The UK economy has slowed down, but what does this mean for the markets? The TPP weekend wrap

After starting the year strongly, the UK economy shows signs of weakness.

London's stock markets closed lower on Friday as investors reacted to an unexpected contraction in the UK economy during October, while the pound lost ground against major currencies.

The FTSE 100 index fell 0.14% to end the session at 8,300.33 points, down 0.10% on the week. The FTSE 250  also declined 0.29% to 20,889.15 points ending the week down 0.81%

In currency markets, sterling was last down 0.39% on the dollar to trade at $1.2624, as it dropped 0.65% against the euro trading at €1.2028.

On London’s equity markets, Rentokil Initial rose 3.66% after Trian Fund Management acquired 7.5 million shares in the pest control company for £31m earlier in the week. The shares were purchased at 413.4p each.

Schroders edged up 0.13%, as reports emerged that the asset manager was considering selling its Indonesian business. The potential divestment was part of new chief executive Richard Oldfield's efforts to streamline operations by exiting underperforming markets.

Greggs also saw a 1.65% rise after RBC Capital Markets initiated coverage with an ‘outperform’ rating, recommending investors "buy the dip." Diageo climbed 1.86%, benefiting from a bullish note by UBS.

Moonpig Group added 1.14%, recovering some ground after recent losses tied to weaker performance in its experiences segment.

On the downside, miners were among the hardest hit as copper prices fell. Anglo American, Rio Tinto, and Glencore dropped 1.86%, 2%, and 1.81%. In the energy sector, Tullow Oil plunged 9.15%, reversing Thursday’s gains when it was revealed the company is in early takeover discussions with US-based Kosmos Energy, which itself declined 2.49%.

The major economic news in the UK this week was a reported slowing of the economy after a strong start to the year which is bad news for Labour.

Real gross domestic product in October unexpectedly shrank 0.1% sequentially, as production output weakened. The economy suffered a contraction of the same magnitude in September. Output in the services sector, which dwarfs the rest of the economy, was flat in both months. Still, the Office for National Statistics estimated that the economy grew 0.1% in the three months through October, compared with the three months through July, amid expansion in the services and construction sectors. The Bank of England is widely expected to hold interest rates steady at its upcoming policy meeting and to proceed cautiously next year due to persistently high services inflation.

UK industrial production fell by 0.6% sequentially in October, a second monthly decline that defied expectations for a 0.3% increase. Manufacturing output also contracted 0.6% over the period, which was less than the 1.0% drop that occurred in September.

Europe

The STOXX Europe 600 Index ended 0.77% lower, as investors debated whether the European Central Bank (ECB) has been easing monetary policy fast enough to support the struggling economy. Major stock indexes, however, were mixed. Germany’s DAX eked out a 0.10% gain, while Italy’s FTSE MIB added 0.40%. France’s CAC 40 Index fell 0.23%.

The ECB lowered its key deposit rate by a quarter of a percentage point to 3.0%, the fourth reduction this year. The ECB appeared to leave the door open to ease monetary policy further, dropping a reference to keeping rates “sufficiently restrictive for as long as necessary” from its statement. Nevertheless, the ECB’s announcement retained its emphasis on taking a meeting-by-meeting approach to policy decisions. The central bank also revised lower its outlooks for growth and inflation.

Meanwhile, the Swiss National Bank (SNB) surprised markets with a larger-than-expected half-percentage-point reduction on the same day—its biggest rate cut since January 2015. The central bank said it aimed to counter lower inflationary pressure and keep consumer price growth within its defined range for price stability of 0% to 2%. The SNB also lowered its forecast for inflation to 0.3% in 2025, half of what it projected in September.

The U.S.

Most major stock indexes ended the week lower, although the technology-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. Large-cap stocks held up better than their smaller-cap peers as the Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. As measured by Russell 1000 indexes, growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12.08%) and Google parent Alphabet (8.44%), the latter of which recorded its largest two-day gain since 2015 between Tuesday and Wednesday.

The S&P equal weight index (all companies are equal) posted yet another down day meaning that it has only been positive on one trading day so far in December.

The highlight of the week’s economic calendar came on Wednesday with the Labor Department’s report of headline and core (less food and energy) consumer price inflation (CPI), which both rose by 0.3% in November and were in line with consensus expectations. On a year-over-year basis, core prices increased 3.3% in November, unchanged from the prior month, while overall inflation accelerated modestly to 2.7%, up from 2.6% in October. Higher shelter costs were responsible for nearly 40% of the total price increase in November, and very few of the index’s components decreased during the month. Similarly, producer price inflation accelerated a tick in November, to 0.4% from 0.3%.

The week’s economic data releases appeared to be enough for markets to solidify expectations for a rate cut at the upcoming Federal Reserve meeting. According to the CME FedWatch Tool, futures markets on Friday were pricing in a 97.1% chance of the Fed cutting rates at its upcoming meeting, up from 86.0% at the end of the prior week. The two-day meeting begins December 17, with an announcement on the rate decision made the following day.

Asia

Japan’s stock markets registered modest gains over the week, with the Nikkei 225 Index rising 0.97% and the broader TOPIX Index up 0.71%. Regional market sentiment was boosted by China’s announcement of more proactive fiscal measures and moderately looser monetary policy.

On the domestic monetary policy front, speculation grew that the Bank of Japan (BoJ) may hold off on an interest rate hike at its December 18–19 meeting, leading the yen to weaken to about the middle of the JPY 153 range against the USD, from the prior week’s 150. In the fixed-income markets, the yield on the 10-year Japanese government bond fell to around 1.04%, from 1.06% at the end of the previous week.

While expectations for the timing of the BoJ’s next interest rate hike had been finely balanced between December and January, investors now appear to have converged around the view that a 25-basis-point (0.25%) hike at the central bank’s first meeting in the new year is more likely.

Chinese equities lost ground as recent policy announcements underwhelmed investors. The Shanghai Composite Index gave up 0.36%, while the blue-chip CSI 300 fell 1.01%. In Hong Kong, the benchmark Hang Seng Index added 0.53%, according to FactSet.

China pledged to implement a more proactive fiscal policy and increase the budget deficit in 2025 at the annual Central Economic Work Conference, a high-level meeting in which top officials plan the economic agenda for the next year. Officials also stated that the central government will continue issuing ultra-long special Treasury bonds to fund major projects. However, the readout following the two-day conference did not provide any details, which dampened investor sentiment.

Inflation data released earlier in the week showed that China’s economy remained stuck in deflation. The consumer price index rose a below-consensus 0.2% in November from a year earlier, down from 0.3% in October. Core inflation, which strips out volatile food and energy costs, edged up to 0.3%, from October’s 0.2% rise. The producer price index fell 2.5% year on year, easing from the prior month’s 2.9% drop and marking the 26th straight monthly decline despite Beijing’s efforts to boost domestic demand in recent months.

The Week Ahead

There’s no danger of a quiet few days ahead of the Christmas break as UK inflation figures, US gross domestic product figures and interest rate calls on each side of the Atlantic all get released next week.

Following news the UK economy contracted for a second successive month in October, focus will be on Wednesday’s inflation figures and Thursday’s Bank of England rate call.

Expectations are for inflation to have accelerated to 2.5% in the year to November, following a 2.3% rise in October, according to Trading Economics.

Markets have held their nerve prior to Thursday’s UK rate decision, with chances of a cut remaining slim despite further economic decline, XTB analyst Kathleen Brooks noted.

The Bank of England’s outlook will be key though, she said, with the probability of a “mega cut” come February set to grow if improvement is not seen into the new year.

Across the Atlantic, the Federal Reserve’s latest decision on interest rates will come on Wednesday, with bets pointing to a 25 basis point cut.

In-line consumer price index data in the week just gone had firmed up expectations for a cut, before uncertainty hits with incoming president Donald Trump’s potentially inflationary policies.

A final estimate for third-quarter US gross domestic product is then due on Thursday, which is expected to see growth of 2.8% confirmed.

Elsewhere over the week, retail sales figures from both the US and UK will feature, alongside personal consumption expenditures data from the former.

Next week brings key events for water companies and in Boohoo's boardroom showdown with Frasers.

First though, Hollywood Bowl and Buznl will offer up updates on Tuesday after a quiet Monday. Both are expected to detail positive trading, with the bowling operator having previously signalled that full-year results would outdo market expectations.

Friday we get a trading update from Carnival and US PCE Price Index before things quiet down a bit for the Christmas week.

On our platform:

Global stocks, and US stocks in particular, have been very bullish this year.

Our leveraged trackers have had a brilliant year (so far) on the back of that, but it's safe to say that the market climate won't always be as bullish as this year.

Like with any investment, diversification is key.

Our 'active strategies' have been the strongest performers since our formation, but this year they have struggled to keep up with our other types of strategies.

The best portfolios on TPP are those that spread their risk across our strategy types.

Our leveraged trackers are designed to yield 1.5 times their market benchmark. As a long-term growth tool, they are very hard to beat. If you think equities have performed well over the last couple of years, just imagine compounding those gains by 1.5 times.

The best thing about our leveraged trackers is that we offer them in two types. One is a whole market tracker (eg SP500) and one tracks structured products like the Buffett Fund.

They are a great starting point for your TPP foundations. If you can link to one of them (or multiple trackers) after a market pullback, even better. Timing the markets with these is always hard when global stocks seem so bullish, but if you're looking over a 5-10 year timeframe, it is very hard to beat these.

Combine the leveraged trackers with our 'long or flat' strategies to conclude your foundations. We find our LoF's tend to perform best in markets that oscillate, and would you believe that one of these strategies invests in the FTSE 100, but has outperformed the S&P500 this year! Our founders are big fans of these types of strategies.

Regardless of where equity markets reside, they always seem to offer an entry point for investors to link with these strategies. They're patient and they wait for high-probability trades.

Finally, although our active strategies have been the laggards this year (so far), they will come good. JP Morgan struggled to time this over-exuberant market, and so did some of our active strategies.

However, what if the markets took a plunge from here? Even a retracement of 5-10%? It is safe to say that if they kept their current portfolio bias, they'd be very well positioned.

‍

Moving into 2025, make sure your TPP portfolio is diversified and ready to profit regardless of the climate.

Don't be a frustrated investor, be a benchmark-beating investor.

‍

‍