2025 Weekly Update

Market update

The S&P 500 closed the week at 6,013.13, -1.66% lower. The Dow Jones closed at 43,428.02, -2.51%, with the Nasdaq lower by -2.51%. The volatility index VIX closed the week at 18.21, up from 14.77. The Euro Stoxx 600 rose +0.26%. 

The 10-year UST closed at 4.43%, down from 4.48% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 12bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 147bps and High Yield spreads widened +4bps at 301bps. German 10-year Bunds yield closed at 2.47% up from 2.43% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 95bps and High Yield narrowed -4bps at 312bps. 

The US Dollar Index (DXY) depreciated -0.09% last week and closed at 106.61. The Euro closed at 1.0458 (-0.32%); the Yen appreciated +2.00%, closing at 149.27 and the Swiss Franc appreciated +0.17%, closing at 0.8983. Gold closed at $2,936.05, appreciating +1.86%. Oil was lower, Brent closed at $74.43 (-0.41%) and WTI at $70.4 (-0.48%).

Macroeconomy

Economic data

In the US, new data revealed weaker economics but firmer inflation. Flash Services PMIs dipped to 49.7 (vs. 53.0 expected), in contraction territory for the first time in 13 months. Meanwhile, PMI Manufacturing input prices rose to 63.5, their highest level since October 2022. Survey from the University of Michigan also showed 5 to 10-year inflation expectations shooting up to +3.5%, the highest reading since 1995. In Europe, the region’s preliminary PMI indices showed an improvement in manufacturing (+0.7 points to 47.3) and a slight decline in services activities (-0.6 points to 50.7). France published disappointing data (composite index down -3.1 points to 44.5) while numbers coming from Germany showed an improvement (Composite index at 51, +0.5 points). In the UK, headline CPI rose to 3% y-o-y, above consensus and the BoE’s forecast of 2.8%. Core CPI at 3.7% was in line with consensus, while service CPI at 5% surprised to the downside. Flash PMIs showed further contraction in manufacturing (-1.9 points to 46.4) but better services activities (+0.3 points to 51.1).

Fedspeak

The Fed minutes contained hawkish comments about inflation risks and the neutral rate including the fact “that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated”. Moreover, “a few [members of the FOMC] noted that the current target range for the federal funds rate may not be far above its neutral level” and other factors were cited as potentially hindering the disinflation process, including the effects of potential changes in trade and immigration policy. Surprisingly, the Fed minutes also highlighted participants’ concerns regarding the debt ceiling's impact on money markets with a sense of urgency, likely due to the recent quarter-end spikes in the SOFR. They also signaled that the end of QT is approaching stating that “reserves might decline quickly upon resolution of the debt limit and, at the current pace of balance sheet runoff, might potentially reach levels below those viewed by the Committee as appropriate”. Finally, St. Louis Fed President Musalem made hawkish remarks about inflation saying “the risks of inflation stalling above 2% or moving higher seem skewed to the upside”. These followed more dovish comments from Fed’s Waller earlier during the week who acknowledged the hot CPI but noted that the PPI pointed to a more muted PCE on 02/28.

German elections

Provisional results confirm a victory for the center-right CDU/CSU with 28.6% of the vote, an outcome that was expected. The far-right AfD came in second with 20.8% of the vote, followed by the center-left SPD (16.4%) and Greens (11.6%). Of the smaller partis, the leftist Linke (8.8%) comfortably exceeded the 5% threshold, while the far-left BSW (4.97%) and liberal FDP (4.3%) fell short. BSW’s narrow failure to enter the Bundestag, which may take a few days to be definitively confirmed, has the important consequence of leaving the CDU/CSU, SPD and Greens combined at just under 66% of seats, short of a two thirds majority. This means smaller parties have a blocking minority which may make it difficult to push through reforms, including revisions to a constitutionally enshrined limit on public borrowing.

Highlights

On rates

It was another volatile week for US sovereign bonds. Treasuries initially struggled after hawkish remarks from Fed officials who stated they were in no hurry to adjust monetary policy. Yields then retreated after Treasury Secretary Scott Bessent said moves to increase longer-term debt sales were “a long way off”. The 10yr Treasury yield ended the week at 4.43%, down       -4.5bps, and posting a sixth consecutive weekly decline. Fed expectations shifted in a dovish direction with the market pricing in 48bps worth of cuts for the year (up from 40bps on Monday). Over in Europe, 10yr bund yields ended the week +3.7bps higher driven by increased expectations of higher European defense spending.

Q4 earnings

In the US we are entering the final stage of the Q4 earnings season with over 80% of companies having reported. Overall, EPS growth coming in at +10% y-o-y, beating expectations by 7%. Topline growth is printing at +5% y-o-y, surprising positively by 1%. Around 75% of S&P500 companies that reported posted earnings above consensus. Robust results are coming from the Discretionary and Communication Services sectors while Energy, Materials, and Industrials are reporting underwhelming numbers. Amongst last week’s releases, Walmart missed expectations and provided disappointing guidance. Looking ahead, Nvidia's earnings on Wednesday will be watched closely. In Europe, more than half of companies have posted the results and EPS growth is tracking at +10% y-o-y, surprising positively by 4%. Of the Stoxx600 companies that have reported, 58% beat EPS estimates. At a sector level, Energy, Materials, Utilities and Real Estate are faring poorly, while Discretionary and Healthcare are recording strong EPS growth. Revenue growth is +2% y-o-y, surprising positively by 2%.

What to watch

•  Monday: US: Fed activity index for Chicago and Dallas; Japan: January PPI services; Germany: February Ifo survey
• Tuesday: US: Conference Board Confidence Survey, Fed index for Philadelphia and Richmond; Germany: Q4 GDP; Korea: BOK rate decision
• Wednesday: US: New home sales and mortgage applications; Australia: January CPI
• Thursday: US: Q4 GDP, durable goods orders and initial jobless claims; Japan: February Tokyo CPI; Switzerland: Q4 GDP
• Friday: US: January PCE; Canada: Q4 GDP; Europe: ECB 1Y and 3Y CPI expectations, CPI from Germany, France, and Italy; Asia: Japan CPI, India GDP