2025 Weekly Update

Market update

The S&P 500 closed the week at 6,101.24, +1.74% higher. The Dow Jones closed at 44,424.25, +2.15%, with the Nasdaq higher by +1.65%. The volatility index VIX closed the week at 14.85, down from 15.97. The Euro Stoxx 600 rose +1.23%.

The 10-year UST closed at 4.62%, 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 31bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 154bps and High Yield spreads narrowed -14bps at 291bps. German 10-year Bunds yield closed at 2.57% up from 2.53% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 106bps and High Yield narrowed -7bps at 331bps.

The US Dollar Index (DXY) depreciated -1.74% last week and closed at 107.44. The Euro closed at 1.0497 (+2.18%); the Yen appreciated +0.19%, closing at 156 and the Swiss Franc appreciated +0.99%, closing at 0.9059. Gold closed at $2,770.58, appreciating +2.49%. Oil was lower, Brent closed at $78.5 (-2.83%) and WTI at $74.66 (-4.13%).

Macroeconomy

Bank of Japan

BOJ raised policy rate by 25bps to 0.5% which was basically fully priced with the meeting statement unchanged from the last meeting. However, BOJ raised inflation forecasts, especially for the full-year 2025 notably due to higher rice prices and recent depreciation in yen. Several reasons underlie the decision to hike which would be also important for future normalization. First, strong wage momentum: with increasing passthrough from prices to wage in recent years, wage growth has been trending up and close to 3%. Shunto negotiation in spring is important, amid labor shortage, Shunto wage increase this year could be still decent (base pay increase could be still above 3%), though probably slightly lower than last year. This should continue to support wage growth. Second, inflation sustainably at around 2%: higher wage growth has been putting upward pressure on services inflation, and this could continue. This, along with other factors including rise in inflation expectation and improving output gap could help sustain CPI around BoJ’s 2% target. Lastly, global economy, especially US growth and policy are important: a positive tone around this is another factor behind the hike.

FOMC preview

Investors expect the Fed to leave rates on hold at 4.375% (4.50-4.25% target range). Markets expect a relatively quiet meeting with no rate move and limited guidance about future policy decisions. While Chair Powell may not rule out a March cut as he did last January, the broad signals from the meeting should confirm that such a cut is not likely with Powell possibly emphasizing the underlying strength of the economy and signs of stabilization in the labor market that would require patience in removing further restriction. When asked about Mr. Trump’s policies and their impact on inflation, investors expect Powell to say that the committee won’t prejudge policies in advance.

ECB preview

Investors expect the European Central Bank (ECB) to cut rates by 25bps next week, bringing the deposit facility rate down to 2.75%. Three arguments will justify this cut in the eyes of the Governing Council. First, since the last meeting in December, incoming short-term macroeconomic data have not surprised on the upside. The composite PMI was weak in December, pointing to subdued growth in the fourth quarter. The small positive surprise that came with the January flash print does not change this overall picture of modest growth momentum. And consumer confidence did not rebound significantly in January, which could challenge the ECB staff’s projection of a private consumption-led growth recovery in 2025.  Second, there is still a high degree of confidence that inflation will converge to the target this year. The overall inflation picture has not changed since December. Most of the disinflation process is now behind, and the last mile seems difficult to walk with high services inflation (at 4% since early 2024), but recent developments are positive (the momentum of services prices - a good leading indicator of inflation - is showing signs of moderation and wage growth will decline this year, as indicated by the ECB’s wage tracker). Finally, ECB speak has been dovish of late. Klaas Knot stated that he was comfortable with the cuts priced in by the markets for the next two meetings. Villeroy de Galhau sees a growing consensus within the Governing Council for more back-to-back cuts going forward. Even Nagel acknowledged that inflation is converging towards the target, which supports the case for a less restrictive monetary policy stance. There is still a stronghold of caution in the words of Schnabel, but it seems that the most hawkish members are increasingly in a minority within the Governing Council.

PMIs

The US flash composite PMI printed at 52.4 (vs 55.2 expected) for January, a 9-month low. The decline came from the services PMI coming in at 52.8, which is the weakest since April last year. Services were impacted by a contraction in export orders and inflationary pressures, which caused input costs to rise. Manufacturing was in expansionary territory for the first time since June, ticking up to 50.1 (vs 49.7 expected). Factory production rose marginally, increasing for the first time in six months, with new orders also returning to modest growth after six months of decline. Although the two indices had mixed readings, job creation was up for both, reflecting optimism in both sectors. In Europe, the composite PMI rose to 50.2 (vs 49.7 expected), driven by a rebound in Germany, while the contraction in activity for France softened. The expansion was also driven by the services sector, while manufacturing production continued to contract, albeit at the weakest level since May. In China, the official factory activity unexpectedly shrank in January, coming in at 49.1 (vs. +50.1 expected), down from +50.1, reversing the expansionary momentum over the past three months. China’s non-manufacturing PMI fell to 50.2 in January, compared to 52.2 last month. Dec. China’s industrial profits jumped +11.0% y-o-y, growing for the first time since July. Full-year industrial profits in 2024 fell -3.3% y-o-y, extending declines to a third consecutive year.

Highlights

On rates

US Treasury yields ended the week slightly lower after flash PMIs revealed a slowdown in services. The 2yr yield decreased -1.7bps to 4.27%, while the 10yr yield closed to week at 4.62%, down -0.6bps. The softer data also meant investors grew more confident that the Fed would cut rates this year. The number of cuts priced in by the December meeting rose +4.3bps to 42bps, meaning markets expect 2 rate cuts in 2025. In Europe, yields moved in the other direction after the upside surprise in flash PMIs. The 10yr bund yield closed at 2.57%, up +3.6bps and the amount of rate cuts priced in by the December meeting fell -12.5bps over the week to 87bps.

Q4 earnings

More than 16% of the S&P 500’s market cap has reported. Weaker earnings revisions in the US have created a lower bar that is easier for companies to beat. So far, 80% of companies are beating earnings expectations by an average of 7.3%. Earnings revisions are expected to improve as the reporting season progresses, peaking around the 7th or 8th week, before tapering off towards the end of the quarter. Notable earnings reports last week included American Express (EPS in line with consensus), Verizon (upside on sales and earnings), and Intuitive Surgical (in line results but softer guidance on procedure growth and margins). This week, 102 S&P companies are expected to publish their results, including 6 mega caps: TSLA, AAPL, GOOG, MSFT, AMZN, and META. Q4 2024 is expected to see strong y-o-y earnings growth of approximately 14%, with 40% of this growth from the Mag-7, and double-digit growth projected to continue throughout the year alongside steady sales growth of around 10%. In Europe, revisions are more balanced, with significant upgrades in Real Estate, Technology, and Healthcare. 53 Stoxx 600 companies are reporting this week. Major releases include LVMH, SAP, and ASML.

What to watch

• Monday: China Ind. Profits & PMI; Germany Ifo (Nov.); France Consumer Confidence (Jan.); US New Home Sales (Dec.)
• Tuesday: US Conf. Board Cons. Confidence
• Wednesday: Canada BOC Decision; US FOMC decision
• Thursday: ECB Deposit Rate Decision; FR GDP (4Q); EC GDP (4Q), Unemployment rate; US GDP (4Q)
• Friday: Japan Tokyo CPI (Jan.); France CPI (Jan.); Germany CPI (Jan.)