Issue #52: Feb'25 week 6
Block 1. Key Indices/Instruments
Block 2: Summary and Macroeconomic Overview
Broad US equity indices predominantly recovered after their decline amid the astonishing results from China’s AI firm DeepSeek. One of the largest daily drops for NVDA was overwhelmingly bought back – over the week, NVDA shares rose by 15% and AVGO by almost 8%. However, this growth did not prevent Magnificat from incurring slight losses due to a wave of sell-offs in GOOGL and TSLA stocks, which fell by 7% and 8.6% respectively amid mixed reports. Meanwhile, the sectors that were most affected showed partial recovery: SOXX (semiconductors) and XLK (technology) increased by 3.36% and 3.8% respectively. It is also worth noting the rise in shares in the Basic Materials sector (XME), including those of gold miners, buoyed by gold prices reaching a new historical high. The government bond segment ended the period with a moderate decline in yields on the medium- and long-term maturities.
On the macroeconomic front, particular attention is drawn to the labour market data from 07 February, which can be characterised as mixed. While the unemployment rate fell and the number of non-farm job openings declined, average hourly earnings increased significantly on both a monthly and annual basis, indicating persistent inflationary pressure.
A weak but steady slowdown in US job growth, combined with heightened inflation expectations, confirms the Federal Reserve’s inclination to keep interest rates unchanged in the near term. Data from the US Bureau of Labour Statistics (BLS), published on Friday, show that in January the number of new jobs increased by 143,000, while revised figures for the previous two months added another 100,000 jobs. The annual revision of employment indicated that job growth in 2024 was lower than initially estimated – the average monthly increase was 166,000 rather than the previously reported 186,000.
The unemployment rate fell to 4.0%, although these figures cannot be directly compared with previous months due to changes in population estimates. According to the BLS, excluding this effect, unemployment indeed declined compared to December.
The largest job gains were recorded in the healthcare, retail and public sectors. In contrast, employment fell in the oil and gas, mining, automotive and temporary employment sectors.
It is worth noting that extreme weather conditions (such as wildfires in California and heavy snowfall in several states) did not have a significant impact on the official statistics. However, in January nearly 600,000 people were unable to work due to weather conditions – the highest figure in the last four years.
An additional pressure on the labour market is the Trump administration’s plans to reduce federal staffing and potentially restrict immigration, which could lead to a labour shortage.
The Fed is in no hurry to further ease monetary policy. After cutting rates by 1 percentage point last year, the regulator is proceeding cautiously, awaiting additional signals on inflation and employment dynamics.
The latest data confirm the resilience of the US labour market, despite signs of a slowdown. Combined with heightened inflation expectations, this strengthens the Fed’s case for keeping rates unchanged in the near term. Rising wages (+4.1% YoY) and a reduction in working hours may also signal structural changes in the labour market.
REVERSE REPO
Reverse Repo (RRP) volumes have been steadily declining since the start of 2023 after reaching an impressive peak of $2.5 trillion, and have now fallen to a modest $79.9 billion. The RRP mechanism is simple and effective: the Fed “absorbs” liquidity from the market, collateralised by government bonds, thereby partially restraining inflation.
With the financing of the budget deficit predominantly through short-term Treasury bills (T-bills), notes (T-notes) and bonds (T-bonds), demand for these instruments was weak, which objectively did not allow the extension of US debt maturities. Instead, the massive issuance of T-bills was successfully absorbed by money market funds and other market participants, leading to a liquidity outflow from the RRP.
Conceptually, the relationship between the broad market and the RRP is straightforward: fewer funds in the RRP means more funds available in the market. For example, since the $2.5-trillion peak, the S&P 500 index has grown by roughly 60%. However, this source of liquidity is now nearly exhausted.
The likelihood that the Fed will announce a reduction or even a complete termination of its QT programme at upcoming FOMC meetings is growing. As a result, the market may face a moderate liquidity shock.
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Block 3. EU Update
Over the week, broad European equity indices showed strong growth, with the German DAX once again reaching a record high. The government bond segment mostly remained unchanged. In terms of macroeconomic publications, there were no significant data releases. However, finalised data for the Eurozone composite PMI showed no change at 50.2. The services component was revised down slightly from 51.4 to 51.3.
Block 4. Great Britain
During the review period, sovereign bonds showed a slight decline in yields, while broad equity indices finished the period with gains, including a new historical high for the FTSE-100, with elevated net inflows into funds compared to average levels. In terms of macroeconomic publications and events, a notable adjustment in the business activity indices from S&P occurred: the final January data was revised, with the services component being lowered from 51.2 to 50.8, and the composite index adjusted down from 50.9 to 50.6. Additionally, the Bank of England held its scheduled meeting, during which the key interest rate was reduced by 25 basis points to 4.5%, with a split vote of 7 to 2. Notably, two members of the committee—Swati Dhingra and Catherine Mann—advocated for a more aggressive cut of 50 basis points. However, there were no clear signs in the key statements suggesting a willingness to accelerate the easing process. On the contrary, the inclusion of the word "cautious" in describing the approach to easing monetary conditions underscores that this will be a slow process.
Outlook: Inflation Remains in Focus
The Bank of England's updated inflation forecasts are more cautious than those in November:
These figures suggest that the anticipated rate-cutting trajectory is already factored into the forecast, and the market is generally aligned with the regulator’s stance. In the short term, the Bank of England raised its forecast for inflation in 2025, forecasting a peak of 3.7% in the third quarter. The main driver behind the inflation acceleration is expected to be energy prices.
Economic Growth: Less Optimistic Assessment
Revisions have been made to GDP growth expectations:
Thus, the Bank of England acknowledges a slowdown in economic activity, but does not view it as sufficient grounds for faster rate cuts. Another key point is that the committee acknowledged the likelihood of a rise in the "neutral" interest rate compared to previous estimates. While in 2018, it was assessed at 2-3%, some committee members now allow for a level around 3.5%. In summary, the February Bank of England meeting confirmed that the central bank is sticking to its strategy of gradual and steady rate cuts. So far, the slowdown in the economy and labour market has not provided enough justification for a faster pace of easing. The regulator continues to focus on inflation, especially in light of potential temporary acceleration in 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.