2025 Weekly Update

Market update

The S&P 500 closed the week at 6,025.99, -0.24% lower. The Dow Jones closed at 44,303.4, -0.54%, with the Nasdaq lower by -0.53%. The volatility index VIX closed the week at 16.54, up from 16.43. The Euro Stoxx 600 rose +0.60%.

The 10-year UST closed at 4.49%, down from 4.54% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 16 bps. US Corporate Bond spreads: Investment Grade remained at 153bps and High Yield spreads widened +1bp at 296bps. German 10-year Bunds yield closed at 2.37% down from 2.46% a week before. In Europe, Corporate Investment Grade spreads narrowed -2 bps at 101bps and High Yield narrowed -3 bps at 324bps.

The US Dollar Index (DXY) depreciated -0.30% last week and closed at 108.04. The Euro closed at 1.0328 (-0.33%); the Yen appreciated +2.44%, closing at 151.41 and the Swiss Franc appreciated +0.11%, closing at 0.9099. Gold closed at $2,861.07, appreciating +2.24%. Oil was lower, Brent closed at $74.66 (-2.74%) and WTI at $71 (-2.11%).

Macroeconomy

US jobs

US economy added 143k jobs in Jan. according to the Establishment survey, below expectations of 175k. However, Dec. and Nov. were revised higher by 100k jobs in aggregate. The unemployment rate ticked down 10bps to 4% (below consensus at 4.1%). Note that the 4% includes an updated forecast of the population. Hourly wage growth ran hot at +0.5% m-o-m (vs. expectations +0.3%) and +4.1% y-o-y (vs. +3.8%). However, as the workweek length shrank to 34.1 hours, the average weekly earnings growth was only 3.75% y-o-y (much less than the 4.1% hourly wage increase). The Bureau of Labor Statistics says the LA fires and severe winter weather in Jan had no discernible effect on the labor figures. The annual benchmark revision showed a neg. revision of ~589k on a seasonally adjusted basis, not far from the consensus forecast of ~600k (and not as bad as the ~800k suggested back in Aug.).

Fedspeak

Fed Governor Kugler said that the prudent step is to hold the fed funds rate for some time given a hot labor market, economic uncertainty. Minneapolis's Kashkari flagged uncertainties about tariff policy and said next couple of inflation prints may be key. Fed Vice Chair Jefferson first mentioned that the Fed can remain patient with the economy in a good place. Then, he reiterated the view that “a gradual reduction in the level of monetary policy restraint” as “the most likely outcome”, even as he said that “I do not think we need to be in a hurry to change our stance”. Lastly, Chicago's Goolsbee said the Fed may be on hold with interest rates. He mentioned that “if we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs”. Goolsbee had been one of the more sanguine FOMC voices on inflation in the past year so it’s a notable comment for how Fed might be thinking about tariff risks.

Bank of England

As anticipated, the BoE has cut its policy rate by 25bps to 4.5%. Among the 9 members who voted for a rate cut, two of them voted for a 50bps rate, including the usual hawk Catherine Mann. The minutes revealed that one member argued a 50bps cut would "give a clearer signal of financial conditions appropriate" for the UK, likely from Mann as she may fear a potential budget-driven gilt selloff. The BoE has shifted its guidance to support a gradual and cautious approach to rate cuts, acknowledging both global and domestic uncertainties and the dual risks to inflation forecasts. While the vote was dovish, the meeting's signals were mixed: the GDP growth forecast was cut by more than half for 2025 yet the inflation is projected to rise more than 3% y-o-y this year. The committee expects inflation pressures to stem from higher global energy costs and regulated price changes while anticipating domestic inflation to decline further.

France budget

France is well on the way to having a budget for 2025. The 2025 budget is a compromise budget, less ambitious than Barnier's original draft because Bayrou's minority government had to buy the support of the Socialists to ensure its survival after Barnier's fall. In short, the budget envisages a 0.6ppt reduction in the budget deficit to 5.4% of GDP in 2025, down from 5% in the original version. 90% of the planned savings will come from higher taxes from high-income individuals and the largest companies. Overall, the French fiscal position will remain weak in 2025, with the highest budget deficit and the third-highest debt-to-GDP ratio in the euro area (~115% of GDP). Hence, rating downgrades remain likely, with S&P (AA-, stable) and Fitch (AA-, negative) reviewing their ratings on 28 Feb, and 24 Mar. respectively. The adoption of the budget brings short-term relief on the political front, but the overall picture is unchanged: the Bayrou government remains in a minority, exposed to a vote of no confidence, and early elections remain a likely outcome this year.

German elections

The centre-right CDU/CSU currently leads the polls with around 28%, followed by the far-right AfD with a bit more than 20%, the centre-left SPD at around 16%, and the Greens at close to 14%. Given the fragmented political landscape, a coalition will need to be formed. The centre-right CDU/CSU has completely ruled out any cooperation with the far-right AfD. For now, a coalition between the CDU/CSU and the SPD seems the most likely outcome. Based on past experience, a new coalition government could be in power by the end of April at the earliest. The composition of the Bundestag will also be important to watch. A key focus will be on whether the AfD and BSW (a new populist party formed by former members of The Left party - Die Linke) together secure more than a third of the Bundestag seats, as this would be enough to block any changes to the constitutional debt brake or to set up a special fund.

Highlights

On rates

Treasuries sold off at the end of the week following the release of hawkish economic data, notably in the labor market. On the inflation front, the Michigan report showed a massive 100bps increase in 1-year inflation expectations. That led investors to dial back their rate cut expectations this year. 36bps are now priced in by the Dec. meeting, lower than the 50bps priced in at one point during the week. The 10yr yield closed the week at 4.50%, up +6.1bps on Friday, even though it was still down -4.5bps over the week. Treasury Secretary Bessent reiterated a preference for lower 10yr yields, which he said would naturally come down under Trump’s policies. He also said he did not “foresee any changes in the issuance (of Treasuries) for the foreseeable future” and noted that the US would continue to have a “strong dollar” policy. In Europe, 10yr bund yields fell -8.8bps to 2.37%, including a -0.7bps decline on Friday as tariff risks outweighed the stronger US data.

Q4 earnings

Almost 80% of S&P 500 companies have reported and more than 77% have beaten earnings expectations. EPS growth stands at +12% y-o-y, surprising positively by 5%. This marks the highest positive surprise since 2021 even if helped by significant downgrades. 2025 EPS estimates are trending downwards, along with the earnings revision ratio. Financials, Communication Servs. and Healthcare are printing strong results while Energy, Materials, and Cons. Staples are underperforming. Highlights from last week include Amazon (solid EPS upside but Q1 guidance short of expectations), AMD (shortfall in Data Center sales), and Alphabet (in line EPS but miss on Cloud revenue). In Europe, more than half of companies have beaten expectations with EPS growth at +1% y-o-y, 3% ahead of estimates. Sales are surprising by more than 2.5% and above the 14-year average. Revisions are improving due to EUR depreciation. This week, 75 S&P 500 and 79 Stoxx 600 companies will report. Major releases include McDonald’s, Coca-Cola, BP, Nestle, Siemens and Hermes.

What to watch

• Monday: Japan Bank Lending
• Tuesday: US NFIB Small Business Optimism, Powell Testimony to Congress
• Wednesday: Japan Machine Tool Orders; India CPI; US Jan CPI and Weekly Earnings
• Thursday: Japan PPI; UK 4Q GDP; Switzerland CPI; Eurozone Industrial Production; US PPI and Initial Jobless Claims
• Friday: Eurozone 4Q Flash GDP and Employment; US Retail Sales and Industrial Production