2025 Weekly Update

Market update

The S&P 500 closed the week at 5,667.56, +0.51% higher. The Dow Jones closed at 41,985.35, +1.20%, with the Nasdaq higher by +0.17%. The volatility index VIX closed the week at 19.28, down from 21.77. The Euro Stoxx 600 rose +0.56%.

The 10-year UST closed at 4.25%, down from 4.31% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -5bps. US Corporate Bond spreads: Investment Grade spreads narrowed -8bps at 161bps and High Yield spreads narrowed -16bps at 356bps. German 10-year Bunds yield closed at 2.76% down from 2.87% a week before. In Europe, Corporate Investment Grade spreads narrowed -3bps at 101bps and High Yield narrowed -3bps at 324bps.

The US Dollar Index (DXY) appreciated +0.36% last week and closed at 104.09. The Euro closed at 1.0818 (-0.56%); the Yen depreciated -0.46%, closing at 149.32 and the Swiss Franc appreciated +0.26%, closing at 0.8828. Gold closed at $3,022.15, appreciating +1.27%. Oil was higher, Brent closed at $72.16 (+2.24%) and WTI at $68.28 (+1.64%).

Macroeconomy

Fed on hold

The Fed held rates in the 4.25%-4.50% range for a second consecutive meeting, while announcing a slowing in the pace of Quantitative Tightening (QT). The updated dot plot showed the median FOMC member is still expecting two rate cuts in 2025, even as the responses shifted in a more hawkish direction with 8/19 members expecting one or no cuts this year. The projections also saw 2025 core inflation revised +0.3pp higher and growth -0.4pp lower, a more stagflationary direction. In the press conference, Powell reiterated that policy was in a “good place” and that the Fed is not in a “hurry” to cut rates, while emphasizing the “remarkably high” uncertainty and avoiding potential hawkish signals. He acknowledged that tariffs may delay “further progress” on inflation but said that the base case was that the tariff impact on inflation would be “transitory” and noted that long-term inflation expectations remained anchored. On the balance sheet, the Fed announced a slowing in the pace of QT, with the runoff in Treasury holdings to slow from $25bn to $5bn from April 1, while the MBS redemption cap was unchanged at $35bn. Powell said that the FOMC had “seen some signs of increased tightness in money markets” and reused a “slower for longer” argument adopted when the Fed first slowed QT last May.

US data

It was a mixed week for US macro data. Industrial production accelerated to +0.7% m-o-m (+0.2% expected) from +0.3%m-o-m in Jan., and manufacturing production rose +0.9% m-o-m (+0.3% expected). US housing starts increased +11% to a seasonally adjusted rate of 1.50mn units in February (+1.4% expected), though building permits were more in-line and tend to be more indicative of the underlying trends with starts often weather influenced. Monthly import prices came hotter at +0.4% m-o-m (vs. 0.0% expected), including a sizeable jump in imported international airfares (+0.9%). We saw a softer-than-expected headline US retail sales print (+0.2% m-o-m vs the expected +0.6% m-o-m), the homebuilder sentiment index fell back to its August 2024 level and the empire manuf. survey disappointed (-20.0 vs -1.9 expected). January’s retail sales were also revised to -1.2% m-o-m (previously -0.9% m-o-m). However, February retail control growth was +1.0%, six tenths above. That brought the 3-month annualized growth of retail control, which feeds more directly into GDP, to a solid +3.8%. The weekly jobless claims of +223k for the latest week matched the forecast of +224k.

Bank of Japan

As expected, the BoJ left rates on hold at 0.50%, with limited changes in its statement, only including concerns about trade policy uncertainty. The press conference was on the dovish side. The BoJ governor mentioned the high uncertainty around US policy and a still moderate services inflation. On the hawkish side, he said that some members see some upward pressure on CPI. Markets expect 1.5 rate hikes for 2025, with a terminal rate at 1%. In terms of economic data, Japan’s core inflation came in at 3.0% y-o-y in February (vs. +2.9% expected) but lower than January’s figure of 3.2%. Headline inflation rose +3.7% y-o-y in February (vs. +3.5% expected) easing from a two-year high of +4.0% seen last month, thus staying above the BoJ’s 2% target for 35 straight months. The “core-core” inflation rate climbed to +2.6% y-o-y from +2.5% in the month before and maybe a touch above expectations especially as the print nearly rounded up to 2.7%. Japanese exports climbed +11.4% y-o-y in February (vs. +12.6% expected) up for a fifth straight month driven by strong demand from both the US and China. It followed a revised increase of +7.3% in January. Imports fell -0.7% y-o-y in February, marking its first drop in three months and compared with the Bloomberg estimate of a +0.8% gain. Japan’s trade balance switched back into the black, with a surplus of ¥584.5Bn (vs. ¥688.3Bn expected).

Bank of England

The BoE decided to leave its policy rate unchanged at 4.5%, maintaining its gradual and careful approach. The vote was less dovish than in previous meetings, with an 8-1 majority: Catherine Mann chose not to support a 50bps. The eight members argued that progress on domestic disinflation and wages is still ongoing and acknowledged the two-sided risks concerning inflation and the balance between supply and demand. The Committee noted that surveys continue to point towards weakness in growth, particularly in employment. Governor Bailey noted that they "still think that interest rates are on a gradually declining path," leaving open the possibility of further rate cuts this year. In economic data, the March report on the labor market showed some moderation in wage growth in line with consensus and a steady market.

Swiss National Bank

While many central banks are pausing, the Swiss National Bank (SNB) decided to cut its policy rate by 25bps to 0.25% as expected. The decision not to pause likely reflects increased geopolitical and trade uncertainty, which could put upward pressure on the currency. There were no significant changes in the SNB’s economic outlook. The press statement did not provide any specific hints regarding future actions. However, in the press conference, SNB’s Martin Schlegel said that “monetary policy is now appropriate” and that “the probability is now lower for further easing,” which could be interpreted as a signal that March’s cut might be the last one this year (as priced in by the market).

People’s Bank of China

The People’s Bank of China (PBOC) kept the 1-year loan prime rate (LPR) at 3.1% and the 5-year LPR at 3.6%, where they have been since a 25bps cut in October. On economic data, growth momentum this year has been robust. Industrial production was still decent (0.5% m-o-m sa for Jan-Feb vs 0.8% for Q4 monthly average), but service weakened a bit more (-0.3% for Jan-Feb vs 1% in Q4). From the demand side, investment momentum was stronger for manufacturing and infrastructure on the back of government frontloading policy efforts (consistent with surge in capex loans), while retail sales weakened with significant pullback in home appliance/auto which surged Q4 last year on trade-in support, and exports momentum slowed as well on pullback of exports frontloading and tariff impacts kicking in. National housing sales, which rebounded strongly in Q4 after policy easing, moderated in Jan-Feb and housing prices also moderated and declined in Feb.

Highlights

On rates

It was a positive week for Sovereign bonds with yields retreating slightly. In the US, the 10yr Treasury yield fell -6.6bps to 4.25% supported by the FOMC’s decision to slow the pace of Quantitative Tightening and Fed Chair Powell’s view that tariffs would only have a transitory impact on prices. Fed expectations shifted in a dovish direction with futures markets pricing in 71bps worth of rate cuts this year, up +5.6bps on the week. Bonds saw a similar rally in Europe with German Bunds recovering after their recent sell-off caused by the country’s historic debt-brake and defense and infrastructure package.

What to watch

• Monday: Australia, Japan and India Prel. PMI; Eurozone Flash PMI; US S&P PMI
• Tuesday: China 1-year Med-Term Lending Facilities Rate; Germany IFO Business Survey; US New Home Sales and Conference Board Confidence
• Wednesday: Australia CPI; UK CPI; US Durable Goods Orders
• Thursday: China YTD Industrial Profits; US Initial Jobless Claims
• Friday: Tokyo CPI; ECB Inflation Expect.; UK Q4 GDP; Germany GfK Cons. Confidence; US PCE, UoM Survey, Pers. Income & Spending; Canada GDP