The US Federal Reserve takes its foot off the gas
The central banks of the USA and the eurozone lowered their key interest rates by 25 basis points in December. The markets had hoped for a bigger move in the eurozone. However, what investors had not expected was the Fed's announcement that it would probably only make two interest rate cuts in 2025 instead of four. The markets fell as a result.
The international stock markets fell for the most part in December 2024. The German DAX share index closed the month down a moderate -0.12%. The broad European share index Stoxx Europe 600 lost -1.71%. In the USA, the broad S&P 500 share index fell by -1.44%, while the Nasdaq technology index rose by 1.06%. The Japanese Nikkei index fell by -0.50%. Overall, global equities, as measured by the MSCI World Index, fell by -1.71% - all index figures in euro terms.
The price declines on the stock markets are primarily attributable to the announcements by the US Federal Reserve (Fed). As expected, the Fed lowered key interest rates by 25 basis points to a range of 4.25 to 4.50%. What caught the markets on the wrong foot, however, was the announcement that it would slow its pace in 2025, with only two further interest rate cuts of 25 basis points each by the end of 2025. Although the Fed emphasized that its monetary policy was significantly less restrictive than at the start of 2024, it was now closer to the neutral interest rate level, which would neither stimulate nor slow down the economy.
Inflation trends played an important role in this assessment. US inflation rose by 2.7% in November compared to the same month last year (October: 2.6%). The Fed expects inflation to fall only slightly in 2025 and does not want to reach its target of 2% until 2027. Following the Fed's decision, the stock markets, which had largely moved sideways until then, fell sharply. This was because the vast majority of investors had previously expected twice as much, i.e. four interest rate cuts of 25 basis points each for 2025. In the eurozone, the European Central Bank lowered its key interest rates by 25 basis points to 3.15% (main refinancing rate), although inflation here also rose to 2.3% in November (previous month: 2.0%). However, the markets had hoped for a bigger move in view of the still very subdued economic outlook.
The bond markets reacted to the central banks' monetary policy not being as loose as expected with a rise in yields, particularly for longer-dated high-quality government bonds. At 2.37%, yields on 10-year German government bonds were 33 basis points higher than at the end of the previous month. The yield on their US counterparts rose by 38 basis points to 4.57%. The price of gold also fell against the backdrop of rising interest rates. After a temporary high of USD 2,718.23, the troy ounce cost USD 2,624.50 at the end of the month, down -0.71% on the previous month.
Asian stock markets performed differently in December. While the markets in China and Hong Kong recorded price gains, the stock exchanges in Japan, India, Indonesia and Korea fell. In China, the government announced additional measures to boost domestic demand and consumption. To this end, the budget deficit is expected to be increased and the interest rates and minimum reserve ratios of the banks lowered. By strengthening domestic demand in this way, the Chinese government is attempting to counter the risks posed by higher US import tariffs on Chinese goods. It remains to be seen whether these measures will be sufficient to mitigate the effects of a deteriorating environment.
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