2025 Weekly Update

Market update

The S&P 500 closed the week at 5,954.5, -0.98% lower. The Dow Jones closed at 43,840.91, +0.95%, with the Nasdaq lower by -3.47%. The volatility index VIX closed the week at 19.63, up from 18.21. The Euro Stoxx 600 rose +0.60%.

The 10-year UST closed at 4.21%, down from 4.43% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -10bps. US Corporate Bond spreads: Investment Grade spreads widened +8bps at 155bps and High Yield spreads widened +18bps at 319bps. German 10-year Bunds yield closed at 2.41% down from 2.47% a week before. In Europe, Corporate Investment Grade spreads widened +2bps at 98bps and High Yield widened +9bps at 312bps.

The US Dollar Index (DXY) appreciated +0.94% last week and closed at 107.61. The Euro closed at 1.0375 (-0.79%); the Yen depreciated -0.91%, closing at 150.63 and the Swiss Franc depreciated -0.53%, closing at 0.9031. Gold closed at $2,857.83, depreciating -2.66%. Oil was lower, Brent closed at $73.18 (-1.68%) and WTI at $69.76 (-0.91%).

Macroeconomy

US budget

The US House on Tuesday managed to pass a budget resolution calling for large tax cuts (up to $4.5Trn), spending cuts (up to $2.0Trn), as well as increases in military and border security spending over the coming decade. However, the political process is likely to become more difficult from here. Indeed, the narrow 217-215 vote reflected the fight among Republicans over the spending cuts to finance the tax cuts and spending programs. The bill mentions a target of $900bn in spending cuts, but it’s not clear how that can be achieved without large cuts into major programs such as Medicare. The bill also mentions cuts to agriculture and food aid schemes. The budget doesn’t need to be balanced within the next 10 years, only by 2034. Some parameters including GDP growth can be adjusted to mitigate the impact on the deficit, but there are limits to accounting tricks as the CBO will be providing their estimates and the Joint Committee for Taxation will be looking into the numbers as well. At this stage, the non-partisan Committee for a Responsible Federal Budget noted that the new measures would add at least $2.8Trn to the deficit by 2034, which will continue to fuel concerns from part of the GOP.

US prices

Core PCE came in in line with expectations, rising 0.285% m-o-m in January, consistent with the annual inflation rate edging down from 2.9% to 2.6% y-o-y. The breakdown was more encouraging as a further rebound in core goods was largely offset by slower momentum in supercore services, while shelter inflation remained somewhat firmer yet still on an easing trend. Supercore services inflation eased to 3.1% y-o-y, its lowest level in nearly 4 years.

US consumer

The Conference Board consumer confidence gauge declined to a 9-month low in Feb., with higher inflation expectations weighing on the index. The all-important labor market differential (jobs plentiful - jobs hard to get) deteriorated slightly further, consistent with a slowdown in employment growth. Initial jobless claims ticked up above consensus expectations to the highest since Oct. The jump in Washington DC jobless claims likely reflected the first effects of federal job cuts, including the potential second-round effects to private sector contracts for the state. The other important release was the merchandise trade deficit, which unexpectedly surged more than +25% to $153.3Bn in Jan. (vs. $116.6Bn expected). The surge likely reflects companies seeking to import goods before tariffs come into place, with gold shipments one potential factor. The release caused a big hit to Q1 GDP estimates with the Atlanta Fed’s GDPNow estimate plummeting to show an annualized contraction of -1.5%, though traditional nowcast models may need to be discounted given the distortions.

ECB meeting

The ECB is expected to meet this coming Thursday. Markets expect the ECB to cut its deposit rate by 25bps to 2.5%. The focus will be on (1) the staff projections and (2) the policy language. Limited changes are expected to the staff projections, with modestly higher headline inflation due to increased energy prices. Some ECB officials—notably Executive Board member Isabel Schnabel—have suggested that policy should no longer be described as “restrictive”.

European data

Negotiated wage growth fell from 5.4% to 4.1% y-o-y in Q4 2024, and the ECB’s wage tracker suggests that moderation should continue going forward. This should support the ECB’s narrative that services inflation will fall this year and inflation will converge to target. Meanwhile, monetary policy continues to support credit growth: net new bank lending to non-financial corporations declined in Jan. after hitting a two-year high, while flows to households remained steady.

German politics

A blocking minority has triggered a sudden turn in the fiscal debate. Last week, CDU leader Friedrich Merz proposed setting up a €200Bn (4.6% of GDP) special fund dedicated to defense spending to be passed in the outgoing parliament. This will provide an extra boost to defense spending over the coming years. As a side note, to meet the 2% of GDP NATO target, €20Bn per year is used from the existing fund, with the rest coming from the current budget (€65Bn).

China economy

Chinese manufacturing activity grew more than expected in Feb., indicating a strong start to 2025 led by bounce backs in new orders. China's official manufacturing PMI rebounded to 50.2 in Feb., up from 49.1 in Jan. (vs. 49.9 expected). The non-manufacturing PMI saw a smaller uptick in Feb., to 50.4 from 50.2, in line with consensus forecasts. The index has been at, or above, the 50 threshold for 26 months now. At the same time, the Caixin's manufacturing PMI also rebounded to 50.8 in Feb. (vs. +50.4 expected) from 50.1, a three-month high, benefiting from an uptick in both output and new orders.

Japan prices

Headline inflation for Tokyo came in at +2.9% y-o-y in Feb. (vs. +3.2% expected) down from +3.4% in Jan. At the same time, Tokyo’s core consumer prices rose by +2.2% y-o-y in Feb., a deceleration from January’s 2.5% increase, an 11-month high, and a tenth lower than expectations. Separately, other data showed that Japan’s industrial production in Jan. decreased by -1.1% m-o-m, aligning with market expectations and compared to a -0.2% contraction in Dec. Retail sales grew +3.9% y-o-y in Jan., as expected and compared to a +3.5% gain in the prior month.

Highlights

Q4 earnings

90% of S&P500 companies have reported. At +13% y-o-y, EPS growth is better than expected, surprising positively by +7%. From the companies that reported, 75% beat EPS estimates, while 55% topped sales estimates. Overall revenue growth is +5% y-o-y, surprising positively by 1%. While Communication Services and Information Technology are still meaningful drivers of overall EPS growth in the US, the spread between the Magnificent-7 and the S&P500 ex Mag-7, earnings growth has continued to narrow. In terms of guidance, the 2025 profit outlook is being revised lower with S&P500 2025 EPS estimates continuing to decline. In Europe, around 70% of companies have posted their results and EPS growth is coming in at +2% y-o-y, beating expectations by +3%. Energy is a considerable drag to overall earnings growth in both the US and in Europe. Excluding Energy, EPS growth stands at +16% y-o-y and +11% y-o-y in the US and Europe, respectively. Looking at last week’s earnings, Nvidia was the main event. The company reported upside on EPS (89c vs. expectations of 84c) with the beat driven by higher sales (+78% y-o-y) and better margins (EBIT margin of 64.9%). Major releases this week include Broadcom, Costco, and Crowdstrike in the US and Adidas, Thales, and Bayer in Europe.

What to watch

•  Monday: Manuf. PMI for Japan, Taiwan, Asian, India, Caixin China; Eurozone Manuf. PMI and CPI; US ISM Manuf.; Canada Manuf. PMI

• Tuesday: Japan Jobless Rate; RBA Minutes; Eurozone Unemployment Rate

• Wednesday: Korea GDP; Eurozone Services PMI; Switzerland CPI; US ISM Services, ADP Employment, Factory Orders

• Thursday: ECB Rate Decision; Eurozone Retail Sales; US Initial Jobless Claims, Unit Labor Cost, Challenger Job Cuts

• Friday: China and Taiwan Exports; Eurozone Final Q4 GDP; Germany Factory Orders; US Nonfarm Payrolls; Canada Unemployment