2025 Weekly Update

Market update

The S&P 500 closed the week at 6,040.53, -1.00% lower. The Dow Jones closed at 44,544.66, +0.27%, with the Nasdaq lower by -1.64%. The volatility index VIX closed the week at 16.43, up from 14.85. The Euro Stoxx 600 rose +1.78%.

The 10-year UST closed at 4.54%, down from 4.62% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 24bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 153bps and High Yield spreads widened +4bps at 295bps. German 10-year Bunds yield closed at 2.46% down from 2.57% a week before. In Europe, Corporate Investment Grade spreads narrowed -3bps at 103bps and High Yield narrowed -4bps at 327bps.

The US Dollar Index (DXY) appreciated +0.86% last week and closed at 108.37. The Euro closed at 1.0362 (-1.29%); the Yen appreciated +0.52%, closing at 155.19 and the Swiss Franc depreciated -0.55%, closing at 0.9109. Gold closed at $2,798.41, appreciating +1.00%. Oil was lower, Brent closed at $76.76 (-2.22%) and WTI at $72.53 (-2.85%).

Macroeconomy

Trade tariffs

The US announced 25% additional tariffs on imports from Canada (ex-energy imports at 10%) and Mexico, and a 10% additional tariff on China. They are announced to start on Feb. 4th and will be implemented under the International Emergency Economic Powers Act (IEEPA), citing a national emergency due to “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl”. In response, Canada has retaliated by announcing 25% tariffs on CAD155bn of US goods, of which CAD30bn start on Tuesday and the remainder in three weeks' time. Mexico’s President said that she’d instructed the Economy Minister to “implement the Plan B” they’d been working on and has signaled that the details of this plan will come today. China have said they would “take necessary countermeasures to defend its rights and interests”. The Commerce Ministry also said they’d file legal proceedings at the WTO. These three countries make up around 40% of imported US goods, at around $1.35tn. To put this in perspective, during the first Trump administration, the US targeted around $350bn of Chinese goods. So, the magnitude is huge compared to anything seen for decades with regards to global trade and at face value takes us back to the protectionist period between the two world wars in terms of scale of tariffs. The average duty rate on US imports would move from 2.3% to around 10% assuming no trade redirection.

Fed on hold

The Fed kept the fed funds rate unchanged in the 4.25-4.50% range, as widely expected, after delivering 100bps of cuts over the previous three meetings. The on-hold decision was accompanied by some potentially hawkish tweaks in the press release, notably removing wording that “inflation has made progress toward the 2% objective”. However, Powell later downplayed this change, also referring to the policy stance and the economy as in a “good place”. He said that the Fed needs to see “further progress” on inflation or a labor market weakening to ease policy further but added that the Fed did not need to see inflation “all the way back to 2%” to cut rates. In terms of the immediate signal, Powell appeared to downplay the likelihood of a rate cut in March, saying that “we don't need to be in a hurry to adjust the policy stance”, though he noted that the policy stance was still “meaningfully restrictive”. The Fed chair largely avoided getting drawn on the potential implications of the new Trump administration, pointing to uncertainty around tariffs, immigration, fiscal and regulatory policies and saying that the Fed will have to “wait and see”. There was no change to Quantitative Tightening (QT). Powell noted that reserves remain abundant, and while the Fed is monitoring the situation, he did not provide a timeline for halting QT, so no immediate need to end QT. More likely timing of an end is in June/Sept.

ECB

The European Central Bank delivered a 25bps rate cut as expected. That took their deposit rate down to 2.75%, meaning that they’ve now cut by a total of 125bps since they began last June. Looking forward, it was clear that further cuts were on the agenda, as the statement still described monetary policy as “restrictive”, and President Lagarde said “we are not at the neutral rate”. However, Lagarde didn’t want to signal how long they’d keep cutting for, saying that “it would be premature at this point in time to talk about the point where we have to stop”. After the meeting, we did hear some more hawkish ECB sources stories suggesting that ECB could drop the description of stance as “restrictive” at the next meeting in March and that some of the policymakers were open to the possibility of a pause by the April meeting. The ECB’s latest Bank Lending Survey showed that credit standards for firms tightened in Q4, with a net +7% reporting tighter credit standards, the highest in a year. Lastly, the Euro Area economy was stagnant in Q4, contrary to expectations for +0.1% growth. Then on Friday, France’s flash CPI prints for January surprised on the downside, with EU-harmonized CPI at +1.8% (vs. +1.9% expected), while Germany’s was in line with expectations at +2.8%.

Other central banks

The Bank of Canada delivered a 25bps rate cut to 3%. They acknowledged the risk of US tariffs: “a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada”, and that “if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested”. They also announced their plan to end QT, which would see asset purchases restart in early March. This week, investors expect the Bank of England (BoE) to cut rates by 25bps, to 4.5%. This is supported by recent progress in services disinflation and a slowdown in economic activity and a weaker labor market. The BoE will face the challenge of balancing a two-sided economy. On one hand, the downward pressure on growth in the short/medium term, partly due to the restrictiveness of its monetary policy, could justify more rate cuts. On the other hand, upward pressure on headline inflation could compel the BoE to proceed more cautiously.

Highlights

On rates

US sovereign bonds rallied last week, with the 10yr Treasury yield falling -8.1bps to 4.54% despite a +2.4bps increase on Friday due to investor worries about the inflationary implications of broad tariffs. Fed expectations moved in a hawkish direction, with the market pricing in 45bps worth of cuts, down from 51bps at the beginning of the week. Yields also declined in Europe, with 10yr bund yields down -11.0bps to 2.46%. This mostly took place towards the end of the week, including -5.9bps on Friday, following softer than expected economic data. In the meantime, Euro IG credit spreads closed at 103bps, their tightest level in three years. 10-year euro government bond spreads vs. the Bund remain stable and hopes regarding an agreement over the French budget meant the 10-year French spread fell back below its Greek counterpart, at 75bps.

Q4 earnings

In the US, 30% of S&P 500 companies have published earnings with strong results. On average, companies are reporting 4.9% sales growth and 17.7% EPS growth. 66% of companies are beating sales expectations while 73% of companies are beating on earnings. The sectors with the strongest EPS growth are Communication Services and Financials. The biggest laggards are Energy, Materials, and Industrials with negative earnings growth. Major releases last week included mixed results from big Tech. Apple reported slight EPS upside, Meta reported strong EPS upside driven by higher sales, Microsoft reported a small miss on Azure growth, and Tesla posted an EPS shortfall due to sales softness. 124 S&P 500 companies are expected to report this week including Alphabet, Amazon, AMD, Palantir, and Eli Lilly. In Europe, 20 companies in the STOXX 600 have posted their results. 75% of them are beating sales expectations (vs. around 60% in a typical quarter). 19% of the index will report this week including Novo Nordisk, L’Oréal, Siemens and 35% of EU Banks.

What to watch

• Monday: Asian & China Caixin Manufacturing PMI; Eurozone Manufacturing PMI, CPI; US ISM Manufacturing
• Tuesday: Japan Monetary Base; US tariffs on Canada, Mexico and China; US Jolts Job Opening, Durable Goods Orders 
• Wednesday: China Caixin Services PMI; Japan Cash Earnings; UK, Eurozone Services PMI; Europe PPI; US ADP Employment, ISM Services PMI
• Thursday: UK Rate Decision; Eurozone Retail Sales; US Initial Jobless Claims
• Friday: India Rate Decision; Taiwan Exports; US Non-Farm Payrolls, University of Michigan Survey