US Economy: Weekly Commentary – January 6, 2025.
US Market Review
US Treasury yields fell at the short end. Stocks had mixed results. The dollar strengthened. Oil rose. Gold gained amid economic uncertainty. Bitcoin saw growth.
US Treasury bond yields dropped at the short end of the curve this week, with the 10Y-3M spread turning positive. The spread between the 2Y and 10Y Treasury yields steepened, reaching its widest level since 2022. The outlook for the bond market in 2025 remains positive, with some investors currently adjusting the duration in their portfolios to secure higher yields over a longer period.
US stock markets ended the week with mixed results. The S&P 500 and Nasdaq 100 both saw declines, while the Russell 2000 gained approximately 1%. Small- and micro-cap stocks advanced by 0.95% and 1.55%, respectively, while large-cap stocks dropped by nearly 0.50%. The performance of the "Magnificent 7", which collectively fell by 1.40%, played a significant role in the pullback of both the Nasdaq and S&P 500. The US stock market is currently trading at historically high valuations. The market capitalization of the S&P 500 as a percentage of global GDP reached a record 46%, surpassing the previous peak of 42% before the 2022 bear market. For context, this ratio stood at 39% at the height of the dot-com bubble in 2000.
The US dollar strengthened against the euro, reaching a level of 0.973893. Crude oil (WTI) prices rose by more than 5%, driven by an optimistic outlook for China's economy and fuel demand following President Xi Jinping's commitment to fostering stronger economic growth. Gold prices increased by 0.73%, as investors sought refuge in the metal amid concerns about potential inflationary pressures and uncertainty surrounding Trump's policies. Cryptocurrencies maintained strong momentum, with Bitcoin rising by 5.33% over the week.
US Treasury bond yields dropped at the short end of the curve this week, with the 10Y-3M spread turning positive. The spread between the 2Y and 10Y Treasury yields steepened, reaching its widest level since 2022. The outlook for the bond market in 2025 remains positive, with some investors currently adjusting the duration in their portfolios to secure higher yields over a longer period.
US stock markets ended the week with mixed results. The S&P 500 and Nasdaq 100 both saw declines, while the Russell 2000 gained approximately 1%. Small- and micro-cap stocks advanced by 0.95% and 1.55%, respectively, while large-cap stocks dropped by nearly 0.50%. The performance of the "Magnificent 7", which collectively fell by 1.40%, played a significant role in the pullback of both the Nasdaq and S&P 500. The US stock market is currently trading at historically high valuations. The market capitalization of the S&P 500 as a percentage of global GDP reached a record 46%, surpassing the previous peak of 42% before the 2022 bear market. For context, this ratio stood at 39% at the height of the dot-com bubble in 2000.
The US dollar strengthened against the euro, reaching a level of 0.973893. Crude oil (WTI) prices rose by more than 5%, driven by an optimistic outlook for China's economy and fuel demand following President Xi Jinping's commitment to fostering stronger economic growth. Gold prices increased by 0.73%, as investors sought refuge in the metal amid concerns about potential inflationary pressures and uncertainty surrounding Trump's policies. Cryptocurrencies maintained strong momentum, with Bitcoin rising by 5.33% over the week.
US Market Views Synopsis
December saw a slight improvement in manufacturing, with rising demand but inflation concerns. Housing market activity increased, with pending sales rising and home prices growing regionally.
The ISM Manufacturing PMI improved slightly but remained below 50, signalling continued contraction for the ninth consecutive month. While demand showed growth, particularly in new orders and production, employment and inflation concerns remained, with the employment index dropping and the price index rising significantly. This points to potential stagflation. In the housing market, pending home sales rose 2.2% MoM and 6.9% YoY in November, driven by increased inventory. Home prices grew 3.6% YoY in October, with regional differences, highlighting stronger growth in cities like New York and Las Vegas. A housing market recovery is anticipated in 2025.
The ISM Manufacturing PMI improved slightly but remained below 50, signalling continued contraction for the ninth consecutive month. While demand showed growth, particularly in new orders and production, employment and inflation concerns remained, with the employment index dropping and the price index rising significantly. This points to potential stagflation. In the housing market, pending home sales rose 2.2% MoM and 6.9% YoY in November, driven by increased inventory. Home prices grew 3.6% YoY in October, with regional differences, highlighting stronger growth in cities like New York and Las Vegas. A housing market recovery is anticipated in 2025.
Manufacturing Activity
The ISM Manufacturing PMI improved slightly in December, with rising demand but weak employment and inflation concerns, signalling potential stagflation due to increasing costs.
US manufacturing has shown promising signs of recovery, with both production and new orders in the ISM manufacturing report moving into growth territory after a prolonged downturn. The December ISM manufacturing index surpassed expectations, rising to 49.3 from 48.4 in November, bolstered by a significant increase in the production component, which surged to 50.3 from 46.8. This rebound was partly driven by the return of striking Boeing workers. The new orders index saw its fastest growth since May 2022, rising by 2.1 points to 52.5, which further fuelled the recovery in production. However, the employment component weakened, signalling ongoing job cuts, while tariff uncertainty remains a concern, especially for companies relying on international supply chains or exports. Additionally, the price index surged by 2.2 points to 52.5, reflecting a notable expansion in costs. This sharp rise in prices is particularly concerning, as it suggests an acceleration of inflationary pressures, potentially leading to a stagflationary environment. While the manufacturing sector shows signs of gradual improvement, the dual challenges of rising costs and a weakening labour market could hinder sustained growth. Ongoing tariff uncertainties and global supply chain disruptions may also dampen the sector's potential recovery.
We anticipate volatility in the manufacturing sector during the first quarter of 2025. The impact of Trump's policies remains unclear, making it difficult to assess their potential effects on the sector.
US manufacturing has shown promising signs of recovery, with both production and new orders in the ISM manufacturing report moving into growth territory after a prolonged downturn. The December ISM manufacturing index surpassed expectations, rising to 49.3 from 48.4 in November, bolstered by a significant increase in the production component, which surged to 50.3 from 46.8. This rebound was partly driven by the return of striking Boeing workers. The new orders index saw its fastest growth since May 2022, rising by 2.1 points to 52.5, which further fuelled the recovery in production. However, the employment component weakened, signalling ongoing job cuts, while tariff uncertainty remains a concern, especially for companies relying on international supply chains or exports. Additionally, the price index surged by 2.2 points to 52.5, reflecting a notable expansion in costs. This sharp rise in prices is particularly concerning, as it suggests an acceleration of inflationary pressures, potentially leading to a stagflationary environment. While the manufacturing sector shows signs of gradual improvement, the dual challenges of rising costs and a weakening labour market could hinder sustained growth. Ongoing tariff uncertainties and global supply chain disruptions may also dampen the sector's potential recovery.
We anticipate volatility in the manufacturing sector during the first quarter of 2025. The impact of Trump's policies remains unclear, making it difficult to assess their potential effects on the sector.
Housing market
Pending home sales rose 2.2% MoM and 6.9% YoY in November. U.S. home prices increased 3.6% YoY in October, with regional variations in price growth.
Pending home sales increased by 2.2% MoM in November, marking the fourth consecutive month of growth and reaching the highest level since February 2023. YoY, pending sales rose by 6.9%, despite challenges posed by elevated mortgage rates and ongoing affordability issues. The rise in sales was largely driven by an increase in available inventory. Regionally, the South (+5.2%), West (+0.5%), and Midwest (+0.4%) reported MoM gains, while the Northeast experienced a decline. The most significant supply surges were seen in the Southern and Western markets, which, alongside improving affordability, could unlock pent-up demand and stimulate market activity in the new year.
Home prices in the U.S. saw a 3.6% YoY increase in October, slightly down from the 3.9% rise recorded in September. The 10-city Composite rose by 4.8% YoY, while the 20-City Composite saw a 4.2% increase. The largest price gains were observed in New York (+7.3%), Chicago (+6.2%), and Las Vegas (+5.9%), while Tampa recorded the smallest YoY increase at just 0.4%. These regional variations reflect differing market dynamics, with some areas experiencing stronger price growth than others.
As previously mentioned during the latter half of 2024, we anticipated the housing market would begin its recovery in 2025.
Pending home sales increased by 2.2% MoM in November, marking the fourth consecutive month of growth and reaching the highest level since February 2023. YoY, pending sales rose by 6.9%, despite challenges posed by elevated mortgage rates and ongoing affordability issues. The rise in sales was largely driven by an increase in available inventory. Regionally, the South (+5.2%), West (+0.5%), and Midwest (+0.4%) reported MoM gains, while the Northeast experienced a decline. The most significant supply surges were seen in the Southern and Western markets, which, alongside improving affordability, could unlock pent-up demand and stimulate market activity in the new year.
Home prices in the U.S. saw a 3.6% YoY increase in October, slightly down from the 3.9% rise recorded in September. The 10-city Composite rose by 4.8% YoY, while the 20-City Composite saw a 4.2% increase. The largest price gains were observed in New York (+7.3%), Chicago (+6.2%), and Las Vegas (+5.9%), while Tampa recorded the smallest YoY increase at just 0.4%. These regional variations reflect differing market dynamics, with some areas experiencing stronger price growth than others.
As previously mentioned during the latter half of 2024, we anticipated the housing market would begin its recovery in 2025.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750)
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved