Week #4 — Market Update for January 20-24, 2025

Executive Summary

US Stock Market: The major U.S. stock indexes extended their rally, gaining between 1.7% and 2.2%, driven by easing trade concerns. President Donald Trump’s decision to delay new tariff announcements provided temporary relief, helping stabilize equity markets. However, analysts at The Sevens Report caution that tariff risks remain, with federal agencies set to review trade practices by April 1. Historically, tariffs have triggered market volatility; during Trump’s first term, the S&P 500 fell 5% after the imposition of China tariffs. With current S&P 500 forward valuations at 21x–22x—well above the 17x–18x levels of that period—there is little margin for error.

Cryptocurrencies: Bitcoin showed limited movement this week despite broad market optimism. Trump’s executive order to establish a digital assets working group initially sparked enthusiasm but ultimately fell short of expectations. The order proposes evaluating a national digital asset stockpile using seized cryptocurrencies but disappointed those anticipating proactive steps, such as a national Bitcoin reserve announcement.

Global Stock Markets: Global country ETFs posted moderate gains, heavily influenced by U.S. dollar movements. The dollar experienced its steepest weekly loss since November 2023, following comments from President Trump hinting at a softer stance on China tariffs.

Economic Data: The January flash PMI data highlighted divergent economic trends among the G4 economies. Japan's composite PMI rose to 51.1, its highest in four months, driven by strong services growth despite a manufacturing contraction. The eurozone's composite PMI reached a five-month high of 50.2, with manufacturing rebounding but services slowing, led by Germany's stabilization amid steep input cost increases challenging the ECB's inflation goals. The UK’s composite PMI climbed to 50.9, with slight growth in services and manufacturing but weakened employment and subdued optimism. In contrast, the US composite PMI fell to a nine-month low of 52.4, as services growth decelerated despite slight improvement in manufacturing.

Earnings Season: The Q4 2024 earnings season continued with 78 S&P 500 companies (16% of the index) reporting results. Of these, 78.2% exceeded analysts' expectations, surpassing the long-term average of 67.0% and matching the four-quarter average of 77.7%. Next week, 21% of S&P 500 companies are set to report, including four Magnificent 7 members: Meta Platforms, Microsoft, and Tesla (Wednesday) and Apple (Thursday).

Monetary Policy: The likelihood of a January Fed rate cut remained unchanged at 2.1%. Traders also adjusted their 2025 easing projections, lowering the expected year-end rate by 3 basis points to 41 basis points.

Bond Market: The U.S. Treasury yield curve remained stable, with the 10-year bond yield rising by 2 basis points to 4.63% and the 30-year bond yield increasing by 1 basis point to 4.85%.

For comprehensive insights and a deeper understanding, readers are encouraged to refer to the full article.

US Stock Market

The major U.S. stock indexes extended their rally, rising between 1.7% and 2.2%, driven by easing trade concerns. President Donald Trump’s decision to hold off on immediate tariff announcements has provided temporary relief, with analysts noting that the absence of new trade threats has helped steady equity markets. However, the Sevens Report warns that tariff risks are far from eliminated, particularly with federal agencies set to evaluate trade practices by April 1. Historically, tariffs have sparked market volatility, as seen during Trump’s first term when the S&P 500 fell 5% after China tariffs were imposed. With current S&P 500 forward valuations at 21x–22x, much higher than the 17x–18x seen then, there is minimal room for error.

Institutional investors, meanwhile, have been reducing their bullish positions despite the S&P 500 reaching record highs. Positioning among rules-based and discretionary investors hit a two-month low, and commodity trading advisors have cut long stock exposure to levels last seen during the market volatility of August. From a contrarian perspective, this hesitancy creates a "dry powder" effect, where sidelined cash could fuel future rallies if fears about tariffs, inflation, or Fed policy subside. The recent cooler-than-expected CPI report has already prompted hedge funds to re-enter the market, with last week’s pace of buying the fastest in 10 weeks.

Despite lingering caution, technical factors could support further gains. Lower volatility is attracting systematic strategies like volatility control funds, which tend to increase equity exposure when market swings subside. Commodity trading advisors may also allocate $15 billion to $30 billion to equities if the current rally continues. Goldman Sachs notes that even traditionally cautious institutional investors, such as mutual and pension funds, could shift to momentum-driven buying amid fears of underperformance.

Despite broad market optimism, Bitcoin has shown little movement over the week. President Donald Trump’s executive order establishing a working group on digital assets initially sparked enthusiasm but ultimately fell short of market expectations. The order outlined plans to evaluate a potential national digital asset stockpile composed of seized cryptocurrencies but disappointed many who had anticipated more proactive measures, such as the announcement of a national Bitcoin reserve.

While federal action remains limited, several states are advancing their own crypto reserve initiatives. Texas, a leader in blockchain innovation, introduced a Strategic Bitcoin Reserve Bill, which would allow the state to accept Bitcoin donations from residents and businesses to build its reserve. Other states, including Massachusetts, Wyoming, and Florida, are exploring similar proposals, with at least 13 states preparing to introduce crypto reserve bills. Advocates view these efforts as a means to position the U.S. as a global leader in the digital revolution, with states like Texas striving to play a pioneering role.

However, the legislative process faces significant obstacles. Many states, including Texas, do not recognize Bitcoin as legal currency, complicating its integration into government reserves. Additionally, the time-sensitive nature of state legislative sessions, competing priorities such as infrastructure and education, and skepticism from lawmakers about emerging technologies add further challenges. For instance, Pennsylvania introduced a bill to allocate 10% of its treasury reserves into Bitcoin, but the proposal failed to gain traction, partly due to opposition from advocacy groups.

In terms of sector performance, ten out of eleven sectors showed positive momentum.

The Fear & Greed Index, which gauges market sentiment, increased to 49 from 38 a week ago, entering a “neutral” zone.

The SPY ETF extended its upward momentum, breaking above its mid-channel line and surpassing its previous high. The RSI increased to 61.84, reflecting strong bullish momentum but nearing overbought levels. This suggests caution as the ETF approaches the upper boundary of its ascending channel. Traders should monitor for potential resistance near the channel’s upper boundary. A breakout above this level could indicate further upside potential, while failure to sustain current levels might lead to consolidation or a retest of the mid-channel line and 50-day SMA as support levels.

The earnings season continues, with 78 companies in the S&P 500 Index having reported Q4 2024 results so far, representing 16% of the index (up from 8% the previous week). Of these, 78.2% have exceeded analysts’ expectations, down from 81.0% the previous week. Despite this decline, the beat rate remains above the long-term average of 67.0% and the four-quarter average of 77.7%.

Projections for Q4 2024 earnings growth have been revised slightly downward. S&P 500 companies are now expected to deliver year-on-year growth of 10.4%, or 13.8% excluding the Energy sector. These figures are down from last week’s estimates of 10.7% and 13.9%, respectively.

During the week of January 27, 103 companies from the S&P 500 Index are set to release their financial results, including four members of the Magnificent 7:

·????? Meta Platforms, Microsoft, and Tesla on Wednesday

·????? Apple on Thursday

Among all stocks, these are among the most highly anticipated earnings reports.

Global Markets

While global country ETFs posted decent gains, their performance was influenced by U.S. dollar movements. The dollar experienced its largest weekly loss since November 2023, as markets reacted to comments from President Donald Trump hinting at a potentially softer stance on tariffs against China.

The ACWX ETF continued its recovery and is now trading above the 50-day SMA, suggesting strengthening momentum. The RSI has risen to 62.91, entering bullish territory but approaching overbought levels. A successful breakout above the 200-day SMA could signal a sustained uptrend and open the path toward the mid-channel line. Conversely, failure to overcome this resistance could result in a consolidation phase or a pullback toward the 50-day SMA and the lower boundary of the ascending channel. Traders should monitor the price action near the 200-day SMA for confirmation of the next directional move.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

·????? President Donald Trump’s return to the White House was marked by a renewed focus on trade policy, with an aggressive push to leverage tariffs as a tool to address perceived imbalances in global trade and strengthen US economic interests. While Trump initially held off imposing immediate tariffs on China, Mexico, and Canada, his administration made clear its intention to take decisive action against what it describes as unfair trade practices. The president threatened tariffs of up to 25% on imports from Canada and Mexico and a 10% tariff on Chinese goods, citing concerns over fentanyl trafficking, immigration issues, and trade deficits.

Trump’s approach reflects a broader strategy aimed at reducing US dependence on foreign supply chains, bolstering domestic manufacturing, and addressing currency manipulation. The administration has signaled that these measures, while potentially inflationary, are seen as necessary for national security and economic self-sufficiency. The proposed tariffs, however, have raised alarms among trading partners and industry leaders, with significant implications for global trade flows and domestic markets.

Canada and Mexico, America’s largest trading partners with a combined annual trade volume of $900 billion, face the possibility of severe economic consequences should the proposed tariffs be enacted. Analysts estimate that the levies could raise new car prices in the US by approximately $3,000 and disrupt supply chains critical to the automotive and manufacturing sectors. Canadian officials have prepared retaliatory tariffs worth C$150 billion ($105 billion) on US goods, while Mexico has sought to appease Trump’s administration by intensifying efforts to combat drug trafficking and rebalance its trade relationship with the US.

China remains a focal point of Trump’s trade agenda, though his rhetoric has been tempered compared to his first term. Discussions between Trump and Chinese President Xi Jinping have highlighted ongoing tensions, with fentanyl exports, TikTok, and broader trade imbalances dominating the agenda. Trump has reiterated that tariffs remain a powerful tool in negotiations but has expressed a preference for reaching agreements that could avoid their imposition. Nonetheless, the potential for escalating tariffs looms, with the administration indicating a willingness to increase duties should talks falter.

The European Union also came under scrutiny, with Trump threatening tariffs on EU goods unless the bloc increases its imports of US energy products. The EU, already preparing lists of goods for potential retaliation, expressed hope for negotiation but is bracing for trade disputes. The energy sector, a cornerstone of Trump’s economic strategy, stands to benefit from increased export opportunities, particularly as the president rolls back restrictions on oil and gas development and expands LNG export capacity.

Global business leaders and economists remain divided on the implications of Trump’s tariff strategy. While some argue that these measures could protect US industries and promote fairer trade practices, others warn of inflationary pressures, disrupted supply chains, and weakened economic growth. JPMorgan CEO Jamie Dimon defended the tariffs as a necessary tool for national security, while Goldman Sachs CEO David Solomon emphasized the importance of thoughtful implementation to avoid unintended consequences.

Trump’s approach has also raised concerns about a potential return to a protectionist era. Bloomberg Economics estimates that if the proposed tariffs on Canada, Mexico, China, and the EU are enacted, the average US tariff rate could rise from 3% to over 10%, reshaping trade flows and increasing costs for US consumers. Despite these risks, Trump’s transactional style left room for negotiation, with several countries, including India and South Korea, seeking ways to strengthen trade ties with the US to avoid punitive measures.

The administration’s actions have prompted varied responses, from Canada’s announcement of a $1 billion border security initiative to China’s efforts to reduce its reliance on US markets. Meanwhile, Mexico has highlighted record fentanyl seizures and taken steps to reduce imports from China in a bid to placate Trump’s demands. The EU and Asian nations, including Vietnam and India, are exploring strategies to maintain trade stability while addressing US concerns.

·????? The January flash PMI data revealed divergent economic trajectories among the G4 economies. Japan’s composite PMI rose to 51.1, its highest in four months, signaling moderate growth led by a robust services sector (52.7), while manufacturing contracted further (48.8). In the eurozone, the composite PMI reached 50.2, a five-month high, as manufacturing rebounded to 46.1, an eight-month peak, though services slowed to 51.4. Germany led the region’s stabilization but also experienced the steepest input cost increases, posing challenges for the ECB’s inflation targets.

The UK and US showed contrasting performances. The UK’s composite PMI edged up to 50.9, a three-month high, with modest gains in services (51.2) and manufacturing (48.2), yet employment weakened sharply amid rising inflation and subdued business optimism. Meanwhile, the US saw its composite PMI fall to a nine-month low of 52.4, driven by a deceleration in services growth (52.8), though manufacturing improved slightly (50.1).

US

·????? The US economy began 2025 with mixed signals, as consumer sentiment declined and business activity expanded at a slower pace, according to the latest economic data. Consumer confidence declined for the first time in six months, with the University of Michigan’s sentiment index falling to 71.1 in January from 74 in December and a preliminary figure of 73.2, marking a three-month low. Concerns about rising unemployment and inflation, driven in part by potential tariffs, weighed on sentiment. Consumers now expect prices to rise 3.3% over the next year, the highest level since May and consistent with the preliminary estimate. Long-term inflation expectations increased to 3.2%, up from 3% in December but slightly below the preliminary reading of 3.3%. Additionally, 47% of consumers foresee higher unemployment, the highest level of concern since the pandemic recession.

On the business front, the S&P Global Flash US Composite PMI signaled slower growth, falling to 52.4 in January from 55.4 in December, a nine-month low. This reflects a moderation in expansion across both manufacturing and services. Manufacturing saw a return to growth after six months of contraction, with its PMI rising to 50.1 from 49.4 in December, supported by marginal increases in output and new orders. Services continued to expand for the 24th consecutive month but at the slowest rate since April, as new business inflows slowed and export orders declined for the first time since June.

Future sentiment among businesses remained elevated, with expectations of output growth at their highest since May 2022. Optimism was particularly strong in manufacturing, where confidence surged to its highest since March 2022, driven by hopes for supportive policies under the Trump administration. Service sector confidence eased slightly but remained at the second-highest level of the past year. Firms cited expectations of looser regulation, lower taxes, and heightened protectionism as reasons for optimism, although concerns about supply chain disruptions, inflation, and a strong dollar persisted.

Chris Williamson of S&P Global highlighted that US businesses are optimistic about the new administration’s policies, which are expected to drive economic growth. While January’s output growth slowed, sustained confidence and a strong labor market suggest the downturn might be temporary. However, rising inflation could prompt a more hawkish stance from the Fed, particularly if robust economic growth and tight labor conditions persist.

Eurozone

·????? The Eurozone's private sector showed signs of recovery in January 2025, with the HCOB Flash Eurozone Composite PMI rising to 50.2, indicating slight growth after two months of contraction. This marks the first expansion in business activity since August 2024. The improvement was primarily driven by the services sector, which maintained modest growth, while manufacturing continued to contract, albeit at the slowest pace since May 2024.

Germany’s economy stabilized, ending a six-month decline, with its composite PMI returning to expansionary territory. France remained in contraction, though at a slower pace, while the rest of the Eurozone saw continued modest growth. However, demand across the region remained weak, with new orders falling for the eighth consecutive month, although the decline was the smallest since August 2024. Weakness in export orders persisted, with international demand decreasing for nearly three years, reflecting challenges in both services and manufacturing.

Employment trends highlighted cautious optimism. Overall staffing levels in the Eurozone nearly stabilized, with service sector employment rising at the fastest rate in six months. In contrast, manufacturing continued to shed jobs. Germany and France reported job reductions, while the rest of the Eurozone recorded job creation. Backlogs of work decreased again, a trend ongoing since April 2023, though the rate of depletion slowed to an eight-month low.

Price pressures escalated, with input costs rising at the fastest rate since April 2023. This surge was driven by sharp increases in services costs, influenced by higher wages and Germany’s new CO2 tax. Manufacturing input costs also rose for the first time in five months, reflecting the weaker euro and rising energy prices. Output prices followed suit, with the rate of inflation accelerating to a five-month high. Germany led the increase, while France saw output prices fall for the first time in nearly four years.

Business confidence remained stable, with optimism for future output tempered by ongoing demand weakness. Manufacturing sentiment improved to a seven-month high, while services confidence dipped. Germany showed a sharp rise in optimism, contrasting with muted sentiment in France. Across the rest of the Eurozone, optimism remained robust.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted the cautious recovery, emphasizing the easing drag from manufacturing and the moderate growth in services. He highlighted increased service sector employment and new business inflows, signaling potential resilience. However, he cautioned about persistent fragility, particularly in export demand and outstanding business. On the inflation front, rising costs in services and manufacturing pose challenges for the ECB, which may continue its gradual approach to cutting interest rates despite higher price pressures. Wage increases across the Eurozone, reported at the highest levels since the euro’s inception, further complicate the inflation outlook.

·????? Investor confidence in Germany’s economy weakened further, with the ZEW institute’s index of expectations falling sharply to 10.3 in January from 15.7 in December, well below forecasts. While a measure of current conditions showed improvement, persistent stagnation is evident due to weak household spending and declining demand in the construction sector. According to ZEW President Achim Wambach, this stagnation risks widening Germany's gap with other eurozone countries if current trends persist.

The HCOB Flash Germany Composite PMI edged up to 50.1 in January from December’s 48.0, narrowly surpassing the neutral threshold of 50. This ended six months of contraction, driven by modest growth in services (52.5) and a slower decline in manufacturing output (45.2). Despite this improvement, new business inflows fell in both sectors, reflecting weak domestic demand and subdued export orders. The manufacturing sector continued to face strong competition from foreign producers and reduced client spending amid political and economic uncertainties. Business optimism improved significantly, particularly in manufacturing, where confidence reached a three-year high. Firms cited early signs of market recovery and hopes for economic improvement after February’s general elections.

Commenting on the latest PMI data, Dr. Cyrus de la Rubia of Hamburg Commercial Bank highlighted optimism in services and a slowing manufacturing contraction, attributing part of the shift to improved sentiment and potential benefits from the new government’s policies. However, he cautioned that economic recovery will hinge on factors such as trade dynamics and policy measures addressing inflation and stagnation.

However, the German government tempered expectations, projecting minimal growth of 0.3% for 2025, down from the previous forecast of 1.1%. Meanwhile, the Bundesbank highlighted continued stagnation, inflationary pressures, and uncertainty in manufacturing and private spending as key obstacles to recovery. While inflation is expected to ease in the coming months, it will likely remain above long-term averages due to structural cost increases.

UK

·????? The UK private sector experienced modest growth in January 2025, with the S&P Global Flash UK Composite PMI rising to 50.9 from 50.4 in December, marking its highest reading since October 2024. However, this growth remains below the long-term series average of 53.6 and reflects an economy struggling to gain momentum. The service sector saw marginal growth, with its PMI at 51.2, while manufacturing output contracted for the third consecutive month, albeit at a slower pace, with a reading of 49.3. The improvement was driven by efforts to complete unfinished work and successful marketing initiatives, although the broader demand environment remained weak.

New business inflows fell at the fastest rate since October 2023, signaling subdued demand across the private sector. Service providers reported a decline in new work for the first time in 15 months, while manufacturing orders shrank for the fourth month in a row. Firms cited unfavorable economic conditions, inflationary pressures, and rising long-term interest rate expectations as key factors dampening demand. Employment continued to decline for the fourth consecutive month, with workforce reductions in both services and manufacturing, driven by hiring freezes, voluntary attrition, and rising payroll costs. The forthcoming increase in employers' National Insurance also contributed to recruitment cutbacks, further reflecting low business confidence.

Cost pressures accelerated sharply, with input price inflation hitting its highest level since May 2023, driven by higher salaries, energy costs, and imported raw material prices. Output prices rose at their fastest pace in 18 months, as businesses sought to pass on these costs to customers. However, this renewed inflationary pressure poses challenges for the Bank of England, complicating its monetary policy approach amid stagnant economic growth and rising price levels.

Business confidence continued to decline, with expectations for future activity at their weakest since December 2022. The pessimistic outlook was driven by concerns about rising costs, post-Budget uncertainty, and weaker domestic demand. While some firms expressed optimism based on new product launches, technology investments, and overseas expansion, the overall sentiment remained downbeat.

Consumer confidence also fell sharply, with GfK’s sentiment index dropping five points to minus 22 in January, the lowest level since late 2023. Expectations for the economy over the next 12 months plunged to minus 34, reflecting a pessimistic view of household financial prospects and a shift toward precautionary saving.

This fragile economic environment aligns with a broader structural slowdown in the UK’s growth capacity. According to Bloomberg Economics, the UK’s trend growth rate has halved from an average of 2.5% between 1955 and 2009 to just 1.2% in the years ahead, increasing the likelihood of more frequent technical recessions. With growth shocks now capable of triggering contractions more easily, the UK could face a recession every five years compared to the historical average of once every eight years.

Asia

·????? The Bank of Japan raised its key policy rate to 0.5%, the highest level in 17 years, signaling a more aggressive stance on inflation management. This quarter-percentage point increase, anticipated by markets, reflects the BOJ's growing confidence in the strength of inflationary trends and its readiness to continue tightening monetary policy if economic conditions align with its forecasts. The decision was influenced by a need to monitor wage trends and assess global market stability, particularly following the return of Donald Trump to the White House.

Governor Kazuo Ueda emphasized that future rate hikes would depend on economic developments, with no predetermined timeline for adjustments. The BOJ raised its inflation outlook for the year to 2.4%, up from the previous forecast of 1.9%, while maintaining its GDP growth projections for 2025 and 2026. This upward revision underscores expectations of sustained price pressures, with risks to the economic outlook skewed to the upside.

Analysts noted that the rate hike supports the yen in the short term, with some expecting USD/JPY to find support near 155.06. However, opinions diverge on its long-term trajectory, with potential challenges from global trade dynamics and shifts in US monetary policy under the Trump administration. Some strategists foresee the yen strengthening, especially if the US dollar pivots due to evolving fiscal or trade policies, while others anticipate the pair could rise towards 160 if Japan’s rate hikes fail to keep pace with broader market expectations.

Market participants are also focusing on the BOJ’s inflation outlook and terminal rate projections, which could rise to 1%, a level seen as a possible cap for Japanese rates in 2025. Analysts highlighted the BOJ’s acknowledgment of persistent low real interest rates, leaving room for further tightening. The upward revision of inflation forecasts and signals of ongoing policy adjustments have set a more hawkish tone compared to earlier BOJ communications.

·????? Japan’s private sector showed modest expansion at the start of 2025, with the au Jibun Bank Flash Japan Composite PMI rising to 51.1 in January from 50.5 in December. This marked the highest reading in four months and indicated three consecutive months of growth. While overall activity improved, a significant divergence between the services and manufacturing sectors persisted, highlighting structural challenges within the economy. The services sector drove the expansion, supported by rising tourism and new business inflows, while manufacturing output contracted at its fastest pace in nine months due to weak export demand.

Services activity grew at the quickest pace since September 2024, underpinned by improving tourism and robust new business growth, with export business returning to expansion after four months of decline. This growth spurred hiring, with services employment rising for the sixteenth consecutive month, marking the fastest increase since July 2024. Sentiment in the services sector remained above average, fueled by optimism around major events like the 2025 World Expo in Osaka. Outstanding business also decreased, indicating firms’ improved ability to meet current demand.

Conversely, the manufacturing sector struggled, with output and new orders declining sharply at the start of 2025. Export demand remained weak, contributing to a pessimistic outlook among manufacturers, as business confidence fell to a 33-month low. Persistent trade uncertainties and rising costs further dampened sentiment in the sector. The divergence between the services and manufacturing sectors, as reflected in their respective PMI indices, reached its widest gap in six months, emphasizing the uneven nature of Japan’s economic recovery.

Inflation pressures remained a key concern across both sectors. Input prices rose at their fastest pace since August 2024, driven by higher raw material, transport, and wage costs, exacerbated by yen weakness. Service providers faced intensified cost pressures but raised selling prices only marginally, reflecting firms’ attempts to absorb costs to maintain competitiveness. In the manufacturing sector, selling price inflation also lagged input cost increases, hinting at profit margin compression. Despite these challenges, the inflation rate is expected to hover around 2.0%, aligning with the BOJ’s policy targets.

The broader inflation landscape revealed a more entrenched trend. Japan’s core inflation gauge rose to 3% in December, the highest in 16 months, driven by a 10.1% surge in energy prices following the removal of subsidies. Service inflation ticked up to 1.6%, while an index excluding energy and fresh food remained stable at 2.4%. This sustained price momentum, coupled with record-high household inflation expectations, underscores the ongoing cost-of-living challenges for Japanese consumers. Prime Minister Shigeru Ishiba’s government has responded with utility subsidies and cash handouts for low-income households, measures that are expected to temper inflation temporarily.

·????? India’s private sector started 2025 with a marked slowdown in growth as the service economy lost momentum, offsetting a strong recovery in manufacturing. The HSBC Flash India Composite PMI fell to 57.9 in January from 59.2 in December, signaling the slowest expansion in 14 months. While the reading remains well above its long-run average of 54.7, it reflects waning strength in overall private sector activity. The manufacturing sector outperformed, with the HSBC Flash India Manufacturing PMI climbing to 58.0 in January from 56.4 in December, the highest level since July 2024, supported by robust growth in new orders and output. In contrast, HSBC Flash India Services PMI declined to 56.8 from 59.3 a month ago.

New business intakes moderated across the private sector, with services reporting the weakest growth in new orders since November 2023. However, manufacturing orders increased at the fastest pace in six months. Despite slower domestic demand for services, both manufacturing and service sectors reported stronger export growth, resulting in the sharpest rise in aggregate international sales in six months. Gains were reported from regions such as the Americas, Asia, and Europe.

Employment growth accelerated across both sectors, with January recording the most significant increase in aggregate jobs since data collection began in December 2005. Companies hired both permanent and temporary workers, highlighting optimism in labor market conditions. At the same time, capacity pressures intensified, with outstanding business volumes rising at the fastest rate in two-and-a-half years, particularly in the services sector.

Pranjul Bhandari, HSBC's Chief India Economist, highlighted the divergence between manufacturing and services. Manufacturing benefited from a rebound in output and new orders, particularly exports, alongside easing cost pressures. In contrast, the services sector showed signs of vulnerability, with cooling domestic demand offsetting gains in export business.

Foreign Exchange Markets

The Dollar Index, which tracks the value of the U.S. dollar against a basket of major currencies, lost 1.7% over the week and experienced its largest weekly loss since November 2023 as markets reacted to comments from President Donald Trump suggesting a potentially softer stance on tariffs against China.

Trump’s remarks on Thursday, highlighting a "friendly" conversation with Chinese President Xi Jinping and expressing hope for a potential trade agreement, fueled speculation about a shift in U.S. trade policy. He acknowledged the power of tariffs as leverage over China but indicated a preference not to use them, adding an element of uncertainty that unsettled currency and equity markets alike.

Despite the dollar’s recent weakness, analysts remain cautious about its longer-term trajectory. Simon MacAdam, deputy chief global economist at Capital Economics, suggested the greenback could resume its climb if U.S. economic strength relative to other major economies persists or if Trump’s policies, including tariffs or interest rate adjustments, lead to favorable shifts in rate differentials.

Commodities and Energy Markets

In the commodities sector, most assets ended the week with positive movements.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (through June 2026) has shown minimal movement.

Similarly, the U.S. Treasury yield curve remained mostly steady. The 10-year bond yield rose by 2 basis points to 4.63%, while the 30-year bond yield increased by 1 basis points to 4.85%.

Central Bank Insights

·????? European Central Bank officials continue to signal a gradual move toward lower interest rates as they assess still-elevated inflation and a sluggish economy. President Christine Lagarde says policymakers see no reason to accelerate the pace of rate cuts, pointing to steady progress toward the 2% inflation goal even though services inflation and wage growth remain a concern. She noted that the neutral level for the deposit rate likely lies around 2%, leaving scope for quarter-point reductions from the current 3%. In that view, Lagarde isn’t alone: several Governing Council members, including Francois Villeroy de Galhau and Klaas Knot, endorsed back-to-back quarter-point cuts at each meeting, with no immediate push for larger moves.

Executive Board member Isabel Schnabel agrees that inflation is likely on track, buoyed by wage gains and an expected uptick in consumer spending, although uncertainties from US trade policies under President Donald Trump are adding risk. Joachim Nagel similarly sees scope to keep easing until rates are no longer restrictive, though he cautions the ECB’s task isn’t finished given lingering price pressures, particularly in services. Other officials such as Boris Vujcic and Jose Luis Escriva are comfortable with market bets on multiple quarter-point cuts, including one at the upcoming meeting, based on data aligning with ECB forecasts. Olli Rehn underscores that officials are watching closely for both upside and downside risks, from geopolitical tensions to weaker growth, and will decide each move meeting by meeting.

Peter Kazimir believes another cut next week is virtually certain, and he foresees two or three more afterward if inflation and growth remain on course. Yannis Stournaras favors a similarly measured approach, aiming to reach around a 2% deposit rate by the end of 2025 with a series of 25-basis-point steps, citing persistent downside risks to growth. Meanwhile, Robert Holzmann takes a slightly more cautious stance, warning that rising energy costs and a soft euro could push inflation above predictions. He isn’t convinced the ECB should accelerate cuts if new data complicate the outlook.

Markets largely anticipate continued easing, with some traders laying options bets on a possible half-point reduction this year if inflation or growth surprises. The consensus among economists still centers on four quarter-point cuts in 2025, but some are wary of signs that elevated wage growth or trade disputes could keep price pressures higher than expected.

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