Market Matters- Inflation calms nerves, AI finds its feet, BoE cuts (just), Japan tightens

Equity markets finished the week in better shape than they started. The UK led the way (+2.6% for the FTSE 100), Europe added around +1.1%, and the US was marginally positive. In contrast, Asia was weaker: Japan fell about -1.5%, emerging markets were down around -1.4%, and China slipped roughly -1.6%. Bonds were broadly flat on the week, which suggests most of the heavy lifting came from equity sentiment rather than a big rate rally. It still doesn’t feel like a classic ‘Santa rally’ backdrop, but the market did at least manage to stabilise — and that matters after a fortnight where AI nerves and crypto wobble threatened to leak into everything.

US: inflation helped, Micron helped more, and tech did the rest

The main support came from US inflation data that looked encouraging on the surface — softer than feared and enough to revive the ‘disinflation is back (sort of)’ narrative. There’s always noise in the monthly prints and, yes, there were a few questions about how ‘clean’ the signal is, but markets trade the direction of travel, not academic footnotes. That inflation tone combined with Micron’s results and guidance, helped flip the mood in the AI complex from maybe this shake-out is more rotation than the bubble bursting!

Friday underlined the shift. A rally in mega-cap technology pushed the S&P 500 higher on the day and into a weekly gain, with information technology the top sector. NVIDIA got a boost from deal-related headlines, Oracle jumped sharply on the back of TikTok-related optimism, and the market generally leaned into the idea that AI remains transformative, even if the ride is choppy. Consumer sentiment ticked higher too, offering a small counterweight to the ‘late-cycle gloom’ trade.

The rate backdrop in the US remains supportive, even if the tone is cautious. For markets, the more important point is that policy is no longer tightening, financial conditions aren’t worsening, and earnings expectations are still holding up, which is why dip-buyers keep reappearing, even when the narrative turns wobbly for a few sessions.

UK: rate cut delivered, but it was a knife-edge call

UK inflation fell to 3.2% in November, down from 3.6% and below both market expectations (3.5%) and the Bank of England’s forecast (3.4%). The decline was broad-based, with services inflation easing to 4.4%, offering further evidence that domestic price pressures are gradually moderating. Sterling weakened following the release, while markets priced in a more straightforward easing path, with two rate cuts now expected by early 2026.

The Bank of England subsequently delivered a 25bp rate cut to 3.75%, though the 5–4 split on the Monetary Policy Committee underlined a still cautious stance. Governor Bailey characterised future decisions as finely balanced, noting that policy is approaching neutral. While inflation is easing, the Bank remains wary of residual wage pressures and uneven growth dynamics. With unemployment rising, GDP momentum softening, and recent budget measures expected to further dampen inflation next spring, the direction of travel remains toward lower rates, albeit at a measured, data-dependent pace.

UK equities responded well. Part of that is simply valuation and positioning: the UK market rarely needs much of an excuse to bounce when rates are nudged lower, sterling isn’t causing problems, and global risk sentiment isn’t collapsing. Financials also continue to serve as a barometer for a “we can live with this” rate path, and the week’s tone felt more constructive than the macro headlines warranted.

Japan: a reminder that not everyone is cutting…

Japan went the other way. The Bank of Japan raised rates by 25bps to the highest level in decades. It was framed as ‘no worse than feared’, but it still landed as a tightening step in a world where most of the conversation is about easing. The market reaction was relatively orderly, yet Japanese equities were weaker on the week, and the move reinforces a theme we’ve flagged before: Japan can still surprise investors because its policy normalisation is on a different cycle to the US/UK/Europe story.

China and EM: still waiting for domestic confidence to re-ignite
China remained a drag. The story hasn’t changed much: policy support is present, but confidence is still fragile, and markets are tired of being promised stability without feeling the uplift in domestic demand. Stimulus talk helps at the margin, and it matters for Asia supply chains and broader EM earnings, but Chinese equities are still behaving like a market that needs proof, not pledges.

Emerging markets were softer too, which is slightly counterintuitive given that US inflation data was friendlier this week. That’s likely more about China weight, regional currency and rate dynamics, and the fact that the AI complex in the US is still steering risk appetite. EM could well deliver another strong year across equities and bonds, and it probably doesn’t need perfection in 2026. It requires a less hostile dollar/rates environment and a steadier China impulse, but we’re not quite there yet.

Looking ahead to the last full week of 2025: still no Santa surge, but the ingredients are improving
It’s not a straight line, and the AI winners-and-losers sorting process will keep producing sharp, headline-driven moves. There will also be weeks where bitcoin, one mega-cap, or one odd inflation component seems to dictate index direction. But the bigger picture is quietly improving: inflation is no longer re-accelerating, central banks are (mostly) easing, and earnings narratives are still intact. If the AI shake-down continues to transition from panic to rotation (and Micron’s tone suggests the demand/capex runway is still real),  then dip buyers are likely to remain active into year-end.

In short, no obvious Santa rally yet, but the market has stopped behaving like it’s about to fall down the stairs. That’s usually the first step before it starts climbing again.