AI’s Record 2024

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

• AI startup funding hit a record in 2024.
• Eurozone inflation accelerated in December.
• The UK’s long-term borrowing costs hit their highest level since 1998.
• China’s currency dropped to a 16-month low.
• Inflation in the country decelerated for the fourth consecutive month.

Dig deeper into these stories in this week’s review.

AI

New data this week showed venture capital firms invested a record $97 billion in AI startups in the US in 2024, representing a 66% increase from the year before. This milestone was driven by multibillion-dollar funding rounds for companies such as OpenAI, Anthropic, and Elon Musk’s xAI. The AI-focused deals represent an increasing share of all startup investment, with almost half of the total $209 billion raised by US startups last year going to AI companies – the highest portion on record.

Europe

Inflation in the eurozone accelerated last month, supporting the European Central Bank’s gradual approach to reducing interest rates and dampening hopes of a big cut later this month. Consumer prices in the bloc rose by 2.4% in December from a year ago, in line with economist estimates but up from November’s 2.2% pace, marking the third consecutive month of rising inflation. The increase was largely driven by energy costs, which climbed for the first time since July. Excluding volatile items such as food and energy, core inflation held steady at 2.7%. Finally, services inflation, which is closely watched by the ECB for signs of domestic price pressures linked to the labor market, ticked up slightly to 4%. The measure has been stuck at that level for more than a year.

UK

The UK’s long-term borrowing costs rose to their highest level since 1998 this week, as the global bond market selloff intensifies and investors grapple with the prospect of persistent inflation and a surge of government debt sales. Yields on 30-year gilts hit 5.25% on Tuesday, pushing past a previous peak in October 2023 and exceeding levels seen during the height of the market fallout from Liz Truss’s disastrous “mini” Budget in late 2022. The new high followed the UK Treasury’s sale of £2.25 billion in new long-term debt on Tuesday at a yield of 5.20%, marking its steepest 30-year borrowing cost this century. Adding to the bad news, yields on 10-year gilts also soared this week, hitting their highest level since 2008.

If sustained, the latest rise in bond yields would leave the UK chancellor with just £1 billion of headroom against her key budget rule, which requires current spending (excluding investment) to be covered by tax receipts. Put differently, should yields remain elevated, the UK government may be forced to raise taxes or cut spending to fund the increased interest payments. This could further strain Britain’s already struggling economy, which many investors fear is teetering on the brink of stagflation. Compounding the issue is the fact that lower economic growth would put downward pressure on tax revenues, further straining the government’s budget…

China

In a sign that investors are becoming increasingly concerned about the Chinese economy’s growth prospects, the onshore renminbi dropped to a 16-month low against the dollar this week, touching 7.34 relative to the greenback on Wednesday. China’s currency is allowed to fluctuate within 2% of the daily reference rate set by the central bank. While the People’s Bank of China has been steadily lowering the reference rate, investors have also been driving the exchange rate toward the lower limit of that trading band. The latest selloff partly reflects fears that the steep tariffs on Chinese products proposed by Trump would force the central bank to weaken the renminbi even further to offset their impact on exports, which have helped the country maintain economic growth amid weak domestic consumer demand.

Further highlighting the weak state of consumer demand in China, new data this week showed inflation in the country decelerated for the fourth consecutive month – despite months of effort by policymakers to stimulate spending. Consumer prices increased by just 0.1% in December from a year ago, in-line with economist estimates but down from November’s 0.2% pace. What’s more, producer prices, which reflect what factories charge wholesalers for products, fell for the 27th consecutive month, declining by 2.3% in December from a year ago.

The persistence of deflationary pressures in China is in stark contrast to other major economies, with elevated inflation risks recently flagged by US Fed officials and eurozone price growth accelerating last month. The worry for Chinese authorities is the risk of a deflationary spiral, where falling consumer prices and economic activity reinforce each other. See, anticipating further price drops, consumers might delay purchases, dampening already weak consumption. Businesses, in turn, might lower production and investment because of uncertain demand. What’s more, falling prices lead to lower corporate revenues, potentially hitting wages and profits. Finally, during times of deflation, prices and wages fall, but the value of debt doesn’t, which adds to the burden of repayments and raises the risk of defaults.

Next week

• Monday: China trade balance (December).
• Tuesday: Nothing major.
• Wednesday: UK inflation (December), eurozone industrial production (November), US inflation (December). Earnings: BlackRock, Citigroup, Goldman Sachs, JPMorgan, Wells Fargo.
• Thursday: UK GDP (November), eurozone trade balance (November), US retail sales (December). Earnings: Bank of America, Morgan Stanley, TSMC, UnitedHealth.
• Friday: China GDP (Q4), UK retail sales (December), US industrial production (December). Earnings: Schlumberger.