2025 Weekly Update

Market update

The S&P 500 closed the week at 5,770.2, -3.10% lower. The Dow Jones closed at 42,801.72, -2.37%, with the Nasdaq lower by -3.45%. The volatility index VIX closed the week at 23.37, up from 19.63. The Euro Stoxx 600 fell -0.69%.

The 10-year UST closed at 4.30%, up from 4.21% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -1bp. US Corporate Bond spreads: Investment Grade spreads widened +4bps at 159bps and High Yield spreads widened +18bps at 337bps. German 10-year Bunds yield closed at 2.84% up from 2.41% a week before. In Europe, Corporate Investment Grade spreads narrowed -1bp at 97bps and High Yield narrowed -12bps at 300bps.

The US Dollar Index (DXY) depreciated -3.51% last week and closed at 103.84. The Euro closed at 1.0833 (+4.41%); the Yen appreciated +1.72%, closing at 148.04 and the Swiss Franc appreciated +2.57%, closing at 0.8799. Gold closed at $2,909.1, appreciating +1.79%. Oil was lower, Brent closed at $70.36 (-3.85%) and WTI at $67.04 (-3.90%).

Macroeconomy

German fiscal expansion

Germany delivered a proper fiscal paradigm shift. CDU/CSU (Conservatives) and SPD (Social Democrats) agreed on a package composed of: 1) a new special fund for infrastructure investment totaling EUR 500bn (11.6% of GDP), to be spent over the next 10 years; 2) an exemption of defense spending exceeding 1.0% (EUR45bn) of GDP from the debt brake and; 3) a reform of the debt brake at the state level to raise their net borrowing cap from 0% to 0.35% of GDP, aligning it with the federal level. The package needs now to be approved by both chambers of parliament. The fiscal package is highly likely to pass. The additional defense spending sends a strong signal to European allies that Germany is committed to its defense at a time when Europe faces the prospect of losing US security guarantees. The infrastructure fund indicates a strong commitment to addressing key structural challenges and will provide a boost to German growth over the medium-term.

US jobs

The US economy added 151k jobs according to the Feb. Establishment survey, below the 160k forecast but better than many whispers (and more positive than what ADP signaled on Weds.). Private payroll adds were about inline at 140k (vs. 145k expected), while total govt. employment creation cooled to just 11k in Feb. (vs. 44k in Jan. and 36k in Dec., and down from 71k in Feb. 24). Establishment survey revisions were minimal, with just a 2k net reduction for Jan. and Feb. combined. According to the Establishment survey, employment trended up in health care, financial activities, transportation and warehousing, and social assistance. Federal government employment declined by 10k. However, while the Establishment survey was decent, the Household survey reflected a massive 588k decline in the number of employed people. The unemployment rate ticked up to 4.1% vs. 4% in Jan. and above consensus at 4%. The participation rate sank 20bps to 62.4% (the consensus was flat at 62.6%). Wage growth was a cooler on a y-o-y basis at +4% (vs. consensus of +4.1%), and Jan. wages were revised lower (from +4.1% to +3.9% y-o-y). The workweek length held flat m-o-m at 34.1 hours (shorter than the forecast of 34.2 hours). Average weekly earnings rose just 3.41% y-o-y to $1,225.21, less than the 4% growth in hourly wages due to the shortened workweek.

Economic reset

This past weekend we heard from both Bessent and Trump about their plans to reorientate the economy. Treasury secretary Bessent said, “could we be seeing that this economy that we inherited starting to roll a bit? Sure. And look, there’s going to be a natural adjustment as we move away from public spending to private spending”, “the market and the economy have just become hooked. We’ve become addicted to this government spending, and there’s going to be a detox period.” Meanwhile President Trump told Fox that “there is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing”. “What I have to do is build a strong country. You can’t really watch the stock market”, “If you look at China they have a hundred-year perspective".

Fed on wait-and-see mode

Powell mentioned that despite elevated levels of uncertainty, the US economy continues to be in a good place. Recent indicators point to a possible moderation in consumer spending relative to the rapid growth over H2 2024. Powell said the Fed is still in wait and see mode. He sounded upbeat about the economy and mentioned the recent uptick on near-term inflation expectations. His comments matter but also don’t matter at the same time given the rapidly changing policy landscape. “While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity”. Adding that “sentiment readings have not been a good predictor of consumption growth in recent years”.

ECB meeting

The European Central Bank lowered its policy rates by 25bps, to 2.5% as was expected. The tone regarding restrictiveness changed, with the ECB mentioning that "monetary policy is becoming meaningfully less restrictive". This was more hawkish than expected. Lagarde emphasized that the ECB is "not pre-committing to a certain rate path" and that the ECB maintains its "meeting-by-meeting" and "data-dependent (more than ever)" approach, keeping some optionality due to uncertainty. Lagarde didn’t sound worried about the repricing in rates markets, noting that the movements in cross-country spreads have remained “very limited” despite the sharp rise in bond yields.

China economy

Premier Li Qiang at the at the opening session of the National People’s Congress (NPC), acknowledged challenges posed by trade tensions as well as problems facing the Chinese economy. The government outlined plans to issue 1.3Trn yuan ($179bn) in ultra-long-term special treasury bonds in 2025 and another 500Bn yuan worth of special treasury bonds will be issued this year to support large state-owned commercial banks in replenishing capital. At the same time, Beijing raised its budget deficit target to 4% of GDP, from 3% last year. Additionally, Beijing revised down its annual consumer price inflation target to “around 2%” this year - the lowest in more than two decades - from 3% or higher in prior years. Lastly, Chinese inflation fell -0.7% y-o-y, below -0.4% consensus and -0.5% last month. Core inflation fell -0.1% y-o-y, the first decline since 2021. PPI printed at -2.2% y-o-y vs. -2.1% expected and -2.3% the previous month. Overall, there was likely some distortion due to the timing of Lunar New Year.

Highlights

On rates

It was an extremely volatile week for sovereign bonds. The rate divergence between the US and Europe took an unexpected turn with US Treasury yields seeing more modest increases than their European counterparts. The 10yr yield rose +9.4bps to 4.30% after Powell's comments that the US economy is in "good shape" helped alleviate concerns stemming from weaker than expected labor data. The 2yr yield ended the week at 4.00%, rising only 1bp. Fed expectations held steady, with futures pricing 71bps of rate cuts for 2025 (vs. 44bps at the beginning of the year). The Fed terminal rate currently stands at 3.6%. The increase in yields was more pronounced in Europe following Germany’s pledge to do “whatever it takes”. 10yr Bunds saw their largest weekly yield sell-off since reunification in 1990, rising 43bps to 2.83%. Both ECB’s terminal rate and the 10-year term premium increased (to 2.16% and 1.2% respectively) on the back of rising bonds issuances and higher economic uncertainty. Investors expect 46bps of 2025 additional rate cuts (vs. to 112bps at the beginning of the year). As a result, the euro saw the biggest weekly gain vs. the USD since March 2009, up +4.41% last week to $1.0833.

What to watch

•  Monday: Japan Labor Earnings; Germany Industrial Production, Exports, CPI; US NY Fed 1-year Inflation Expectations

• Tuesday: Japan Q4 Final GDP; US NFIB Small Business Optimism, JOLTS Job Reports

• Wednesday: Japan PPI; US CPI, Real Earnings; Bank of Canada Rate Decision

• Thursday: Eurozone Industrial Production; US PPI, Initial Jobless Claims

• Friday: UK Jan. GDP, Industrial Production; US University of Michigan Survey