since the U. election in early November, on worries that Donald Trump’s threats of fresh trade tariffs will pile more pressure on the struggling Chinese economy.
Today, the central bank relaxed macro-capital measures, allowing Chinese corporates and financial institutions to raise more money overseas.
Just as US tariffs loom when Trump begins his presidency next week, China reported a massive trade surplus in December of nearly $105bn. It would not be a surprise to Trump commenting on this today, Turner said.
The only currency withstanding the dollar onslaught at the moment is the Japanese yen. Japan was closed today for a holiday, but it seems the threat of more Bank of Japan intervention… plus the chances of a BoJ 25bp rate hike on 24 January – now priced at 52% – are providing the yen with some support.
Bond yields rise again, stock markets open lower
UK bond markets have just opened, and yields are up again – by about 5 basis points across all maturities. US and German yields have also edged higher.
The yield, or interest rate, on the 30-year gilt (UK government bond) has hit 5.472%, still the highest since 1998, up by 6 basis points on the day.
Stock markets have opened lower, with the FTSE 100 index in London falling 20 points, or 0.2%, to 8,228.
Germany’s Dax, France’s CAC and Italy’s FTSE MiB all lost 0.3% while Spain’s Ibex fell by 0.5%.
Analysts at Deutsche Bank led by Jim Reid said:
It’s hard to determine what’s icier at the moment, global bond markets or the weather across much of Northern Europe and even New York where sub zero temperatures have been the norm in recent days.
As the weather warms up a bit, whether the deep freeze in bond markets continues may be determined by how US CPI [consumer prices index] on Wednesday materialises after Friday’s blockbuster payrolls report.
Annuity rates surge amid bond turmoil
Annuity rates have surged following the turmoil in the bond markets.
Annuity rates are affected by long-term gilt yields, which rose sharply last week.
The latest data from Hargreaves Lansdown shows a 65-year-old with a £100,000 pension can now get up to £7,425 a year from a single life level annuity with a five-year guarantee. This is up from £7,235 a year last week, and 48% higher than this time three years ago when it was £5,003.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said:
The turmoil in the bond markets has caused annuity incomes to soar, giving an extra boost to a market that has already enjoyed a stellar year. We could see further income rises in the weeks to follow and this could push incomes up to the highs we saw in the aftermath of the mini-budget.
Annuities continue to provide great value, and we can expect to see interest in them continue to increase, with many retirees deciding that now is the time to take the plunge and get a guaranteed income for life.
She said that it is important to check different providers because once bought, an annuity cannot be unwound.
There is no need to annuitise all your pensions at the same time – people can annuitise in stages throughout their retirement, she said.
This means your remaining pot can remain invested in income drawdown where it can grow while you get the potential to take advantage of higher annuity incomes as you age.
Introduction: Pound slides to fresh 14-month low; GSK buys US cancer firm for $1.15bn
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The pound is on the slide again, as Rachel Reeves, the UK chancellor, returns to her desk after her trip to China.
The dollar has jumped to the highest level in more than two years against a basket of major currencies, to peak at 108.98, extending last week’s rally, after a strong US jobs market report underscored the strength of the world’s largest economy.
Sterling fell more than 0.5% to $1.2128 against the dollar, the lowest in 14 months while the euro is at its weakest since November 2022 at $1.0275.
The pound had a rough ride last week, as UK government bonds, known as gilts, sold off, pushing their yields higher, reflecting investors’ concerns about the UK’s public finances.
Bond yields rose sharply for governments worldwide, before falling back on Friday, after the last jobs report of the Biden administration showed the US labour market grew strongly in December. This morning, US and German yields are edging higher again.
UK officials will be monitoring closely moves in the price of government bonds after last week’s turmoil in global markets, when the yield – effectively the interest rate – on the 30-year bond hit its highest level since 1998.
Expectations for Federal Reserve rate cuts have receded sharply, but also for UK rate cuts. Markets are awaiting US data on inflation on Wednesday.
If the bond selloff is sustained, it could force the chancellor to make adjustments to her tax and spending plans or risk breaking her fiscal rules. Reeves has vowed to stand by her “non-negotiable” fiscal rules.
We reported last week that the Treasury was considering steeper cuts to public services while the Telegraph reported that disability benefits faced billion-pound cuts.
GSK, the UK’s second-biggest pharmaceutical firm, has struck a deal to buy Boston-based firm IDRx, which is developing a treatment for a rare type of gastrointestinal tumours.
GSK is paying up to $1.15bn under the terms of the deal, which will strengthen its oncology portfolio. Chief executive Emma Walmsley has been making targeted acquisitions to boost key areas, after slimming down the overall drugs portfolio in recent years.
GSK’s chief commercial officer, Luke Miels, said
IDRX-42 complements our growing portfolio in gastrointestinal cancers. This acquisition is consistent with our approach of acquiring assets that address validated targets and where there is clear unmet medical need, despite existing approved products.
The Agenda
