Bank of Japan Lifts Policy Rate to a Three-Decade High

United States

U.S. equity markets ended the final full trading week of the year with mixed performance across major indexes. Smaller-capitalization stocks lagged, with the Russell 2000 Index posting the weakest result, falling 0.86%. The Dow Jones Industrial Average declined 0.67%, while the S&P MidCap 400 and the S&P 500 Index both finished the week largely unchanged. In contrast, technology-heavy shares showed modest strength, with the Nasdaq Composite gaining 0.48%.

Market sentiment at the start of the week was broadly negative, extending the prior week’s sell-off in technology stocks. Investor caution was driven by persistent concerns around elevated valuations and capital expenditure trends in the artificial intelligence sector. These pressures weighed on equity markets, alongside a series of mixed economic indicators, including the November employment report released early in the week.

As the week progressed, sentiment improved. Equity markets recovered some ground toward the end of the week, supported by a softer-than-expected inflation reading and robust earnings results from semiconductor producer Micron Technology. These developments appeared to improve investor confidence, particularly in technology and AI-related sectors.

Employment Data Sends Mixed Signals

The U.S. Bureau of Labor Statistics released its widely followed nonfarm payrolls report on Tuesday. The data showed that U.S. employers added 64,000 jobs in November, exceeding consensus expectations of approximately 45,000 and marking a significant rebound from the revised decline of 105,000 jobs recorded in October.

The October contraction, which was also released on Tuesday due to reporting delays linked to the U.S. federal government shutdown, was primarily attributed to a reduction of 162,000 federal government positions. In contrast, job creation in November was concentrated in health care, which added 46,000 jobs, and construction, which contributed 28,000 positions.

Despite the improvement in payroll growth, labor market conditions showed signs of cooling. The unemployment rate increased to 4.6% in November, reaching its highest level in more than four years.

Core Inflation Eases to the Slowest Pace Since Early 2021

Later in the week, inflation data provided a more supportive backdrop for financial markets. The Bureau of Labor Statistics reported that U.S. consumer price inflation moderated more than expected in November. Headline CPI rose 2.7% year over year, below market expectations of around 3.1% and down from a 3.0% increase in September. October CPI data were not published due to data collection disruptions stemming from the government shutdown.

Core inflation, which excludes food and energy prices, increased 2.6% year over year, also below forecasts and marking the slowest pace since March 2021. Shelter costs, a key component of the CPI basket, slowed to an annual rate of 3.0%, the lowest reading since August 2021.

Although some caution remains warranted due to the recent data collection issues, investors appeared encouraged by the inflation report. Equity markets opened higher following the release, reflecting expectations that easing price pressures could support a more accommodative monetary environment.

Business Activity Growth Slows in December

Data on business activity suggested a moderation in economic momentum toward year-end. S&P Global’s Flash U.S. Composite Purchasing Managers’ Index declined to 53.0 in December from 54.2 in November, indicating the slowest pace of expansion in six months. Readings above 50 continue to signal economic growth.

Both the manufacturing and services sectors experienced slower growth, and business confidence weakened compared with the previous month. Firms also reported that price pressures intensified, even as demand growth softened.

According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, the December PMI data indicate that the recent acceleration in U.S. economic growth may be losing steam. He also noted that companies have become more cautious in hiring decisions amid a more challenging operating environment.

U.S. Treasury Yields Decline, Bonds Advance

U.S. Treasuries generated positive returns over the week, supported by declining yields across most maturities. The move followed the Federal Reserve’s interest rate cut in the prior week, with bond prices rising as yields fell.

Municipal bonds remained broadly stable but underperformed Treasuries, according to T. Rowe Price traders. Trading activity in the municipal market was subdued, with limited secondary market participation.

High yield bonds showed resilience despite mixed employment data and early-week equity market weakness. Sentiment improved following the CPI release, although overall trading volumes remained below average. Market activity was largely driven by issuer-specific developments rather than broader macroeconomic factors.

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. Index descriptions and trademark information remain unchanged.

Europe

European equity markets advanced during the week in local currency terms. The STOXX Europe 600 Index rose 1.60%, supported by signs of stable economic growth and expectations for looser monetary conditions. Major regional indexes also posted gains. Italy’s FTSE MIB Index climbed 2.86%, France’s CAC 40 rose 1.03%, Germany’s DAX added 0.42%, and the UK’s FTSE 100 gained 2.57%.

ECB Maintains Current Policy Settings

The European Central Bank left its deposit rate unchanged at 2.0% for the fourth consecutive meeting. ECB President Christine Lagarde stated that current policy settings remain appropriate but emphasized that future decisions will depend on incoming economic data and evolving risks.

The ECB revised its GDP growth forecasts upward, projecting annual growth of 1.4% in 2025, 1.2% in 2026, and 1.4% in both 2027 and 2028. Headline inflation is expected to fall slightly below the ECB’s 2.0% target in 2026 and 2027 before returning to target in 2028.

Bank of England Cuts Rates as Inflation and Labor Markets Cool

The Bank of England reduced its policy rate by 25 basis points to 3.75% following a closely divided 5–4 vote. Governor Andrew Bailey adopted a more dovish tone, acknowledging that while further easing remains possible, future decisions will be more finely balanced.

The rate cut followed data showing a sharp slowdown in inflation, with headline CPI falling to 3.2% in November from 3.6% in October, well below market expectations. Labor market indicators also weakened, with unemployment rising to 5.1% in the three months through October, the highest level since early 2021. Growth in regular pay slowed to 4.6% over the same period.

Nordic Central Banks Hold Steady

Sweden’s Riksbank kept its policy rate unchanged at 1.75% and signaled limited likelihood of near-term adjustments. Norway’s Norges Bank also left rates unchanged at 4.0%, maintaining a restrictive stance to address inflation pressures.

Japan

Japanese equity markets declined over the week. The Nikkei 225 Index fell 2.61%, while the broader TOPIX Index declined 1.17%. Technology stocks underperformed, reflecting similar valuation concerns seen in U.S. markets and investor unease around aggressive AI-related spending.

BoJ Implements Widely Anticipated Rate Increase

The Bank of Japan raised its benchmark interest rate by 25 basis points, from 0.50% to 0.75%, marking its highest level since 1995. The decision, which was fully priced in by markets, was announced following the BoJ’s December 18–19 policy meeting.

The yield on the 10-year Japanese government bond rose to 2.01% from 1.95% the previous week. Governor Kazuo Ueda reiterated that future policy adjustments would depend on economic conditions, price trends, and wage growth. With limited guidance on the timing of the next rate increase, the yen weakened to approximately JPY 157.3 per U.S. dollar from around JPY 155.8.

Japan’s core CPI increased 3.0% year over year in November, unchanged from October and in line with expectations. Export growth remained strong, rising 6.1% year over year, supported by increased shipments to the U.S. and a weaker currency.

China

Chinese equity markets delivered mixed results. The CSI 300 Index declined 0.28%, while the Shanghai Composite edged up 0.03%. Hong Kong’s Hang Seng Index fell 1.10%.

Recent economic data highlighted ongoing challenges in domestic demand. Retail sales increased 1.3% year over year in November, the slowest pace since the pandemic. Fixed asset investment declined 2.6% over the first 11 months of the year, placing it on track for its first annual contraction since records began in 1998. Industrial output rose 4.8% year over year, below expectations.

Chinese authorities reiterated plans to maintain a measured approach to stimulus. According to the Central Economic Work Conference, policymakers will use interest rate and reserve requirement adjustments flexibly while maintaining a necessary level of fiscal spending in 2026. Analysts interpret this stance as continued support for a manufacturing-focused growth strategy alongside efforts to encourage consumption.

Other Key Markets

Chile

Chile’s central bank reduced its policy rate by 25 basis points to 4.50%, citing faster-than-expected disinflation. Inflation declined to 3.4% year over year in November, and policymakers expect inflation to reach the 3% target in the first quarter of 2026.

Mexico

Mexico’s central bank cut its overnight interbank rate by 25 basis points to 7.00% following a divided vote. Policymakers cited weak economic activity and ongoing uncertainty while maintaining confidence that inflation will converge toward the 3% target in 2026.