Week #6 — Market Update for February 3-7, 2025

Executive Summary

US Stock Market: The major U.S. stock indexes edged lower over the week, declining between 0.2% and 0.5%, primarily due to drops in some Magnificent 7 stocks. Alphabet shares plunged 9.2% after both earnings and revenue fell short of expectations. Tesla dropped 10.6%, suffering its worst week since October, as weak sales figures emerged from key markets—partly attributed to Elon Musk’s political activities. In Germany, Tesla's sales fell to their lowest level since 2021, with similar declines in France and the U.K. Musk’s recent alignment with Germany’s far-right party and his conflict with the U.K. prime minister coincided with weak sales performance in these three major European markets. In contrast, Nvidia surged 8.1% after easing supply chain concerns surrounding its next-generation AI chips. Super Micro Computer announced that its new AI data center systems, designed to support Nvidia’s Blackwell chips, are now in full production and ready for shipment.

Cryptocurrencies: While stock markets have largely recovered from the initial volatility triggered by President Donald Trump’s sweeping tariffs on Canada, Mexico, and China, the cryptocurrency market has struggled to regain momentum. From Friday to Friday, the steepest losses were recorded in Ethereum (-20.5%), XRP (-21.0%), Solana (-17.1%), Dogecoin (-25.0%), and Cardano (-24.9%).

Global Stock Markets: Globally, country ETFs mostly posted gains, with the global ex-U.S. index rising 0.8%.

Economic Data: Global economic growth slightly slowed at the start of 2025, with manufacturing returning to expansion but services growth decelerating to a 13-month low. The J.P.Morgan Global Composite PMI fell to a 12-month low of 51.8 in January, though job creation reached a six-month high, and business optimism hit its highest level since May 2024. Manufacturing improved in production and new orders, but new export orders declined for the eighth consecutive month, particularly in the U.S., euro area, and U.K. Employment rose in the U.S., Japan, India, Brazil, and Russia but declined in China, the euro area, the U.K., and Canada.

Earnings Season: The Q4 2024 earnings season continued, with 308 S&P 500 companies (62% of the index) reporting results. Among them, 76.3% exceeded analysts' expectations, surpassing the long-term average of 67.0% but falling below the four-quarter average of 77.7%.

Monetary Policy: The likelihood of a March Fed rate cut dropped to 8.0% from 17.0% the previous week.

Bond Market: The U.S. Treasury yield curve slightly flattened. The 10-year bond yield fell by 9 basis points to 4.49%, while the 30-year yield declined by 14 basis points to 4.69%. Among the positive developments for the debt market:

·????? The estimated federal borrowing for Q1 was revised slightly lower, thanks to a higher-than-expected cash balance at the start of the year.

·????? The Treasury confirmed that bond auction sizes will remain unchanged through mid-2025, alleviating concerns about a possible increase in long-term debt sales.

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 edged lower over the week, decreasing between 0.2% and 0.5%, significantly influenced by declines in some Magnificent 7 members. Alphabet shares plunged 9.2% after both earnings and revenue fell short of expectations. Tesla shares dropped 10.6%, suffering their worst week since October as weak sales figures emerged from key markets, partly due to Elon Musk’s political activities. In Germany, sales fell to their lowest level since 2021, while France and the U.K. also saw declines. Musk’s recent alignment with Germany’s far-right party and his conflict with the U.K. prime minister coincided with poor sales performance in these three major European markets. In contrast, Nvidia surged 8.1% after positive developments eased concerns about supply chain constraints that had previously challenged the rollout of its next-generation AI chips. Super Micro Computer announced that its new AI data center systems, designed to support Nvidia’s Blackwell chips, are now in full production and ready for shipment.

While stock markets have largely recovered after the initial surge of volatility following President Donald Trump’s imposition of sweeping tariffs on Canada, Mexico, and China, the cryptocurrency market has struggled to regain its footing. From Friday to Friday, the most significant losses were seen in Ethereum (-20.5%), XRP (-21.0%), Solana (-17.1%), Dogecoin (-25.0%), and Cardano (-24.9%).

In terms of sector performance, seven of the eleven sectors showed positive momentum.

The Fear & Greed Index, which gauges market sentiment, declined to 39 from 46 a week ago, entering the “fear” zone.

The SPY ETF has pulled back after testing the upper boundary of its ascending channel, with the RSI falling to 51.45, indicating cooling momentum while remaining in neutral territory. The price remains above all major SMAs, suggesting that the broader uptrend is still intact. Traders should watch for potential support near the 50-day SMA. A successful bounce from this level could confirm renewed bullish momentum, while a break below it could lead to a deeper pullback toward the 100-day SMA.

The earnings season continues, with 308 companies in the S&P 500 Index having reported Q4 2024 results so far, representing 62% of the index (up from 36% the previous week). Of these, 76.3% have exceeded analysts’ expectations, up from 75.3% the previous week. The beat rate remains above the long-term average of 67.0%, but below the four-quarter average of 77.7%.

Projections for Q4 2024 earnings growth have been significantly revised upward. S&P 500 companies are now expected to deliver year-on-year growth of 14.8%, or 18.2% excluding the Energy sector. These figures are up from last week’s estimates of 11.5% and 14.8%, respectively.

During the week of February 10, 78 companies from the S&P 500 Index are set to release their financial results. Among all stocks, these reports are among the most highly anticipated:

Global Markets

Globally, country ETFs mostly posted positive movements, with the global ex-US index increasing by 0.8%.

The ACWX ETF remains in a consolidation phase after encountering resistance at the 100-day SMA. The RSI has edged up to 58.20, reflecting continued positive momentum but nearing overbought conditions. The price is holding above both the 50-day SMA and the 200-day SMA, which now serve as key support levels. A breakout above the 100-day SMA could confirm renewed bullish momentum, with the mid-channel line as the next target. Conversely, failure to break higher may lead to further consolidation or a retest of the 50-day SMA for support.

Economic Indicators, Statistics and News

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

Global

·????? President Donald Trump escalated global trade tensions by imposing sweeping tariffs on imports from Mexico, Canada, and China. Trump’s move, citing concerns over fentanyl trafficking and illegal immigration, includes 25% duties on most goods from Mexico and Canada, a 10% tariff on Canadian energy products, and 10% tariffs on Chinese imports. The response was swift, with Canada announcing 25% tariffs on $155 billion worth of US goods, including beer, wine, lumber, and appliances. Mexico confirmed plans for retaliatory tariffs but did not provide specifics. EY’s analysts warn of severe economic repercussions, with projections indicating a potential 1.5 percentage-point hit to US GDP, while Canada and Mexico could be pushed into recession. The possibility of stagflation in the US, marked by weaker growth and renewed inflationary pressures, looms large. While Trump framed the tariffs as essential for national security, legal experts questioned the validity of his emergency declaration, and US businesses raised concerns over rising costs and job losses.

Following the initial announcement, Trump temporarily delayed the tariffs on Canada and Mexico after securing commitments from both governments to combat migration and drug trafficking. Canada agreed to a C$1.3 billion border security plan, while Mexico pledged to deploy 10,000 National Guard troops. Despite this delay, tensions with China escalated, with Trump warning of “very, very substantial” duties if negotiations with President Xi Jinping failed. Beijing retaliated with 10-15% tariffs on US coal, LNG, oil, and agricultural equipment, while launching an antitrust probe into Google and blacklisting PVH Corp. and Illumina. Additionally, China imposed export restrictions on tungsten-related materials, crucial for military applications. Despite the retaliation, analysts noted that Beijing’s response was measured, likely to maintain leverage for future negotiations.

The EU has been closely monitoring these developments, preparing for its own trade battle with Washington. German Chancellor Olaf Scholz and French President Emmanuel Macron emphasized that Europe has the strength to retaliate, while European Commission President Ursula von der Leyen stated that the EU would “respond firmly” if targeted. Some EU leaders, including Polish Prime Minister Donald Tusk, warned against a trade conflict, calling it an unnecessary distraction amid geopolitical tensions with Russia and China. The EU is particularly concerned about US tariffs on steel and aluminum, with past disputes in 2018 resulting in retaliatory duties on politically sensitive American exports like Harley-Davidson motorcycles and Levi’s jeans. Although the EU has developed countermeasures, officials see Trump’s temporary reprieve on North American tariffs as a sign that negotiation remains possible.

A major hurdle in EU-US relations is the lack of strong diplomatic connections within the new Trump administration, as key trade posts remain unfilled. European leaders have been attempting to mitigate the risk of a trade war by offering increased LNG imports, cooperation on export controls, and a joint stance on China’s industrial overcapacity. However, Trump’s rhetoric has remained firm, insisting that tariffs on the EU “will definitely happen” to address the US trade deficit with the bloc. Research by Bloomberg Economics suggests that Trump may take a more targeted approach, focusing on industrial machinery, automobiles, and digital services taxes. Germany, Ireland, and Italy are particularly vulnerable, with analysts highlighting how tariffs on EU-made cars could push American consumers toward domestic alternatives. While broad tariffs remain an option, a more selective strategy would allow the US to pressure specific EU nations while attempting to create divisions among member states.

The trade dispute is further complicated by Europe’s urgent need to increase defense spending in light of the ongoing war in Ukraine and Trump’s demands that NATO allies contribute more. Lithuanian President Gitanas Nauseda called for immediate action, warning that Europe cannot afford to wait until its next budget cycle in 2028. Greece has proposed a €100 billion EU-wide defense fund, though Germany and other nations have resisted joint debt measures.

With steel tariffs set to expire in March, the EU is weighing its options, potentially extending the suspension of retaliatory measures to maintain a constructive relationship with Washington. EU trade chief Maros Sefcovic emphasized the need for dialogue but reiterated that the bloc would respond decisively to any unfair US trade actions.

On Friday, Trump announced plans to unveil a new wave of reciprocal tariffs next week, indicating that these tariffs would apply broadly to U.S. economic partners. However, he did not specify which countries or industries would be affected. He emphasized that the goal is to ensure fair treatment for U.S. exports by matching the tariffs imposed by other nation

·????? Global manufacturing showed signs of recovery at the start of 2025, with the J.P. Morgan Global Manufacturing PMI rising to 50.1, indicating a return to expansion for the first time in seven months. Growth was led by strong performances in India, the US, and China, while the euro area, Japan, and the UK continued to contract, though at a slower pace. Consumer goods production surged to a seven-month high, and intermediate goods also returned to growth, but investment goods output remained in decline for the eighth consecutive month. Despite these gains, new export orders continued to shrink, extending the current downturn to eight months, though at the slowest rate in that period.

Employment remained a weak spot, with staffing levels declining globally for the sixth straight month, matching the sharpest pace of job losses in the last four-and-a-half years. Job cuts were particularly severe in China, the euro area, and the UK, outweighing hiring gains in the US, Japan, and India. Price pressures increased, with input costs rising at a five-month high, prompting manufacturers to raise selling prices. Supplier performance deteriorated for the eighth consecutive month, and inventories of both purchases and finished goods continued to decline.

The services sector also lost some momentum, with the Global Services PMI slipping to 52.2, a 13-month low. New business growth slowed, though hiring improved, with job creation at its strongest level since June 2023. Financial services remained the best-performing subsector but experienced the sharpest slowdown.

Overall, the global economy saw a mild deceleration in growth, as the rebound in manufacturing was offset by slower expansion in services. The J.P. Morgan Global Composite PMI fell to a 12-month low of 51.8, down from 52.6 in December, though it remained above the 50.0 threshold for the 25th consecutive month. Employment improved for the second straight month, with job growth driven by the US, Japan, India, Brazil, and Russia, while China, the euro area, the UK, and Canada saw continued job losses.

Business sentiment reached an eight-month high, with confidence improving among manufacturers while holding steady in services. Developed economies were generally more optimistic than emerging markets. Inflationary pressures intensified, with input costs rising at the fastest pace since July 2024 and output prices increasing at their highest rate in eight months. Developed nations saw higher inflation rates compared to emerging markets, adding to concerns about persistent price pressures in the months ahead.

US

·????? The US economy showed signs of renewed expansion at the start of 2025, with both manufacturing and services sectors growing, though with some mixed signals across industries. The S&P Global US Manufacturing PMI rose to 51.2 in January, its first move above the 50.0 threshold in seven months, signaling a modest improvement in the sector’s health. Growth in new orders and output fueled optimism, which surged to a 34-month high, reflecting increased business confidence in the new administration’s pro-business stance. Employment in manufacturing also picked up, reaching its highest pace since mid-2024.

The ISM Manufacturing Index reinforced this trend, rising to 50.9, its highest level since September 2022. The jump was driven by a 3-point rise in new orders to 55.1, marking the strongest growth since May 2022, while production climbed to 52.5. However, concerns lingered over tariffs on Canada and Mexico, which could disrupt supply chains and increase costs. Some manufacturers also reported tightening supply conditions, particularly in aerospace and defense, due to Chinese restrictions on critical minerals.

The services sector remained in expansion, with the S&P Global US Services PMI registering at 52.9, though down from December’s 56.8. New business growth slowed, particularly in export orders, which declined for the first time in seven months. Employment growth in services accelerated to its highest pace since mid-2022, reflecting increased hiring activity despite rising labor costs. Inflationary pressures strengthened, with input prices reaching a three-month high, driven by higher wages and material costs.

The ISM Services Index echoed this trend, slipping to 52.8 from 54 in December, with new orders falling to a seven-month low. Some companies noted weather-related disruptions and concerns over potential tariff impacts, while pricing pressures remained elevated.

The strongest growth was seen in financials, consumer services, and healthcare, while the technology and basic materials sectors recorded marginal declines in activity. Overall, private sector growth continued, supported by robust consumer spending. The financial sector led expansion with a PMI of 55.7, though down from a three-year high in December (60.5). Consumer goods manufacturers saw the fastest output increase in ten months at 54.2, while industrials maintained positive momentum despite slowing growth.

·????? The US labor market showed signs of cooling in December, with job openings falling to 7.60 million from 8.16 million in November, marking a three-month low. The decline was led by professional and business services, healthcare, and finance, suggesting a gradual softening in labor demand. The ratio of job vacancies to unemployed workers remained at 1.1, far below its 2022 peak of 2 to 1, reinforcing the Federal Reserve’s view that the labor market is no longer a major driver of inflationary pressure. However, hiring remained steady at 3.4%, while the layoffs rate also held at historically low levels.

Despite the decline in job openings, employment growth remained resilient in January, with private payrolls expanding by 183,000, exceeding expectations of 150,000. The service sector, particularly trade, transportation, and hospitality, drove hiring, while business services and manufacturing saw weaker job growth. Wage gains were stable, with job switchers seeing a 6.8% increase and those staying in the same role experiencing a 4.7% raise.

Broader employment data from the Bureau of Labor Statistics confirmed a deceleration in job growth, with nonfarm payrolls adding 143,000 jobs in January, below the expected 175,000. The unemployment rate fell to 4.0%, though this was partly due to annual population adjustments. Payroll revisions for 2024 showed an average monthly gain of 166,000 jobs, down from the initially reported 186,000, suggesting a more moderate expansion. Wage growth accelerated, with average hourly earnings rising 0.5% from December and 4.1% year-over-year, underscoring persistent labor costs.

A notable driver of job market expansion has been immigration. The US labor force grew by a record 2.2 million people in January, primarily due to foreign-born workers. Over the past year, immigrant employment rose by 1.9 million, compared to 766,000 for native-born workers. However, immigration flows have slowed sharply in recent months, and President Trump’s plans for stricter border policies could further constrain workforce growth, potentially leading to upward wage pressures.

Government employment also reached historic levels, with the federal workforce rising to 2.42 million, the highest for any non-census year since World War II. While the Trump administration aims to cut 10% of civilian federal jobs, an initial voluntary resignation program has only seen 65,000 employees accept the offer, falling short of the 240,000 reductions targeted.

US labor productivity remained robust, increasing at a 1.2% annualized rate in Q4 2024, following a 2.3% rise in the previous quarter. For the full year, productivity rose 2.3%, the strongest performance in 14 years outside the pandemic. Higher efficiency gains helped moderate labor costs, with unit labor costs rising 3% in Q4 and 2.6% for the year. These trends have contributed to easing inflationary pressures, aligning with the Fed’s goal of bringing inflation toward its 2% target.

·????? US consumer sentiment weakened in early February, with the University of Michigan's index falling to 67.8, a seven-month low. Inflation expectations surged, with consumers anticipating prices to rise 4.3% over the next year, up a full percentage point from January. This shift comes as President Trump pushes forward with new tariffs, raising concerns about potential price increases and their impact on household spending. Buying conditions for big-ticket items dropped by 12 percentage points, while sentiment declined across all political affiliations. Confidence among Republicans moderated from post-election highs, while Democrats’ outlook fell to its lowest level since 2020. The survey also indicated a decline in expectations for personal financial situations and the broader economy.

Adding to economic pressures, US consumer debt spiked in December, rising by $40.8 billion—the largest monthly jump on record. Revolving credit, primarily credit cards, surged by $22.9 billion, reversing a prior-month decline, while non-revolving credit, such as auto and education loans, increased by $18 billion, the highest in two years. Auto sales reached their fastest pace since May 2021, contributing to the borrowing surge. Despite strong hiring trends, rising costs and elevated interest rates—credit card rates averaged 22.8%—are straining household finances. More Americans are rolling over credit card debt, with a record share making only minimum payments. Delinquencies are climbing, with 3.5% of balances past due for 30 days or more and 1.8% of accounts classified as delinquent, both more than double their post-pandemic lows.

Meanwhile, the US trade deficit widened sharply to $98.4 billion in December, a nearly 25% increase from the prior month, bringing the full-year deficit to $918.4 billion, the second-largest on record. A surge in imports preceded Trump’s new tariff policies, as companies rushed to secure goods before trade restrictions took effect. Industrial supplies saw their largest percentage increase since 1993, driven by metal shipments used in manufacturing, along with higher crude oil and gold imports. The deficit with Mexico hit a record $171.8 billion in 2024, while the shortfall with China widened to $295.4 billion.

The trade imbalance reflects broader macroeconomic forces, including strong US consumption and a strong dollar, which makes imports cheaper while raising costs for American exports. Tariffs are expected to create further challenges for businesses reliant on international supply chains, which are not easily reconfigured. Despite the surge in imports, trade contributed little to GDP in Q4 2024, after dragging on growth for much of the year. The combination of rising debt, inflation concerns, and trade disruptions highlights growing uncertainty in the US economy, with households and businesses bracing for higher costs and potential policy shifts in the months ahead.

Eurozone

·????? Euro-area inflation unexpectedly accelerated at the start of 2025, reinforcing the ECB’s cautious stance on rate cuts while the region’s economy struggles to gain momentum. Consumer prices rose 2.5% year over year in January, up from 2.4% in December and surpassing economist forecasts of stability. Core inflation remained elevated at 2.7%, with price gains in services showing only a slight dip. Despite the ECB’s confidence that inflation will reach its 2% target this year, a Bloomberg Economics nowcast suggests price growth may only ease to 2.4% in February, highlighting persistent inflationary pressures.

The outlook for euro-area wage growth, a key factor in the ECB’s inflation projections, continues to signal a sharp deceleration. The ECB’s wage tracker now anticipates salaries rising at an annual rate of 1.5% by the fourth quarter of 2025, marginally higher than the 1.4% projected in December but well below the 5.3% peak recorded a year earlier. The ECB has already cut rates five times in this cycle, lowering the deposit rate to 2.75% last week. Its confidence in achieving the inflation target relies heavily on wage moderation and a slowdown in services inflation, which has remained stubbornly near 4% for over a year.

ECB President Christine Lagarde emphasized that multiple indicators, including compensation per employee and corporate surveys, confirm the downward trend in wages. The central bank’s December outlook projects a sustained decline in wage growth, falling from 4.6% in 2024 to 2.8% by 2027. While many economists agree that the post-pandemic wage catch-up is nearly complete, some worry that the slowdown could overshoot, pushing inflation below target.

Jens Eisenschmidt of Morgan Stanley warned that wage growth below 2% after August 2025 would be close to pre-Covid levels and could lead to an inflation undershoot. Germany’s IG Metall union has already locked in modest wage gains for the next two years, signaling subdued pressures ahead. However, ECB Chief Economist Philip Lane has argued that a resilient labor market increases the chances of reaching the inflation target rather than undershooting it.

Some analysts believe that current wage declines are temporary. Holger Schmieding of Berenberg expects that as growth picks up in 2026, structural labor shortages will reemerge, driving wage growth back to 4% and keeping inflation above 2% in the medium term. Similarly, Marco Wagner of Commerzbank doubts the ECB’s wage tracker fully captures second-half 2025 wage dynamics, noting that many long-term labor agreements front-load increases in their first year, potentially leading to an underestimation of future wage growth.

·????? The eurozone’s economy showed signs of stabilizing at the start of 2025, with manufacturing and services sectors moving closer to expansion. The HCOB Eurozone Manufacturing PMI improved to 46.6 in January, an eight-month high, though it remained below the 50.0 threshold that separates contraction from growth. The downturn in output, new orders, and inventories eased, while business confidence for future production surged to its strongest level since early 2022. Despite persistent weakness in the manufacturing sector, particularly in Germany (45.0) and France (45.0), the pace of contraction moderated across most major economies. Greece (52.8) and Spain (50.9) remained in expansion territory, while Italy (46.3), Austria (45.7), and the Netherlands (48.4) showed signs of improvement.

The HCOB Eurozone Services PMI signaled another month of modest growth at 51.3, down slightly from December, with demand conditions improving as new orders rose for a second consecutive month. However, business confidence in the sector remained below historical averages, reflecting political uncertainties in Germany and France.

The broader eurozone economy posted its first expansion since August 2024, with the HCOB Composite PMI rising to 50.2 from 49.6 in December. Growth was largely supported by Spain (54.0) and Germany (50.5), which saw its best performance since last May. Meanwhile, Italy (49.7) stagnated, and France (47.6) remained in contraction for a fifth straight month. Despite the slight upturn, total new business inflows continued to decline, with export demand dragging on sales. Firms relied on clearing backlogs to sustain activity, and employment levels neared stabilization, though job losses persisted in manufacturing.

·????? Germany’s economic outlook at the start of 2025 presents a mixed picture, with signs of stabilization in manufacturing and robust growth in services, but underlying challenges remain. December factory orders surged 6.9% from the previous month, far exceeding forecasts, with core orders rising 2.2%. However, industrial production fell 2.4%, the steepest drop in five months, driven by weakness in the automotive and machinery sectors, pushing production to its lowest level since mid-2020. These contradictory signals highlight the fragility of the recovery, with analysts noting that while demand appears to be rebounding, production remains constrained by structural issues.

Germany’s trade surplus with the US widened to €69.95 billion ($72.7 billion) in 2024, up more than 10% from the previous year, likely drawing the ire of President Donald Trump, who has already threatened tariffs on EU goods. The surplus grew as German exports increased while US imports fell, reflecting Europe’s economic struggles and weaker domestic demand. Bloomberg Economics suggests that Germany’s auto and industrial machinery sectors are particularly vulnerable to US trade actions, with Allianz warning that a full-scale trade war could push Germany into a third consecutive year of recession.

In January, the manufacturing sector showed signs of bottoming out, with the HCOB Manufacturing PMI rising to 45.0 from 42.5 in December, the highest reading since May 2024. Output and new orders contracted at the slowest pace in eight months, and the decline in export sales eased. However, the sector remains in contraction, with employment continuing to shrink for the 19th consecutive month. Businesses are operating with surplus capacity, completing orders faster than new work is coming in. While expectations for future production reached their highest level since February 2022, driven by hopes of lower interest rates and post-election economic recovery, structural issues persist.

The services sector provided a more encouraging start to the year, with the HCOB Services PMI rising to 52.5 from 51.2 in December, marking the strongest growth in six months. Employment in the sector saw a modest increase after six months of declines, driven by improving capacity utilization and large project work. However, new business inflows remained weak, particularly from abroad, where orders fell at the steepest rate in nearly a year. Price pressures intensified, with input cost inflation accelerating for the fourth consecutive month, driven by rising wages, fuel prices, and the CO2 tax. Service providers passed on these costs to consumers, with output price inflation reaching an 11-month high.

·????? Germany's economic and political landscape is at a critical juncture as the country approaches the February 23 election. Friedrich Merz, the frontrunner from the CDU/CSU alliance, centered his campaign on revitalizing Europe's largest economy after years of stagnation. Following a tumultuous parliamentary debate over immigration policy that led to protests and accusations of eroding the firewall between mainstream politics and the far-right AfD, Merz attempted to shift the focus back to economic recovery. His proposals include reducing corporate taxes from 30% to 25% by 2029, reintroducing nuclear energy, and ensuring that all policy decisions prioritize industrial competitiveness. However, the details on how tax cuts will be funded remain unclear, and potential coalition partners, including the Social Democrats and the Greens, remain wary of working with him.

Despite the controversy, polling data suggests Merz’s election prospects remain strong. The CDU/CSU gained one point to 30% in a Forschungsgruppe Wahlen survey, maintaining a lead over the AfD, which slipped to 20%. Chancellor Olaf Scholz’s SPD stagnated at 15%, now tied with the Greens. In a direct chancellor preference poll, Merz leads with 32%, up two points, ahead of Green Party leader Robert Habeck at 24%, while Scholz has dropped to 18%. The CDU/CSU’s position remains dominant, but forming a stable government will require careful coalition negotiations, as all mainstream parties have ruled out working with the AfD.

Meanwhile, executives from Commerzbank, RWE, and Bilfinger emphasized the urgent need for structural reforms, including reducing bureaucratic red tape and addressing high energy costs. They believe a stable government post-election could trigger a shift in business sentiment and unlock new investment.

·????? France managed to push through its 2025 budget after Prime Minister Fran?ois Bayrou survived two no-confidence votes, securing fiscal stability following months of political uncertainty. The budget was passed using a constitutional provision that allowed Bayrou to bypass parliamentary approval, a move that triggered opposition motions but ultimately failed to oust the government. The Socialists' decision not to back the no-confidence effort further fractured the left-wing New Popular Front alliance, leaving Bayrou with a weakened but still functional government. However, with the National Assembly deeply divided into three competing blocs, passing future legislation will remain a challenge.

The newly approved budget includes €52 billion in savings, aiming to reduce the deficit to 5.4% of GDP in 2025. This represents a smaller adjustment than the €60 billion in tax hikes and spending cuts proposed by the previous government under Michel Barnier, who was ousted after a failed budget maneuver. Concessions to the Socialists helped secure the budget’s passage, including protections for healthcare and education funding. Despite this progress, the government remains vulnerable to further opposition attempts, particularly over migration reform.

In parallel, France’s fiscal situation showed some improvement in 2024, with the core state budget deficit narrowing to €156.3 billion from €173.3 billion the previous year. Higher tax revenues and an €11.2 billion reduction in spending contributed to the improvement. However, this figure excludes local government and social security balances, and the total public deficit for 2024 is still projected to be around 6% of GDP—well above the initial 4.4% target.

However, economists at Natixis suggest that France’s fiscal shortfall may not be as severe as government estimates, predicting that the overall deficit could be closer to 5.5% of GDP rather than the 6% figure cited by the Bayrou administration. If confirmed in upcoming reports, this would reduce the pressure on policymakers to implement further austerity measures in 2025, making the revised target of 5.4% more attainable with less aggressive fiscal tightening.

UK

·????? The Bank of England reduced interest rates to a 19-month low, cutting its benchmark rate by 25 basis points to 4.5% in a move that signaled further easing ahead. The decision, which marked the third reduction since August, was split among policymakers, with two members of the Monetary Policy Committee (MPC) advocating for a larger 50-basis-point cut. This unexpected shift, particularly from previously hawkish Catherine Mann, prompted markets to increase bets on additional cuts in 2025, driving a decline in the pound and a rally in UK bonds.

The BOE’s updated forecasts pointed to a more challenging economic outlook, with inflation now projected to peak at 3.7% later this year, up from a prior estimate of 2.8%. Policymakers emphasized that domestic inflationary pressures had eased more slowly than expected, reinforcing the need for a “gradual and careful approach” to monetary policy. Governor Andrew Bailey highlighted global uncertainties, warning that economic conditions remained volatile. The BOE now expects UK GDP to grow just 0.75% this year, down from its previous estimate, before picking up to 1.5% in 2026 and 2027. Weak productivity and sluggish business sentiment continue to weigh on growth, with additional pressure from tax increases introduced by Chancellor Rachel Reeves.

Markets interpreted the decision as dovish, with traders now fully pricing in two more rate cuts this year and assigning an 80% probability to a third. Money markets also indicate a high likelihood of the next rate reduction in May, though speculation is growing that a March move could be possible if economic data continues to deteriorate. The pound fell as much as 1.2% to $1.2361 following the decision, reflecting expectations of continued easing.

Despite market enthusiasm for more aggressive rate reductions, Bailey urged investors not to over-interpret voting patterns, stating that the MPC’s decisions should be viewed in the context of broader economic conditions. However, the shift in sentiment was underscored by the MPC’s revised growth projections, which were downgraded significantly.

·????? The UK economy faced ongoing difficulties at the start of 2025, with both the manufacturing and services sectors showing signs of strain. The S&P Global UK Manufacturing PMI rose slightly to 48.3 in January from December’s 47.0, but the reading remained below the 50.0 threshold, signaling contraction. Factory output, new orders, and employment continued to decline, with small and medium-sized businesses hit the hardest. Rising costs, weakened domestic and export demand, and low business confidence contributed to the downturn. New export orders have now fallen for three consecutive years, with weaker demand from the EU and the Middle East.

The services sector continued to expand, albeit at a slower pace. The S&P Global UK Services PMI slipped to 50.8 from 51.1 in December, marking the joint-lowest reading in 15 months. While business activity remained positive, new orders declined for the first time in over a year, and employment saw its steepest decline since January 2021. Export demand was mixed, with resilient sales to US clients offset by weaker spending in Europe.

Inflationary pressures persisted across both sectors. Manufacturing input price inflation reached a two-year high, with rising material and transportation costs forcing suppliers to increase prices. In the services sector, cost inflation hit a nine-month peak, driven by higher wages and increased national insurance contributions. Firms passed these costs on to customers, leading to the strongest rise in prices charged in 13 months.

Asia

·????? Japan’s economy started 2025 with a mix of positive developments in wages and consumer spending, contrasted by continued struggles in manufacturing and rising cost pressures. Nominal cash earnings surged 4.8% in December, marking the fastest growth since 1997. Bonuses played a significant role in this jump, while base pay for full-time workers rose 2.8%, extending its yearlong run above 2%. With overall inflation at 3.6%, real wages also grew for the second straight month, bolstering expectations that consumption and consumer prices will continue to rise. The wage increases reinforced the BOJ’s confidence in its inflation target and strengthened the case for further tightening measures.

Consumer spending responded positively to the wage gains, with household outlays rising 2.7% in December, the fastest pace since August 2022. The three-month moving average improved to 0.5%, while nominal spending climbed 7%. Housing expenditures led the surge, jumping 15.8%, with transportation, communication, and medical expenses also rising. However, questions remain about the sustainability of this trend, as the spending boost was largely driven by temporary bonus effects, and high inflation continues to erode purchasing power.

The Japanese manufacturing sector, however, continued to contract for the seventh consecutive month in January, with the PMI falling to 48.7 from 49.6 in December. Output declined for the fifth straight month, with the contraction accelerating to its steepest pace in ten months. Weak demand, particularly in semiconductors and automotive industries, weighed heavily on new orders, which fell at the fastest rate in six months. Export orders also remained in negative territory, extending a 35-month-long decline. Manufacturers adjusted by reducing inventory levels and cutting back on input purchases at the sharpest rate in nearly a year. Despite the downturn, firms continued hiring, hoping for an eventual recovery, though overall business confidence dipped to a two-year low.

The services sector, by contrast, showed resilience, with the Services PMI rising to 53.0 in January, the highest since September. Business activity expanded for the third straight month, driven by growth in transportation, finance, and insurance. Total new work increased solidly, with export demand rising for the first time in four months, particularly from Asian markets. Employment levels expanded for the 16th consecutive month, reflecting optimism about future growth. However, rising costs were a concern, as input price inflation reached a five-month high, fueled by higher wages and raw material costs. Prices charged by service providers also saw their steepest increase since May 2024.

·????? China’s economy entered 2025 with signs of continued growth across its manufacturing and services sectors, though challenges in employment and pricing pressures remain. The manufacturing sector expanded for the fourth consecutive month, with production rising at a quicker pace on the back of improved domestic demand and increased promotional efforts. However, the headline PMI fell slightly to 50.1 from 50.5 in December, reflecting only marginal growth. While manufacturers increased purchasing activity and inventory levels, employment fell at the fastest pace in nearly five years as companies remained cautious about hiring amid ongoing concerns over trade uncertainties, particularly US tariffs. Export orders declined for the second straight month, highlighting weak external demand.

Despite stable input costs, manufacturers lowered their output prices at the sharpest rate since mid-2023, as companies attempted to boost sales through discounts. While domestic orders remained strong, businesses continued to worry about trade conditions, leading to below-average optimism about future growth. Improved supply chain efficiency helped shorten delivery times, the fastest since May 2023, further supporting inventory accumulation.

The services sector maintained its expansionary momentum, with the PMI posting 51.0 in January, marking the 25th straight month of growth. However, the pace of expansion in both business activity and new orders softened compared to December, and employment in the sector contracted for the second consecutive month. The rate of job shedding was the steepest since April 2024, as firms focused on cost-cutting and operational efficiency improvements rather than expanding their workforce. While domestic demand remained solid, export orders rebounded after a temporary decline in December, with foreign demand rising for the 16th time in the past 17 months.

Cost pressures intensified in both sectors. In services, input price inflation reached a three-month high, driven by rising wages and raw material costs. Selling price increases were relatively modest as firms attempted to balance rising costs with maintaining demand. Manufacturers faced similar pricing dynamics, with stable input costs but declining output prices as businesses absorbed cost pressures to support sales.

·????? India’s economy began 2025 with strong performance in manufacturing while the services sector saw some loss of momentum. Manufacturing expanded at a faster pace, with the PMI rising to a six-month high of 57.7 in January, up from 56.4 in December. The acceleration was driven by a surge in new orders, both domestic and international, with export demand growing at its steepest rate in nearly 14 years. This prompted a significant rise in production, marking the fastest expansion since October 2024. Business confidence strengthened, with nearly a third of firms anticipating growth in the coming months, supported by favorable economic conditions and marketing efforts.

In contrast, India’s services sector lost some momentum, with the PMI falling to 56.5 in January from 59.3 in December, marking the slowest growth in 14 months. While business activity remained in expansion territory, companies cited intense competition and a slowdown in new business growth as factors limiting further acceleration. However, international sales continued to rebound, with export orders rising at the fastest pace in five months, benefiting from demand across Asia, Europe, the Middle East, and the Americas.

·????? India’s central bank cut interest rates for the first time in nearly five years, lowering the benchmark repurchase rate by 25 basis points to 6.25%. The unanimous decision by the Reserve Bank of India’s monetary policy committee, led by Governor Sanjay Malhotra, was widely expected, but the decision to maintain a neutral stance rather than shifting to an accommodative approach left some investors disappointed. The move comes as India’s GDP growth slows to 6.4%, a four-year low, while inflation remains elevated at 5.2%, above the central bank’s 4% target. The RBI projects inflation to moderate to 4.2% in the next fiscal year, while growth is expected to reach 6.7%.

Malhotra, in his first policy address since taking office in December, emphasized the RBI’s commitment to price stability while supporting growth. He reinforced that the inflation target remains at 4%, dismissing the idea that the central bank would be comfortable with inflation simply staying within the 2%-6% range. He likened it to students aiming for top marks rather than just passing an exam. Despite inflation easing, risks persist due to global financial volatility, trade policy uncertainty, and weather disruptions.

The rupee remains a key focus, with Malhotra reiterating that the RBI does not target specific exchange rate levels but intervenes to curb excessive volatility. A weaker rupee could put upward pressure on inflation, but global uncertainty remains a larger concern. The RBI has committed to maintaining sufficient liquidity in the financial system, stating it will remain proactive in addressing any liquidity needs.

Foreign Exchange Markets

The Dollar Index, which measures the U.S. dollar’s value against a basket of major currencies, decreased by 0.3% over the week.

Commodities and Energy Markets

The commodities sector ended the week with positive performance across major assets.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (through July 2026) moved upward by an average of 6 basis points.

In contrast, the U.S. Treasury yield curve slightly flattened. The 10-year bond yield declined by 9 basis points to 4.49%, while the 30-year bond yield fell by 14 basis points to 4.69%. Among the positive developments for the debt market was a slight reduction in estimated federal borrowing for the first quarter, due to a higher-than-expected cash balance at the start of the year. The bond market found further relief as the Treasury confirmed that it would keep the size of its bond auctions steady through at least mid-2025. Recently, market concerns had been rising over a potential increase in long-term debt sales, particularly with the new administration reassessing borrowing needs.

Treasury Secretary Scott Bessent emphasized that the administration is prioritizing lower 10-year Treasury yields rather than seeking cuts to the Fed’s benchmark interest rate. He stressed that energy prices play a crucial role in inflation expectations for working-class Americans, arguing that lowering gasoline and heating oil costs would not only reduce expenses but also improve consumer confidence. He noted that the bond market has responded favorably to expectations of lower energy prices and fiscal discipline under the Trump administration.

Bessent refrained from suggesting direct intervention in the bond market, such as yield curve control, but highlighted that government decisions on debt issuance and deficit reduction could influence yields. The US is currently running a deficit of about 7% of GDP, and some analysts argue that reducing it would be the most effective way to bring down long-term interest rates. While boosting energy supply could help mitigate inflation, some economists remain skeptical that it will be sufficient to drive down 10-year yields, given the pressures from tariffs, budget deficits, and broader economic policies.

Central Bank Insights

·????? Bank of Japan officials and outside observers are converging on the view that Japanese interest rates will need to rise further, possibly reaching around 1.5% over the next few years. Board member Naoki Tamura, regarded as the BOJ’s leading hawk, advocates raising the short-term rate above 1% by the second half of fiscal 2025, citing growing confidence that inflation can remain around the bank’s 2% target. While Tamura stresses that precise timing depends on economic data, he is not wedded to a rigid schedule of one hike every six months.

Former Governor Haruhiko Kuroda, whose administration championed ultra-easy policy, now considers deflation essentially vanquished, arguing it is “perfectly natural” for the BOJ to normalize policy. His stance contrasts with Prime Minister Shigeru Ishiba’s government, which is more cautious about declaring the end of deflation.

Another former BOJ executive Hideo Hayakawa expects two further rate hikes this year alone, projecting a terminal rate near 1.5% before normalization concludes. He notes the bank’s own estimate for the neutral rate lies between around 1% and 2.5% in nominal terms, implying ample room for additional increases. However, Hayakawa warns that rising costs for fresh foods could pinch consumer wallets and weigh on spending, a factor that could slow the pace of tightening.

The International Monetary Fund shares a broadly similar outlook. Deputy Asia-Pacific Director Nada Choueiri says the BOJ is “on the right track” to lift rates at a gradual, flexible pace, reaching a neutral level by the end of 2027. The IMF estimates Japan’s neutral rate at around 1.5%. Although Japan’s GDP growth is forecast at 1.1% this year, uncertainty surrounds global demand, geopolitical risks, and prospective trade moves by the US. The IMF also calls for Japan to pivot its fiscal policy away from subsidies toward more growth-oriented spending and to implement a plan to reduce public debt.

Taken together, these remarks reinforce the growing expectation that the BOJ’s tightening cycle will continue, backed by stable inflation, improving wage trends, and a recovering domestic economy. Still, officials acknowledge shifting variables—from potential US policy changes to energy price fluctuations—could alter the timeline or pace of rate hikes, underscoring the importance of data-driven decisions in the months ahead.

·????? European Central Bank officials broadly agree that inflation in the euro zone is well on its way back to 2%, prompting them to continue lowering interest rates in the months ahead. Klaas Knot, among the more hawkish policymakers, says rates are still restrictive but expects the ECB can begin “taking our foot off the brake” once inflation is assured to stabilize at target later this year. Francois Villeroy de Galhau likewise projects further cuts, noting that policymakers “started cutting rates last June” and likely have more moves to make before reaching a level that neither stimulates nor constrains growth.

Despite this overall direction, officials emphasize caution and flexibility. Peter Kazimir warns it is too soon to “declare victory” over inflation, citing continued risks and the need for “unyielding confirmation” that prices are on a downward path. Gediminas Simkus similarly supports another quarter-point reduction at the March meeting but stresses that any further moves will depend on incoming data—particularly developments in the U.S. under President Donald Trump’s tariff policies.

Chief Economist Philip Lane advises the ECB to remain agile, balancing the danger of moving too slowly against the risk of overshooting. He highlights that inflation may approach 2% slower or faster than expected, making a “middle path” prudent. Lane also downplays the notion of focusing too closely on the so-called neutral rate—the level at which policy is neither restrictive nor stimulative—preferring that officials rely primarily on real-time economic and price data to gauge how fast or far they should cut.

Others share Lane’s skepticism about using a single neutral-rate estimate. While the ECB published a range of 1.75% to 2.25% for neutral, policymakers like Mario Centeno and Piero Cipollone say the bank may need to consider dipping below that band if growth remains weak or new risks emerge. At the same time, estimates show it could be enough simply to bring rates near 2% if inflation converges to target on schedule. Vice President Luis de Guindos underscores that uncertainty around U.S. trade policy compounds the difficulty of pinpointing a final rate level, especially with the possibility of selective tariffs shifting demand, prices, and currency markets in unpredictable ways.

Boris Vujcic concurs that market bets on two or three more cuts this year are “not an unreasonable expectation.” Yet he, too, wants evidence that services inflation—the area still running persistently above 2%—is receding.

·????? Federal Reserve officials broadly agree that US monetary policy can remain on hold in the near term while they assess how inflation and growth evolve in a backdrop of fiscal and trade-policy uncertainty. Several policymakers stress that last year’s series of rate reductions — totaling one percentage point — now warrant a “wait-and-see” period to gauge their full effect on the economy.

Boston Fed President Susan Collins expects tariffs to push certain prices upward, but she and her colleagues prefer to “look through” any short-term spike in inflation provided expectations remain anchored. That stance aligns with Atlanta Fed President Raphael Bostic’s desire to wait “a while” before considering additional cuts. Bostic argues the central bank does not yet have a clear read on 2025 economic performance and wants to watch whether tariffs alter inflation expectations.

Chicago Fed President Austan Goolsbee underscores that outsize tariffs could rekindle the supply-chain disruptions seen in the pandemic, potentially fueling inflation. He therefore advocates slowing the pace of rate cuts, warning that policymakers must distinguish between inflation driven by true economic overheating and inflation tied to temporary trade or geopolitical factors. Still, Goolsbee projects that rates can eventually move “a fair bit” lower over the next 12 to 18 months, assuming inflation continues to glide toward the Fed’s 2% target.

San Francisco Fed President Mary Daly describes the economy as fundamentally sound and calls for patience regarding new policies from the Trump administration. Vice Chair Philip Jefferson similarly foresees a gradual, “bumpy” path back to 2% inflation and says the Fed is under no pressure to make rapid moves unless circumstances change. Jefferson also observes that extended expansions can reduce inequality, but cautions that persistently high inflation undermines such benefits.

Richmond Fed President Thomas Barkin considers the US economy neither hot enough to justify higher rates nor weak enough for a sharp pivot on policy. He remains “moderately restrictive,” anticipating further clarity in coming data and policies before endorsing additional cuts. Dallas Fed President Lorie Logan floats the possibility that rates are already near neutral, such that even better news on inflation would not necessarily spur immediate easing. She explains that strong demand paired with inflation at 2% implies little reason to trim rates aggressively.

Minneapolis Fed President Neel Kashkari sees inflation continuing its gradual decline to target, allowing a modest rate reduction by year’s end. Governor Adriana Kugler makes a case for keeping policy stable for “some time,” given a still-elevated inflation rate, a “healthy” labor market, and uncertainty about the breadth and impact of any new tariffs or fiscal changes.

You can find more articles in our Telegram channel at https://lnkd.in/euxNeUuZ