2025 Weekly Update

Market update

The S&P 500 closed the week at 5942.47, -0.48% lower. The Dow Jones closed at 42732.13, -0.60%, with the Nasdaq lower by -0.51%. The volatility index VIX closed the week at 16.13, up from 15.95. The Euro Stoxx 600 rose +0.20%.

The 10-year UST closed at 4.6%, down from 4.63% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 29 bps. US Corporate Bond spreads: Investment Grade spreads widened +4bps at 158bps and High Yield spreads widened +1bp at 313bps. German 10-year Bunds yield closed at +2.42% up from+2.40% a week before. In Europe, Corporate Investment Grade spreads widened +5bps at 114bps and High Yield widened +3bps at 339bps.

The US Dollar Index (DXY) appreciated +0.88% last week and closed at 108.95. The Euro closed at 1.0308 (-1.13%); the Yen appreciated +0.39%, closing at 157.26 and the Swiss Franc depreciated -0.72%, closing at 0.9085. Gold closed at $2640.22, appreciating +0.72%. Oil was higher, Brent closed at $76.51 (+3.15%) and WTI at $73.96 (+4.76%).

Macroeconomy

Fedspeak

We had comments from several Fed speakers about the policy outlook last week. Generally, those comments have implicitly sounded quite cautious about the scale of further easing, which echoes the Fed’s hawkish shift in their December dot plot, where they only signaled 50bps of cuts for 2025. For instance, on Friday Richmond Fed President Barkin said he was “in the camp of wanting to stay restricted for longer.” Then over the weekend, San Francisco Fed President Daly said that inflation was still “uncomfortably above our target”, whilst Governor Kugler said that “we know the job is not done” with inflation still not at 2% yet. This backdrop has seen US Treasury yields move higher towards the end of the week, with the 30yr yield closing the week at 4.81%, which would be its highest closing level since November 2023. And this Wednesday coming up, we’ll get the minutes from the FOMC’s recent meeting in December, so it’ll be interesting to see how that debate unfolded given there was a dissenting vote.

ISM/PMI data

In the US, the ISM manufacturing printed up to a 9-month high of 49.3 in December (vs. 48.2 expected). Moreover, the new orders component ticked up to an 11-month high of 52.5. Plus, that came just a day after the weekly initial jobless claims fell to their lowest level since April. So collectively, that helped to reassure investors that the US growth outlook was still robust into the new year. In Europe, the December final manufacturing PMIs saw modest downward revisions compared to the flash prints. For example, the Euro Area manufacturing PMI came down a tenth to 45.1, and the UK reading came down three-tenths to 47.0. And in the UK’s case, that also leaves the manufacturing PMI at an 11-month low.Central banks in 2025Global central bankers are poised to cut borrowing costs further in 2025, but less than the drop seen in 2024 according to Bloomberg Economics projections. As opposing forces, central bankers have already made progress in the easing cycle and are also wary about inflation pressures that might yet need to fully dissipate. In the US, the Federal Reserve has already switched its attention to the danger of resurgent inflation, curbing the prospect for much easing for now. Other major counterparts, from the Euro zone to the UK, are poised to keep lowering borrowing costs to aid economic growth, but with no sign of a hurry. On the other hand, two central banks are currently adopting a tighter monetary policy: Japan’s hiking cycle is likely to continue, while Brazilian officials remain set on action to contain fiscally driven inflation.

Major central banks

In the US, the FOMC struck a hawkish posture at the last meeting of 2024, disappointing market expectations with only 50bps of anticipated 2025 cuts. The current federal funds rate stands at 4.5% with markets evenly split on a 25bps cut by March with a move fully priced by June and an almost 70% chance of a second reduction by year-end. In Europe, while headline inflation is expected to settle at the ECB’s 2% target in the course of 2025, services prices are still rising at nearly twice that rate, adding to lingering concerns over wages that have prevented policymakers from sounding the all clear. The current deposit rate sits at 3% with traders expecting a 25bps cut this month followed by three more by the end of June and a 25% chance of a fifth by the end of the year. In Japan, inflation has continued at or above the Bank of Japan 2% target for more than 2 1/2 years and the economy is still growing. A hike would also help support the weakened yen. The current target rate stands at 0.25% with money markets pricing a gradual pace of tightening, projecting a 25bps hike by May followed by another toward year-end. In the UK, Governor Andrew Bailey doubled down on the need for “gradual” cuts at the December meeting, despite a surprise jump in wage growth and pickup in inflation in the days before. The current bank rate is 4.75% with investors favoring a 25bps cut in February and fully price a second reduction by November, with a 30% chance of a third in December. Lastly in Canada, after leading the easing efforts and delivering two back-to-back 50bps cuts, the Bank of Canada is now eyeing a more gradual pace of interest rate reductions with inflation expected to hover around the central bank’s 2% target.

Highlights

Equity market

We saw some weakness in December as markets consolidated after rallying in November, but major indexes still remain above pre-US election levels. The Fed’s 25bps cut was a ‘closed call’, and likely pause until more progress are seen on inflation. This led to a further backup in yields (US 10y Yields pushed above 4.6%), a breakout in the US Dollar, creating volatility (VIX +28% in December but remained below the 18 level) which led to profit taking/rotations. At the same time, market breadth deteriorated in December with 70% of trading sessions in the US had more stocks decline than advance. Also, there was a rotation to Large Cap/Quality style. Small Caps (Russell 2000) sharply underperformed at -8.4%, worst month since 2022, giving up most of November’s 10.8% gain. Magnificent-7 regained leadership with group having its best month of outperformance versus the S&P Equal-Weight in almost 2 years (Mag-7 +6.3% vs -6.4% for S&P Equal-Weight). Every sector was down except broad Tech, with Cyclicals under pressure. At the end, it was still another strong year for equities which marked the 2nd straight annual gain of over 20% for the S&P (best 2-year stretch in 25 years), with Nasdaq also finished year up over 20% for the 6th time in past 8 years. As a quick 2024 performance recap: Nasdaq +24%, S&P +23%, MSCI World +17%, Nikkei +19%, Hang-Seng +18%, EU Stoxx +6%.

What to watch

• Monday: US Nov. factory orders; China Dec. Caixin services PMI; Germany Dec. CPI; Italy Dec. services PMI; Canada Dec. services PMI
• Tuesday: US Nov. JOLTS report, trade balance, Dec. ISM services; China Dec. foreign reserves; France & Italy Dec. CPI; Eurozone Dec. CPI, Nov. unemployment rate; Switzerland Dec. CPI
• Wednesday: FOMC minutes, US Dec. ADP report, Nov. consumer credit; Japan Dec. consumer confidence; Germany Nov. retail sales, factory orders; France Dec. consumer confidence, Nov. trade balance; Eurozone Dec. economic confidence, Nov. PPI; Australia Nov. CPI
• Thursday: US Nov. wholesale trade sales, initial jobless claims; China Dec. CPI, PPI; Japan Nov. household spending; Germany Nov. industrial production, trade balance; Eurozone Nov. retail sales
• Friday: US Dec. jobs report, January University of Michigan survey; Japan Nov. leading index, coincident index; Germany Nov. current account balance; France Nov. consumer spending, industrial production; Italy Nov. retail sales; Canada Dec. jobs report, Nov. building permits