2025 Weekly Update

Market update

The S&P 500 closed the week at 5827.04, -1.94% lower. The Dow Jones closed at 41938.45, -1.86%, with the Nasdaq lower by -2.34%. The volatility index VIX closed the week at 19.54, up from 16.13. The Euro Stoxx 600 rose +0.65%.

The 10-year UST closed at 4.76%, up from 4.6% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 43 bps. US Corporate Bond spreads: Investment Grade spreads narrowed -2 bps at 156bps and High Yield spreads narrowed -6 bps at 307bps. German 10-year Bunds yield closed at +2.59% up from+2.42% a week before. In Europe, Corporate Investment Grade spreads narrowed -1 bp at 113bps and High Yield narrowed -3bps at 338bps.

The US Dollar Index (DXY) appreciated +0.64% last week and closed at 109.65. The Euro closed at 1.0244 (-0.62%); the Yen depreciated -0.30%, closing at 157.73 and the Swiss Franc depreciated -0.87%, closing at 0.9164. Gold closed at $2689.76, appreciating +1.88%. Oil was higher, Brent closed at $79.76 (+4.25%) and WTI at $76.57 (+3.53%).

Macroeconomy

US jobs

The US economy added 256k jobs in Dec. according to the Establishment survey, far above the consensus forecast of +165k and higher than the overall 2024 average of 186k. Employment trended up in healthcare (+46k), government (+33k), and social assistance (+23k) while retail witnessed a large rebound in job creation (+43k in Dec vs. -29k in Nov). Manufacturing was soft, with -13k job losses in Dec (consensus was +5k). Survey revisions were minimal at -8K in aggregate for Oct and Nov. The Household survey was even stronger than Establishment, with a 478k jump in the number of employed people in the month of Dec. The unemployment rate fell 10bps to 3.9% (consensus was anticipating the rate to stay unchanged at 4%) thanks to the big 478k Household number. The participation rate was flat m-o-m and inline at 62.5%. Hourly wage growth was a bit cooler than anticipated at +3.9% y-o-y (vs. +4% expected) while the workweek length was flat m-o-m and inline at 34.3 hours. Average weekly earnings rose just 3.6% y-o-y.

FOMC & Fedspeak

The FOMC minutes echoed the signal of a hawkish Dec. rate cut. The majority of the FOMC saw the decision as “finely balanced” and some “stated that there was merit” in keeping rates unchanged, as “almost all participants judged that upside risks” to inflation had increased. Looking forward, “many” on the FOMC saw “the need for a careful approach to monetary policy decisions over coming quarters”. In terms of Fed speakers, a tone of caution on further rate cuts continued to dominate. Philadelphia Fed President Harker did say that “I still see us on a downward policy rate path”. But Kansas City Fed President Schmid noted that rates may already be “very close” to the neutral level, and Fed Governor Bowman said that she continued to “prefer a cautious and gradual approach”, also mentioning that she could have supported keeping rates on hold in December. Fed Governor Waller said “my bottom-line message is that I believe more cuts will be appropriate”. So that pushed back against speculation that the Fed might not cut at all this year. On top of that, Waller also sounded relaxed about the inflationary impact of tariffs, saying “If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy”. Governor Cook echoing the tone of other speakers. She said that “we can afford to proceed more cautiously with further cuts”, but that it was still “appropriate to move the policy rate toward a more neutral stance”. There was also some unexpected news from the Fed’s Vice Chair for Supervision, Michael Barr, who said he would step down as Vice Chair for Supervision at the end of February, or an earlier time if a successor was confirmed. However, Barr said he would continue to serve on the Fed’s Board of Governors.

US data

Dec. headline ISM services index was stronger than expected at 54.1 (vs. 53.5 expected) and from 52.1 in November. Importantly, the prices paid component saw a large jump to a two-year high of 64.4. On top of that, the JOLTS report for November showed job openings were up to a 6-month high of 8.098m (vs. 7.74m expected), a 3.3% monthly rebound in job openings, although both the hires and quits rates fell to new cycle lows.

European data

Euro area headline HICP accelerated to 2.4% y-o-y in Dec. (up from 2.2% the previous month), while core inflation remained stable at 2.7% y-o-y. The rise in euro area y-o-y inflation was mostly driven by energy prices. On a country-by-country basis, there was some heterogeneity, with upside surprises in Germany and Spain and downside surprises in France and Italy. Within core inflation, services inflation was slightly stickier than expected at 4.0% in Dec., while core goods inflation was somewhat weaker. Now, all eyes will turn towards the Jan. print, often the hardest month to predict. In Switzerland, Dec. CPI inflation fell to 0.6% y-o-y, down from 0.7% the previous month, in line with expectations. The details once again showed weak price pressures in Switzerland. Core inflation, services inflation, and domestic inflation all fell in December. Inflation is expected to soften further in January, driven by the decline in electricity prices and the fact that the 2024 VAT hike will drop out of the annual calculation. Domestic inflation is set to decline mechanically due to changes in rents.

China

The People’s Bank of China said they would suspend purchases of government bonds, which prompted a rise in yields with China’s 10yr yield up +3bps in the week to 1.64%. Consumer prices grew marginally in Dec., rising +0.1% y-o-y, in line with market expectations and compared to an increase of +0.2% y-o-y in Nov. So, close to deflation. Producer price inflation contracted for the 27th consecutive month, shrinking -2.3% in Dec. (vs. -2.4% expected) albeit improving marginally from the -2.5% drop seen in the prior month.

UK on the spotlight

The UK has found itself the center of attention in global markets, mainly due to its twin deficits, the second largest in the G7, only behind the US, who have the benefit of the world’s reserve currency. So, the UK is reliant on overseas investors, with around 30% of Gilts held abroad. On top of that, the combination of sluggish growth and above-target inflation are adding to investors’ concerns, and the current pattern of market moves (with yields up and sterling down) is reminiscent of previous episodes of turmoil. Nevertheless, the size of the moves is nowhere near the scale of what happened in 2022, when the 10yr gilt yield moved up by more than 100bps in three sessions. UK 10yr gilt yield moved from 4.59% to 4.84% at the end of the week. GBP fell to its weakest level against the US Dollar since November 2023, closing the week at $1.2207.

Highlights

On rates

Treasuries sold off last week after strong economic data raised concerns that the Fed and other central banks would keep rates higher for longer. Long-end borrowing costs rose across the world. In the US, 10yr yields close the week at 4.76%, their highest level since October 2023. Investors now expect just 28bps worth of easing in 2025, down from ~40bps at the start of the week. Moreover, the odds of a 25bps cut are below 50% for every meeting until the June, meaning markets assume the Fed will not cut rates in H1. In Europe, yields on 10yr bunds rose to 2.59%, their highest level in over five months. It also marked a 6th consecutive weekly increase for the 10yr bund, a first since 2022, back when the ECB was hiking by 75bps per meeting. The rise in yields was even stronger in the UK where the government could break its fiscal rules unless they another round of fiscal consolidation is announced. Yields on 10yr gilt yield were up +24bps to 4.84%, their highest level since ‘08.

What to watch

• Monday: China trade data (Dec.)
• Tuesday: US NFIB survey (Dec.), PPI (Dec.)
• Wednesday: UK CPI (Dec.); US CPI (Dec.)
• Thursday: UK monthly GDP, IP (Nov.); US retail sales (Dec.)
• Friday: China GDP (Q4), IP; FAI; retail sales (Dec.); UK retail sales (Dec.); US IP (Dec.)