Trump holds off tariffs on China

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• Trump holds off on China tariffs in first week

• Fed to stay put—no cuts expected this week

• Japan hikes rates to post-GFC highs as inflation rises

• U.S. stocks rally on Trump’s softer tariff stance

• Oil slides while Trump pushes Europe to buy U.S. energy

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: Political developments took center stage throughout the week following Monday’s inauguration of President Donald Trump. Contrary to some concerns, Trump did not introduce new tariffs on his first day in office. Instead, he directed federal agencies to review U.S. trade policies to assess the potential effects of future tariffs. However, he did commit to imposing 25% tariffs on Canada and Mexico as early as February. Later in the week, Trump expressed a preference to avoid tariffs on China, which contributed to optimism about a possible trade agreement between the two largest economies. These developments were generally welcomed by investors, boosting market sentiment.

• The U.S. Federal Reserve is widely anticipated to maintain interest rates at their current levels when it wraps up its two-day meeting on Wednesday. However, remarks from Fed Chair Jerome Powell following the meeting could influence market movements. In 2024, the Fed implemented a total reduction of one percentage point over its last three policy meetings. However, the prospect of additional rate cuts remains uncertain due to mixed signals from recent inflation data.

• The U.S. government is set to release its initial estimate of fourth-quarter GDP on Thursday, with expectations indicating that the economy continued its solid growth trajectory. This upcoming report follows an annual growth rate of 3.1% recorded in the third quarter of last year and 2.0% in the second quarter.

• EU: Recent remarks from European Central Bank (ECB) policymakers have strengthened expectations for a fifth interest rate cut on January 30. Speaking at the World Economic Forum in Davos, ECB President Christine Lagarde emphasized a cautious but clear approach, stating that while the pace of future rate adjustments will depend on incoming data, a gradual reduction remains a likely course of action.

• Francois Villeroy, head of the French central bank, expressed confidence in inflation returning to the ECB's 2% target, suggesting that rate cuts could occur swiftly. Similarly, Dutch central bank governor Klaas Knot, in an interview with Bloomberg TV, indicated support for rate reductions in both January and March, citing positive economic indicators. Meanwhile, Yannis Stournaras, governor of the Bank of Greece, advocated for a gradual easing path, projecting that the deposit facility rate—currently at 3%—should decline to 2% by the end of the year, implying a total reduction of another 100 basis points.

• Japan: The Bank of Japan (BoJ) raised its policy rate for the third time within a year, increasing it by 0.25 percentage points to approximately 0.5%—the highest level since the 2008 global financial crisis. Following the widely anticipated rate hike, the yield on the 10-year Japanese government bond climbed to 1.23%, up from 1.20% the previous week.

• Alongside the rate decision, the BoJ revised its inflation outlook for the 2025 fiscal year, projecting all measures to remain above the 2% target, with risks skewed to the upside. This reflects the central bank’s growing confidence in sustained wage growth and suggests the potential for further rate hikes in 2025, with many market participants anticipating another increase in the second half of the year. The BoJ reaffirmed its commitment to adjusting the policy interest rate and monetary accommodation in line with economic and price developments. Recent inflation data further reinforced expectations of continued policy tightening. Japan's core consumer price index increased by 3.0% yoy in December 2024, in line with forecasts and up from the 2.7% rise recorded in November, supporting the case for a gradual normalization of monetary policy.

Equity Markets

• US: The main U.S. stock indexes rose for the second consecutive week, with a Thursday rally propelling the S&P 500 past its previous record from seven weeks ago. Meanwhile, both the Dow and NASDAQ posted weekly increases of approximately 2%, though they still hovered about 1% below their all-time highs reached last month.

• Market expectations edged higher following the release of another round of quarterly earnings reports. As of Friday, fourth-quarter net income for S&P 500 companies—factoring in both reported results and estimates for those yet to announce—was projected to increase by 12.7% year-over-year. If realized, this would represent the strongest quarterly earnings growth in three years, according to FactSet.

Commodities

• Oil: Brent crude oil prices declined by over 4% this week, ending a streak of four consecutive weekly gains. By Friday afternoon, oil was trading at approximately $77 per barrel, down from its recent peak of over $82 per barrel recorded on January 15. Despite the decline, oil prices remained about 5% higher for the year through Friday.

• U.S. President Donald Trump reaffirmed his stance that the European Union should increase its purchases of American oil and gas to avoid potential tariffs. Speaking to reporters at the White House following his inauguration on Monday, Trump stated, “The one thing they can do quickly is buy our oil and gas. We will straighten that out with tariffs, or they have to buy our oil and gas.”

• The European Union, along with several Asian countries, is reportedly exploring the possibility of increasing energy imports from the U.S., which is currently the world’s largest producer of crude oil and a leading exporter of liquefied natural gas (LNG). European Commission President Ursula von der Leyen had previously suggested that U.S. energy imports could serve as an alternative to Russian LNG, a proposal that is now being revisited amid ongoing trade discussions.

In Motion

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