Christmas trimmings

• UK and European equities added +2.6% and +0.9% respectively in sterling terms
• Gold advanced +0.9% in dollar terms

• Japanese (-2.5%), Asia ex-Japan (-1.6%) and emerging market (-1.5%) equities all slid in sterling terms
• The Japanese yen slid -1.3% versus sterling

The Bank of England trimmed interest rates from 4% to 3.75% as expected last week to its lowest level in three years. The close 5-4 vote reflected balancing a softening labour and anaemic economic growth with worries over persistently “sticky” inflation. The doves may have won, but the committee cautioned that “the extent of further easing” will be a “closer call”. Dissenters expressed concerns that persistent wage pressures – with national minimum/living wage and employer national insurance contributions continuing to feed through – might keep inflation above the Bank’s 2% target. That said, weaker macroeconomic data should give the committee greater scope to act – with the Bank itself forecasting a flatlining economy over the fourth quarter of 2025. 

November’s inflation data released last week showing a drop to 3.2% from 3.6% in October might not have been as flattering, or swayed the Bank’s rate decision by as much, as the headline suggested. It beat estimates of closer to 3.5% but the volatile pricing of airfares, accommodation services and seasonal retailer discounting may yet unwind in the months ahead. Stripping out such volatile items, some price rises are still accelerating compared to November 2024. 

On the jobs front, however, data more clearly reveals a weakening trend. The UK’s unemployment rate rose a tad to 5.1% in the three months to October – the highest level since Covid almost five years ago. Total unemployment rose by 158,000 from the previous quarter to total 1.832 million, with the Office for National Statistics also estimating the number of employees on payrolls dropped by 38,000 and youth unemployment increased 

to c.16% in November. A weaking economic backdrop in the second half of the year has contributed to a deteriorating jobs market. And the fact that the national living wage is set to rise by a sizeable 8.5% from April 2026 for 18-to-21-year-olds means that hiring activity for younger workers may well remain subdued. 

As a result of mixed data, markets currently expect 1 or 2 more 0.25% interest rate cuts in 2026.

Two months’ jobs data released last week painted a mixed picture after the US government shutdown:

• The market is sluggish and between May and October only added a net 119,000 jobs; a three-monthly average increase of 22,000 per month is glacial and usually only seen before recessions
• The government is shedding workers: since February, the government has trimmed on average 26,000 jobs per month. But in the private sector, the three-month average increase to August of just 13,000 per month has jumped to 75,000 – good news given fears over AI ‘killing’ jobs
• 909,000 more people in November were working part-time despite preferring full-time employment. Some 5.5 million now want more work than they can find
• The unemployment rate rose to 4.6%, a four-year high

For the Fed’s mandate, controlling inflation is the flip side to stabilising labour markets and inflation surprised positively last week. CPI eased to 2.7% in November, much better than the 3.1% expected. Core inflation also eased. But the authorities may have fixed some CPI data they couldn’t update in October due to the shutdown. Taken together, jobs and inflation prints might persuade rate-setters at the Fed to hold interest rates in January and cut again when they have more clarity. Futures markets still expect 2-3 cuts – an important support to equity markets – in 2026.

• Japanese rates – The Bank of Japan increased interest rates to ~0.75%, the highest since 1995. The move triggered yields on 10-year government bonds to surpass 2%, the highest level in 30 years
• ECB leaves rate unchanged – The European Central Bank left its benchmark interest rate at 2% for the fourth consecutive meeting as it turned more optimistic on the strength of the Eurozone economy. It also upgraded its growth forecast and now expects 1.4% for 2026
• New loan for Ukraine – The European Union agreed a new €90bn loan to Ukraine during a summit in Brussels after a proposal to use frozen Russian sovereign assets collapsed due to the opposition of Belgium. Hungary and Slovakia refused the deal, while the Czech Republic
• Warner Bros. Discovery acquisition – The Hollywood studio is planning to reject a $108bn hostile bid from Paramount. Warner Bros. Discovery argues that Paramount’s bid is less certain as it is backed by the CEO’s family trust
• Germany approves €50bn in military purchases – The Bundestag’s ratification brings Germany’s total defence spending plans between 2025 and 2030 to €650bn
• Rise in Credit Default Swaps – Volumes in financial products that pay out when companies default is on the rise as some investors are starting to protect their assets against the risk of an AI bubble bursting
• Chinese retail sales – sales growth of 1.3% in November missed expectations of 2.9% and slowed from a rate of 2.9% in October

***We are taking a break over Christmas and New Year. Insights Weekly will resume w/c 12 January 2026. Thank you for reading and all the very best for the festive season***

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.