Sobering Inflation as Trump Fights Europe

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• Biggest Drop in U.S. Consumer Spending in a Year

• Fed Faces "Sobering" Inflation Data

• EU & UK Post Modest Q4 Growth

• Japan Yields Hit 15-Year High

• EU Stocks Keep Outpacing U.S.

• IEA Halves Oil Surplus Forecast, Prices Hold

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US : This week's economic calendar was dominated by Wednesday’s inflation data, which exceeded expectations. The Bureau of Labor Statistics (BLS) reported that the headline consumer price index (CPI) increased 0.5% month over month and 3.0% year over year in January, up from December’s 0.4% and 2.9%, respectively. Shelter costs climbed 0.4%, contributing nearly 30% of the overall monthly increase. Core CPI, which excludes food and energy, rose 0.4% in January to 3.3%, doubling December’s 0.2% gain. On Thursday, the BLS released producer price index (PPI) data, which also came in higher than expected, rising 0.4% for the month versus the 0.3% consensus estimate.

• While testifying before the Senate Banking Committee, Federal Reserve Chair Jerome Powell acknowledged that stronger-than-expected inflation data indicate progress in lowering inflation but emphasized that policymakers are “not quite there yet” and intend to “keep policy restrictive for now.” Following the CPI report, futures markets pushed expectations for the next rate cut from September to December. U.S. Treasuries saw some volatility as yields climbed in reaction to inflation data. The benchmark 10-year Treasury yield reached an intraday high of 4.66% after Wednesday’s CPI report before retreating to 4.48% by Friday’s market close.

• U.S. consumers cut back on spending more than anticipated following the holiday season. Retail sales dropped 0.9% in January on a seasonally adjusted basis from the previous month, falling short of economists’ forecasts and marking the largest monthly decline in a year.

• EU: Eurozone industrial production fell by 1.1% in December, driven by sharp declines in capital and intermediate goods output, and declined 2.0% year over year. Meanwhile, a revised estimate from the European statistics agency showed that the eurozone economy grew by 0.1% in the fourth quarter, rather than remaining flat. For the full year, GDP expanded by 0.7%.

• UK: The UK economy posted a modest 0.1% GDP growth rate in late 2024, surpassing economists' forecasts after remaining flat in the prior quarter. The fourth-quarter GDP report, released Thursday, followed the Bank of England’s interest rate cut the previous week. Bank of England Chief Economist Huw Pill cautioned a business group that policymakers must remain wary of cutting interest rates due to persistently strong wage growth. He emphasized that further efforts are needed to lower inflation.

• Japan: While the consensus suggests the Bank of Japan (BoJ) may raise rates in the second half of the year, Japanese government bond (JGB) yields climbed as more investors anticipated a faster-than-expected pace of hikes. The 10-year JGB yield rose to 1.35% from 1.28% the previous week, marking its highest level in nearly 15 years.

Equity Markets

• US: The S&P 500 recorded a weekly increase of 1%, closing just four points short of its record high from three weeks ago. Meanwhile, the NASDAQ and Dow remained approximately one percent below their all-time highs.

• As earnings season winds down, corporate profits have surpassed expectations. As of Friday, analysts projected fourth-quarter net income to increase by 16.9% year-over-year, based on results from three-quarters of S&P 500 companies and estimates for those yet to report. Prior to the season, analysts had anticipated 11.8% growth.

• EU: After trailing the U.S. equity market in 2024 and much of the past decade, European stocks have outpaced their U.S. counterparts in early 2025. By Friday’s close, the EURO STOXX 50 had gained over 12% year to date, while the S&P 500 was up around 4%. Hopes of an end to the Russian war in Ukraine and robust earnings reports in Europe buoyed sentiment.

Commodities

• Oil: The International Energy Agency now projects a surplus of 450,000 barrels per day in 2025, a 50% reduction from its forecast two months ago. The revision reflects stronger demand and the impact of sanctions on Russia and Iran. Despite this, oil prices remained steady over the week, with Brent closing at $74.6 on Friday.

• Gold: Gold surged to a record high during a volatile trading session on Friday, touching $2,964 before pulling back in the afternoon. Silver also spiked, briefly hitting $34 per ounce, nearing its highest level in over ten years before losing momentum.

In Motion

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