Issue #51: Feb'25 week 5
Block 1. Key Indices/Instruments
Block 2: Summary and Macroeconomic Overview
Broad American equity indices ended the week virtually unchanged, having recovered most of the losses by the close of trading on 3 February following the announcement of tariffs on imports from Canada, Mexico and China. The US yield curve experienced a slight increase in yields. The Federal Reserve meeting and subsequent press conference proceeded without incident, with rates remaining unchanged at 4.5%. During the press conference, Powell refrained from commenting on Trump’s antics regarding “compelling rate cuts.”
In terms of macroeconomic releases, particular attention is drawn to GDP data, which—despite being a lagging indicator—showed a decline alongside a marked rise in personal consumption.
The US economy ended 2024 with a 2.3% growth rate, driven by robust consumer demand.
The American economy recorded a 2.3% annual growth in Q4 2024, exceeding market expectations and confirming its resilience amid high interest rates and persistent inflation. Consumer spending was the primary growth driver, compensating for the negative impact of the Boeing strike and reduced levels of inventory investment.
According to the Bureau of Economic Analysis, GDP growth in Q4 decelerated compared to the previous period (3.1%), but remained above Bloomberg’s forecast of 2.6%.
Household spending increased by 4.2%, marking the most significant surge since the end of 2021, with car sales notably rising.
Core inflation increased by 2.5%, representing the second acceleration in the past two years.
Residential investment contributed positively to GDP for the first time in three quarters, indicating a stabilisation in the housing market.
Government expenditure rose by 2.5%, although its future trajectory will depend on the fiscal policies of the Trump administration.
Conversely, business investment declined:
Tariffs
On 3 February 2025, US President Donald Trump signed an executive order imposing new tariffs on imports from Canada, Mexico and China.
Under these measures:
The President justified his decision as necessary to combat illegal migration, drug smuggling, and to reduce the US trade deficit. In response, Canada and Mexico have announced plans to introduce retaliatory tariffs, while China has stated its intention to challenge the decision at the World Trade Organisation.
It is expected that tariff revenues will begin to flow in 2025 (a partial year), reaching around $75 billion. From 2026, annual receipts are projected to stabilise at just over $100 billion, remaining relatively constant until 2035.
Assuming that import volumes from Canada and Mexico do not decline significantly, these tariffs could generate approximately $1 trillion over ten years. Such revenues could be directed towards reducing the budget deficit or funding other initiatives.
Experts view Trump’s new tariff policy not only as an element of protectionism but also as an attempt to use trade measures as a lever in negotiations, while also noting potential risks for the global economy in the form of rising inflation and financial market instability.
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JPMorgan
JPMorgan analysts have noted that the imposition of high tariffs may signal a shift towards an “anti-business” stance by the Trump administration. They warn that “the risk is that policy is beginning to tilt in a direction that is unfavourable for business,” which could negatively impact global supply chains and investment activity.
Comment from Kevin Hassett (White House Economic Advisor)
In an interview with a news agency, a representative of the administration explained that the introduction of tariffs is not an attempt to trigger a trade war, but rather a measure to combat drug trafficking. He stated:
“This matter is being portrayed completely incorrectly. You should go back and re-read President Trump’s executive order, which clearly states that this is not a trade war, but a war on drugs.”
Following the announcement, the immediate implementation of the tariffs was postponed by one month for Canada and Mexico. This delay is seen as a move to strengthen the negotiating position, given several indirect factors—namely, the absence of negotiations or discussions in Congress, and the full imposition of significant tariffs rather than a gradual increase.
Block 3. EU Update
Broad European indices ended the period with modest gains, except for the French CAC 40, while the German DAX once again reached a record high following the ECB meeting on 30 January. During the scheduled ECB meeting on 30 January, the key rate was cut by 25 basis points, as market participants had expected. After the meeting, inflation data was released that turned out to be higher than forecast, reinforcing market expectations of slightly larger rate cuts during 2025. This was clearly reflected in sovereign yields.
In January, inflation in the Eurozone exceeded forecasts, bolstering the case for the gradual reduction of rates by the European Central Bank (ECB) amid economic instability and the threat of escalating trade conflicts with the United States.
According to Eurostat, consumer prices in the Eurozone increased by 2.5% year-on-year after 2.4% in December, although analysts had expected rates to remain at previous levels.
Core inflation (excluding volatile components such as food and energy) remained at elevated levels—2.7%—while the pace of price increases in the services sector declined slightly.
Although no structural reforms in Europe are foreseen at present, the ECB has already cut rates five times since June last year, bringing the deposit rate to 2.75%. Policy remains restrictive, but the bank is hinting at further easing. Lithuanian Central Bank Governor Gediminas ?imkus stated that the March rate cut is unlikely to be the last, with further decisions depending on incoming data. ECB President Christine Lagarde also noted that wage pressures are gradually easing, thereby reducing inflationary risks.
Block 4. Great Britain
Broad UK indices ended the period with gains, with the FTSE-250 – which has a greater exposure to the domestic market – outpacing the FTSE-100. Meanwhile, the yield curve showed a non-parallel shift downwards, recovering from recent highs seen over the past quarter-century; for example, the 10‐year bond fell into the zone below 4.5% after reaching nearly 5%.
In terms of macroeconomic releases, there was a paucity of data, with the only notable development being an increase in approved mortgage loans in December. An acceleration in transactions, driven by buyers’ desire to avoid higher property taxes in April, may provide an additional boost to the market. In the medium term, a loosening of the Bank of England’s credit policy is also expected to lend support.
According to data from the Bank of England, the number of mortgage approvals in December reached approximately 66,500 – higher than the revised figure for November (66,100) and significantly exceeding the consensus forecast of 65,000. Current levels remain above the 10-year average, indicating sustained demand.
Although the markets are currently expecting a more cautious stance from the Bank of England, there is reason to believe that rates could fall faster than anticipated. According to Bloomberg’s forecast, the next cut could occur as early as February, with the key rate potentially dropping to 3.75% by the end of 2025.
Disclaimer:
This information serves as a snapshot of market trends and does not constitute financial advice. Always conduct thorough research or consult with a financial advisor before making investment decisions.