2025 Weekly Update

Market update

The S&P 500 closed the week at 5,996.66, +2.91% higher. The Dow Jones closed at 43,487.83, +3.69%, with the Nasdaq higher by +2.45%. The volatility index VIX closed the week at 15.97, down from 19.54. The Euro Stoxx 600 rose +2.37%.

The 10-year UST closed at 4.63%, down from 4.76% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 32 bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 155bps and High Yield spreads narrowed -2bps at 305bps. German 10-year Bunds yield closed at 2.53% down from 2.59% a week before. In Europe, Corporate Investment Grade spreads narrowed -3bps at 110bps and High Yield remained at 338bps.

The US Dollar Index (DXY) depreciated -0.28% last week and closed at 109.35. The Euro closed at 1.0273 (+0.28%); the Yen appreciated +0.91%, closing at 156.3 and the Swiss Franc appreciated +0.15%, closing at 0.915. Gold closed at $2,703.25, appreciating +0.50%. Oil was higher, Brent closed at $80.79 (+1.29%) and WTI at $77.88 (+1.71%).

Macroeconomy

US prices

Dec. US CPI fell to a monthly +0.2% pace (vs. +0.3% expected), so the y-o-y rate ticked down a tenth to +3.2%. However the +0.2% Dec. number (+0.225% unrounded) followed four consecutive months with a core CPI reading of +0.3%. In fact, the headline CPI print was actually at a 10-month high of +0.39%, and it didn’t see a downside surprise like the core print. Moreover, there are growing signs of stickiness, as the 3m annualized rate of CPI reached an 8-month high of +3.9%, so that’s not where the Fed would normally be comfortable cutting rates. Looking ahead, Bloomberg’s Commodity Spot Index (+5.13% year-to-date) just hit its highest level since January 2023, plus tariffs in the US could impact inflation data. We also had Dec. Producer Price Index (PPI), headline PPI inflation was running at a monthly pace of +0.2% (vs. +0.4% expected), which meant the y-o-y rate only rose to +3.3% (vs. +3.5% expected). Core PPI was also lower than expected, with the measure excluding food, energy and trade services up just +0.1% (vs. +0.3% expected). One notable upside surprise came on airfares, which rose by a monthly +7.2% in Dec.

Fedspeak & US Treasury

Fed Governor Waller sounded open to a rate cut as soon as March, and also said that 3 or 4 cuts were possible this year if the data cooperated. Those comments pushed back against the more hawkish narrative that developed because of strong data like the jobs report last week. Other Fed officials welcomed the inflation print but remained cautious on the path ahead. New York Fed President Williams said that “The process of disinflation remains in train. But we are still not at our 2% goal”. Richmond Fed President Barkin similarly noted that “inflation is coming down toward target” but that “we need to be restrictive to seal the final mile”. Finally, Scott Bessent testified at a Senate Finance Committee confirmation hearing. Bessent called for an extension of tax cuts, saying that they would face “an economic calamity” if they didn’t renew them. Separately, he said that “we must ensure that the US dollar remains the world’s reserve currency”. And on fiscal policy, he said that the US “must work to get our fiscal house in order”. On Russian sanctions, Bessent said he would support sanctions on Russian oil majors.

US data

The Philadelphia Fed’s manufacturing business outlook survey surged to 44.3 in January (vs. -5.0 expected). That’s the highest reading for the index since April 2021, as well as the biggest monthly jump in the index since June 2020. Other hard data was more mixed, with retail sales ex autos up by +0.4% in Dec. (vs. +0.5% expected), but the retail control group up by a stronger +0.7% (vs +0.4% expected). Initial jobless claims moved up to 217k in the week ending January 11 (vs. 210k expected). Finally, the Atlanta Fed’s GDPNow estimate for Q4 ticked up to an annualized pace of +3.0%.

Bank of Japan

BOJ’s Deputy Governor Himino signaled the possibility of an interest rate hike next week. He stated that the board will be debating whether to raise interest rates while adding that there are risks both at home and abroad that require attention. Meanwhile, the global government bond sell-off spread to Japan with yields on the 40yr JGB’s hitting 2.76%, highest level since its inception in 2007 while the 20yr yield touched its highest level since May 2011.

China

Q4 GDP and Dec. activity surprise to the upside. Q4 GDP accelerated to 5.4% y-o-y, higher than consensus (5%), with full year growth for 2024 in line with government’s target, with q-o-q momentum up to 6.6% annualized from 5.3% in Q3.  Both industrial and service output accelerated notably. The People’s Bank of China (PBOC) injected a significant amount of funds into its financial system, marking the second highest on record in data compiled by Bloomberg since 2004. The central bank pumped a net +958.4bn yuan ($131bn) via 7-day reverse repurchase agreement during daily open market operations. This seemingly is aimed at offsetting facilities rolling off, peak tax season and cash demand ahead of the upcoming Lunar New Year holidays.

Highlights

On rates

Treasury yields retreated after slightly more benign inflation surprises led to growing hopes that the Fed and other central banks would continue cutting rates this year. In the US, Fed Governor Waller comments led investors to dial up their expectations for Fed easing this year. On Friday, futures were pricing in 38bps of cuts by the Fed’s December meeting, more than the 29bps at the start of the week. That triggered a significant bond rally, with the US 10yr Treasury closing the week at 4.63%, down 13.2bps. In Europe, the 10yr bund yield fell -6.1bps, closing the week at 2.53% and ending a run of 6 consecutive weekly gains. Similarly, UK gilts saw one of the biggest outperformances. The 10yr yield was down -17.8bps after CPI inflation surprised to the downside in December.

Q4 earnings preview

Expectations for Q4 earnings have been meaningfully reduced in recent months. In the US, the expected y-o-y growth rate stands at 8% for the S&P, down from 18% recorded last year, while the EPS level expected for Q4 is lower than reported in Q3. Revenue growth is forecasted at 4.6%, down from 5.6% in Q3. Similarly, profit margins are expected to come in at 12.0%, down from 12.2% in Q3. Sector wise, Financials, Communication Services and Information Technology are expected to post the highest EPS growth. Earnings from the Magnificent 7 are expected to grow 22% y-o-y in Q4, with the group having beaten expectations for 7 quarters in a row. In Europe, Q4 earnings are expected to rise 1.9% y-o-y. That growth rate rises to 4.8% if we exclude the Energy sector. Q4 revenue is expected to increase 1.9% y-o-y, 5.0% excluding the Energy sector. 7 of the 10 sectors are expected to see better earnings relative to Q4 2023. Real Estate sector has the highest earnings growth rate, while the Consumer Cyclicals has the weakest anticipated growth compared to Q4 2023.

Q4 earnings results

In the US, banks reported solid results and a positive outlook for 2025 net interest income. More specifically, Wells Fargo, JP Morgan, Goldman, Citigroup, Morgan Stanley, Bank of America and BNY Mellon all reported EPS upside as the industry benefited from a robust fee environment and higher rates. Outside of financials, UnitedHealth posted a slight beat on EPS and miss on sales. Elsewhere, Richemont reported very strong numbers. Revenue growth came in at 10% thanks to strong performance in Jewelry. TSMC reported strong numbers with upside on margins and guidance above consensus. This week, 40 S&P 500 companies and 13 Stoxx 600 companies are expected to report their results.

What to watch

• Monday: Martin Luther King Jr Day (US holiday); UK House Prices; China Loan Prime Rate; Japan Core Machine Orders & Industrial Production

• Tuesday: US Philadelphia Fed Non-manufacturing Activity; UK Employment & Weekly Earnings; Eurozone ZEW Survey; Korea & Taiwan Exports

• Wednesday: US Conference Board Leading Index

• Thursday: US Initial Jobless Claims; Eurozone Consumer Confidence

• Friday: US Manufacturing PMI, Services PMI, Existing Home Sales; PMI France, Germany, Eurozone, UK; Japan CPI, BoJ meeting