• Equities finished modestly higher as firmer expectations for gradual Federal Reserve (Fed) easing offset rotation away from the crowded artificial intelligence (AI) trade.
• The U.S. economy remained resilient, with consumer spending holding up and disinflation continuing unevenly.
• Outside the U.S., economic growth remained subdued: China’s recovery remained fragile, in Germany manufacturing weakness persisted, while the U.K. was stuck with persistently high inflation and low investment.
• Sector: Health Care rose on reduced uncertainty around U.S. drug pricing and a rotation away from expensive AI-linked stocks; Materials gained from a record precious metals rally, while Financials were supported by easing rate risks, lower credit concerns, and strong earnings.
• Country: Taiwan remained dominated by TSMC; Switzerland and Canada benefited from large health care names and miners respectively, with banks adding further support.
• Factor: Value outperformed, helped by both unwinding of the AI-trade and exposure to economically sensitive stocks benefiting from easing Fed and policy uncertainty.

Outlook

Emphasizing Value family of factors based on:

• Wide valuation spread.
• Higher long-term interest rates (versus long-term average).

Over the quarter we have:

• Maintained strong value exposure.

Economic Indicators

U.S.: Economy remained resilient, with labor holding up and disinflation continuing unevenly

Jobs: Firm, cooling at the margin

• Non-Farm Payrolls: at 64K, well above expectations and prior quarter.
• Unemployment Rate: 4.6%, above expectations and prior quarter.
• Initial Jobless Claims: 219K monthly average, below previous quarter average of 229K.
• JOLTS jobs openings: 7,670K above expectations and prior quarter 7,208K.
• ADP employment survey: -32K below expectations and prior quarter.

Inflation: Disinflation ongoing, uneven progress

• Core CPI: 2.6% (YoY), below expectations and prior quarter.
• Core PCE Deflator: 2.8% (YoY), in line with expectations but below prior quarter.
• Hourly Earnings (preliminary): 3.5% (YoY), slightly below expectations and prior quarter.

Consumer: Spending flat, sentiment weak

• Retail Sales: 0.0% (MoM, SA), below expectations and prior quarter.
• Michigan Sentiment (preliminary): 53.3, above expectations but below prior quarter.
• Consumer Confidence: 89.1, below expectations and prior quarter (pre-pandemic levels: 120-140).

Manufacturing and Services: Remained strong and in the expansion territory

• Markit PMI Manufacturing SA (preliminary): 51.8, in line with expectations and prior quarter.
• Markit PMI Services, SA (preliminary): 52.9, below expectations and prior quarter.
• Empire State Index, SA: -3.9, below expectations but above prior quarter.

The rest of the world

China: Slowing recovery, deflationary pressures persist
 

• Industrial Output: 4.8% (YoY), below expectations and prior quarter.
• Exports: 5.9% (YoY), well below expectations and prior readings.
• PMI manufacturing: 50.1, in line with expectations and prior quarter.
• PMI services: 52.1, in line with expectations and prior quarter.
• Retail sales: 1.3% (YoY), well below expectations and prior quarter.
• CPI: 0.7% (YoY), in line with expectations and above prior quarter.
• GDP: 4.8% (YoY), below expectations and prior quarter (last data point oct).

Japan: Inflation firm, growth subdued

• CPI Core National: 3.0% (YoY) in line.
• GDP: -0.6% (QQ), below expectations and prior quarter.
• Industrial Production: -2.3% (YoY) in November, first drop in three months.
• Manufacturing PMI: 49.7 in line.
• Services PMI: 52.5 below expectations and prior quarter.

Germany: Manufacturing contraction persists

• CPI EU Harmonized: 2.6% (YoY), in line with expectations and above prior quarter.
• Industrial Production: 1.8% (MoM), above expectations and prior quarter.
• Markit Manufacturing PMI: 42.5, below expectations and prior quarter.
• Markit Services PMI: 52.5, in line with expectations and above prior quarter.

U.K.: Inflation sticky, activity holding up

• CPI: 3.8% (YoY), slightly below expectations and prior month.
• PMI manufacturing: 51.2, above expectations and prior quarter.
• PMI services (preliminary): 52.1, in line with expectations and prior quarter.

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