2025 Weekly Update

Market update

The S&P 500 closed the week at 6,114.63, +1.47% higher. The Dow Jones closed at 44,546.08, +0.55%, with the Nasdaq higher by +2.58%. The volatility index VIX closed the week at 14.77, down from 16.54. The Euro Stoxx 600 rose +1.78%.

The 10-year UST closed at 4.48%, down from 4.49% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 15bps. US Corporate Bond spreads: Investment Grade spreads narrowed -8bps at 145bps and High Yield spreads widened +1bp at 297bps. German 10-year Bunds yield closed at 2.43% up from 2.37% a week before. In Europe, Corporate Investment Grade spreads narrowed -2bps at 99bps and High Yield narrowed -8bps at 316bps.

The US Dollar Index (DXY) depreciated -1.23% last week and closed at 106.71. The Euro closed at 1.0492 (+1.59%); the Yen depreciated -0.59%, closing at 152.31 and the Swiss Franc appreciated +1.11%, closing at 0.8998. Gold closed at $2,882.53, appreciating +0.75%. Oil was mixed, Brent closed at $74.74 (+0.11%) and WTI at $70.74 (-0.37%).

Macroeconomy

US prices

Jan. CPI data was the strongest monthly print for core CPI since April 2023. In terms of the details, headline CPI came in at +0.47% in Jan. (vs. +0.3% expected), which pushed the y-o-y rate up to +3.0% (vs. +2.9% expected). Moreover, there are growing signs that strong print isn’t just a blip, and in the most recent 3 months, CPI was running at an annualized +4.5% pace. That is the strongest 3m rate since November 2022, so this really isn’t in a zone where the Fed can relax. Meanwhile for core CPI, that came in at +0.45% on the month (vs. +0.3% expected), pushing the y-o-y rate up to +3.3% (vs. +3.1% expected). This pattern of upside surprises in Jan. has been a consistent theme over recent years. Upside surprises for core CPI have been more frequent in H1 than H2 and Jan. has seen the most upside surprises of any month. Later in the week, New York Fed’s Survey of Consumer Expectations showed inflation expectations were broadly stable in Jan., with 1yr and 3yr expectations unchanged at 3.0% even if the 5-year expectation edged up three tenths to 3.0%. Importantly for markets, the overall release was a contrast to the University of Michigan’s preliminary survey for February, which showed 1yr expectations surging up to 4.3%, so it helped to reassure investors that the University of Michigan number wasn’t being replicated more broadly. Lastly, PPI came in at +0.4% for the month (vs. +0.3% expected). However, the components of the PPI such as healthcare and air fares that feed into PCE (which is the Fed’s preferred measure of inflation) came in softly.

Fedspeak

Fed Chair Powell spoke before the House Financial Services Committee, where he said “we’re close, but not there on inflation”, and that “we want to keep policy restrictive for now”. We also heard from Chicago Fed President Goolsbee who said that the latest inflation numbers were “concerning” but that it was “just one month” of data. Finally, Atlanta Fed President Bostic commented that “until we have more clarity” on policy changes by the new administration, “it’s going to be impossible to make a judgment about where our policy should go”.

US data

Retail sales fell short of expectations for Jan, coming in -0.9% m-o-m on the headline (vs. the -0.2% forecast) and -0.8% m-o-m for the “control group” (vs. the +0.3% forecast). The data comes on the back of a large upward revision for Dec. (from +0.4% to +0.7% for the headline and from +0.7% to +0.8% for “control group”), and that contributed to the larger sequential drop in Jan. Also, Jan. had some severe winter weather and the wildfires in LA, events that likely skewed spending. Putting the data in context, during the current earnings season, most of the companies with broad consumer exposure suggested spending trends were resilient and healthy (as heard from Amex, Visa, Mastercard, and most banks).

German elections

German elections will be held on Sunday. In terms of the current polls, the Conservatives (led by Friedrich Merz) are still leading by a wide margin at around 30%. The far-right AfD is polling at 21%, and the SPD are third with 15% of total votes, followed by the Greens with 14%. Given its successful social media campaign, the Left is currently enjoying the strongest polling momentum, currently in fifth with 6%. Both the newly founded hard-left party BSW and the FDP are currently polling between 4 and 4.5% and would thus not reach the 5% hurdle for entering parliament but it’s clearly all very finely balanced. At the moment, a two-party coalition is the most likely scenario. The key is whether the three centrist parties attain the required two-thirds majority for amending the constitutional debt brake at some point if agreement can be made to do so.

European gas prices

Gas prices in Europe have increased significantly (+128%) since Feb. 2024 reaching €58/MWh. Last week, they decreased to €50/MWh, influenced by potential peace negotiations, as well as Germany's request for a relaxation of EU storage targets. The increase is weather-related. Wind generation has been weak, impacting alternative energy sources, while relatively cold temperatures have increased demand. Gas consumption is currently higher than in the previous two winters (between 11% and 19%), although it remains lower than in the pre-war period (between -10% and -13%). As a result, storage levels have been depleted, falling below 50% this month, while demand is expected to remain strong (the seasonal trough in storage generally occurs in March). Europe has experienced a collapse of 100bn cubic meters (bcm) in Russian gas supply since 2021. This shortfall has been partially compensated by a significant increase in LNG imports (+44%). US LNG has been the main contributor (+124%), but Russian LNG imports have also risen (+53%). US liquefaction capacities are ramping up, suggesting that increased US supplies may be part of a deal between the US and the EU. As a result, gas prices in Europe are likely to remain higher than those in the US.

Highlights

On rates

In the US, sovereign bonds rallied after dovish economic data at the end of the week pushed yields lower. The 10yr Treasury yield closed at 4.48%, down -1.9bps. Investors dialed up their expectations for Fed rate cuts by the Dec. meeting. The amount of cuts rose from 36bps the previous week to 40bps after the upside in CPI was outweighed by softer activity data and weakness in PPI components which feed into the Fed’s preferred inflation measure of PCE. By contrast, yields on 10yr bunds were up +6.1bps to 2.43% as the Feb. 23 German elections near. In Japan, the 10yr yield reached its highest level since 2011. The rate on the JGB closed at 1.36%, up +6.0bps, after PPI data for January came in at +4.2%, above expectations of +4.0% and its fastest pace since June 2023.

Q4 earnings

In the US, 384 companies of the S&P 500 have published their earnings and 76% of them are beating EPS expectations. Earnings growth is coming in at +11% y-o-y, 5% above forecasts. On top line, more than half of companies are beating forecasts. Sales growth is coming in at 5% y-o-y, surprising positively by 1%. Sector wise, Discretionary, Financials, Communication Services and Healthcare are seeing robust delivery while Energy, Materials, and Industrials are coming in weak. Underwhelming results from some of the Mag-7 mean the group’s contribution to US earnings growth is diminishing, although remains a key driver. The spread between the Mag-7 and the S&P excluding Mag-7 earnings growth has reached the smallest level in the last 7 quarters. In Europe, 201 of the Stoxx 600 have released their earnings and 58% beat EPS forecasts. EPS growth is currently +2% y-o-y, 4% higher than expectations. Like in the US, commodity sectors are underperforming with earnings in Energy and Materials down double-digits. Major releases this week include Walmart, Baidu, Alibaba, Capgemini, Schneider Electric, and Airbus.

What to watch

Monday: US Presidents' Day; Eurozone Trade Balance; Japan Q4 Flash GDP; Singapore & India Exports

Tuesday: Canada CPI; UK Weekly Earnings and Employment; Germany ZEW Survey; RBA Cash Rate Target

Wednesday: US MBA Mortgage Applications, Housing Starts; UK CPI; RBNZ Cash Rate; Indonesia Rate Decision; Japan Exports

Thursday: US FOMC Minutes, Initial Jobless; Germany PPI; Australia Employment; China's Loan Prime Rate; Taiwan Exports

Friday: US S&P PMI, University of Michigan Survey; UK Retail Sales; Flash PMI for Eurozone and UK; Australia / Japan / India PMIs; Japan CPI