Summary of the week - 28 Feb 25

Interest rate

• US: A majority of Fed policymakers acknowledged that the high level of uncertainty warranted a cautious approach when considering further adjustments to monetary policy, minutes from the January 2025 FOMC meeting showed. Many participants suggested that the Committee could maintain the policy rate at a restrictive level if the economy remained robust and inflation stayed elevated. Conversely, several noted that policy could be eased if labor market conditions weakened, economic activity slowed, or inflation returned to 2% more quickly than expected. Many policymakers stressed the need for additional evidence of sustained disinflation. Participants also highlighted upside risks to inflation, citing potential shifts in trade and immigration policies, geopolitical disruptions to supply chains, and stronger-than-anticipated household spending. The Fed kept the fed funds rate steady at the 4.25%-4.5% range in January, pausing its rate-cutting cycle after three consecutive reductions in 2024.

  
  

• UK: The Bank of England cut its benchmark Bank Rate by 25bps to 4.5% in its February 2025 decision, as expected, to mark the third rate cut since the start of its cutting cycle in August of last year. All nine members of the Monetary Policy Committee voted for a rate cut, compared with bets of an 8-to-1 vote, while two members voted for a steeper 50bps cut, including known-hawk Catherine Mann. The Bank maintained its stance that monetary easing is expected to be gradual this year, as mounting growth concerns weigh against stubborn levels of underlying services inflation. Still, the Bank revised its growth forecasts for the current year downward as economic activity has already underperformed expectations from November, indicating a dovish shift in the risk balance between growth and higher prices in the near term.

  
  

• EU: The ECB Governing Council agreed that monetary policy continues to be restrictive and that it is premature to discuss when it will be appropriate for the conclusion of interest rate cuts, according to accounts of their latest meeting. A selected number of members from the central bank’s policy-setting body worried that sticky services inflation and higher energy prices may still a threat, but others vocalized greater concerns over sluggish economic growth and the risk that overly-restrictive policy may drive the central bank to miss the 2% inflation target, balancing policy risks around the Council. Still, members were in consensus that the disinflation process remains on track and that growth risks remain on the downside, aligned with the market’s view that there will be multiple rate cuts to still be delivered this year. The ECB lowered its key interest rates by 25bps in the January 25 meeting, as expected.

Inflation

• US: The US Personal Consumption Expenditures (PCE) price index is estimated to have risen 0.3% month-over-month in January 2025, maintaining the same pace as December. Meanwhile, core PCE inflation, which excludes food and energy prices, is projected to increase by 0.3%, slightly above the 0.2% recorded in December. On an annual basis, headline PCE inflation is expected to ease to 2.5% from 2.6%, marking its first decline in four months. Similarly, core PCE inflation is forecasted to drop to 2.6% from 2.8%, hitting its lowest level in seven months.

  In December, the Federal Reserve adjusted its inflation outlook, raising its 2025 PCE inflation forecast to 2.5% from 2.1% and core PCE inflation forecast to 2.5% from 2.2%, reflecting concerns that inflation may be more persistent than previously anticipated in September.

  
  

• UK: The UK’s annual inflation rate surged to 3% in January 2025, its highest level since March 2024, rising from 2.5% in December and surpassing expectations of 2.8%. The key drivers of this increase were transport costs, with higher airfares and fuel prices, partially offset by declining secondhand car prices. Food and non-alcoholic beverages, particularly meat, bread, and cereals, also saw sharper price increases. Recreation and culture and education contributed to inflationary pressures, with the latter impacted by a 20% value-added tax on private school fees.

  Meanwhile, services inflation climbed to 5% from 4.4%, though it remained below the Bank of England’s 5.2% forecast. Price growth slowed for restaurants and hotels, as well as housing and utilities.

  
  

• EU: Eurozone inflation expectations eased in January 2025, with the median 12-month forecast declining to 2.6% from December’s five-month high of 2.8%. Meanwhile, three-year inflation expectations remained unchanged at 2.4%, reinforcing a stable long-term outlook.

  Perceived past inflation edged down to 3.4% from 3.5%, while inflation expectations varied slightly across demographics. Lower-income groups projected slightly higher inflation than wealthier households, whereas younger respondents (18-34) continued to expect lower inflation than older cohorts, though the difference narrowed from prior years.

  Inflation uncertainty over the next 12 months held steady for the sixth straight month, remaining at its lowest level since February 2022, reflecting growing confidence in price stability.

Equity market

• US: The US equity market faced heightened volatility throughout the week, with major indices struggling under the weight of earnings pressure, geopolitical risks, and shifting interest rate expectations. On Monday, stocks failed to recover from the previous week’s losses, with the S&P 500 slipping 0.5% and the Nasdaq dropping 1.2%, led by declines in tech as Microsoft and Palantir fell on concerns over reduced data center spending, while Apple gained on a $500 billion US investment plan. Investor focus turned to upcoming earnings reports and the Fed’s preferred inflation gauge (PCE Index) on Friday, which could influence expectations for rate cuts. By Thursday, the US100 tech index hit a four-week low of 20,983 points, extending losses despite a 17.09% annual gain, highlighting ongoing caution. However, Friday saw a broad market recovery, with the S&P 500 and Nasdaq rebounding 1.6% each, and the Dow Jones jumping 601 points, despite geopolitical tensions stemming from Trump’s tense exchange with Ukraine’s Zelenskyy and new tariff threats against China, fueling uncertainty for Big Tech.

  Economic data painted a mixed picture, as core PCE inflation eased to 3.7% as expected, but consumer spending unexpectedly fell 0.2%, raising concerns over demand.

  
  

• UK: The FTSE 100 experienced a volatile week, with gains in healthcare and defense stocks offsetting losses in retail and mining. On Tuesday, the index hovered near the flatline as Smith & Nephew led the gains following strong US orthopaedics performance and improved guidance, despite concerns over China. BAE Systems benefited from Germany’s potential €200 billion defense spending boost, while B&M slumped to a near five-year low after cutting profit forecasts and CEO Alex Russo’s retirement announcement. Unilever fell amid CEO Hein Schumacher’s unexpected resignation, and mining stocks like Rio Tinto and Glencore weakened. Additionally, UK energy regulator Ofgem raised the energy price cap by 6.4% from April, adding pressure on household budgets. By Friday, the FTSE 100 declined, though it outperformed other European indices during a broad market selloff fueled by Trump’s escalating trade threats, including 25% tariffs on EU cars and goods from Canada, Mexico, and China. However, Trump hinted at a potential tariff-free trade deal with the UK, adding a layer of optimism. Despite the negative sentiment, IAG rallied on strong earnings and a €1 billion share buyback, while Pearson also gained amid London firms ramping up buybacks this earnings season. Meanwhile, Nationwide reported a 0.4% rise in UK house prices for February, slightly exceeding expectations, signaling resilience in the housing market despite economic uncertainty.

  
  

• EU: European equity markets faced headwinds throughout the week as global sentiment soured, particularly following President Trump’s announcement of new tariffs on Mexico, Canada, and the European Union. On Tuesday, markets opened lower, mirroring global losses as the AI-driven rally stalled, with Euro Stoxx 50 and Stoxx 600 futures down 0.3% and 0.2%, respectively, in premarket trading. Investors also focused on Germany’s Q4 economic growth data, alongside earnings reports from Alcon, Fresenius Medical Care, and Heidelberg Materials. By Thursday, the STOXX 50 and STOXX 600 fell 0.5%, as Trump confirmed a 25% tariff on EU imports, including automobiles, sparking a broad selloff in European automakers. VW, BMW, Mercedes-Benz, Stellantis, and Porsche were among the biggest decliners, reflecting concerns over the impact of trade tensions on the sector. The market downturn highlights the heightened uncertainty surrounding global trade policy, with European equities particularly vulnerable to US tariff risks.

Fixed income market

• US: US bond markets saw a notable shift this week, with the yield on the 10-year Treasury note falling to its lowest levels since December, as investors turned to safer assets amid economic uncertainty and renewed trade tensions. On Tuesday, yields dropped to 4.38%, reacting to President Trump’s confirmation that tariffs on Canada and Mexico would proceed next week after a brief delay, dampening hopes for an extension. Market participants also closely monitored upcoming economic releases, including the PCE price index report and the second estimate of Q4 GDP, which could shape the Federal Reserve’s monetary policy trajectory.

  By Friday, yields fell further to 4.22%, their lowest level since early December, as investors positioned ahead of the PCE inflation data, the Fed’s preferred gauge. A string of weaker economic indicators throughout the week raised concerns over slowing growth, reinforcing expectations for at least two quarter-point rate cuts from the Fed this year. Last week’s flash S&P Global PMI data signaled an unexpected contraction in the services sector, even as manufacturing remained robust, while consumer sentiment weakened amid persistent inflation worries. This combination of trade risks and softer economic data has strengthened the case for monetary easing, prompting markets to reassess their rate-cut expectations for the remainder of 2025.

  
  

• UK: The UK’s 10-year gilt yield fell below 4.5% this week, hitting a two-week low as growing expectations of Bank of England (BoE) rate cuts and heightened global trade risks shaped market sentiment. On Tuesday, BoE policymaker Swati Dhingra reinforced her dovish stance, advocating for a larger half-point rate cut, arguing that even a gradual reduction would still keep policy restrictive. She pointed to weak consumer spending, subdued inflationary pressures, and a cooling labor market despite rising wages, which strengthened market expectations for up to 56 basis points of BoE easing this year, with the first cut increasingly expected by May or June.

  By Friday, gilt yields remained below 4.5% as traders assessed US trade policies and BoE guidance. President Trump confirmed that tariffs on Mexico, Canada, and China would take effect next week but hinted at a potential tariff-free deal with the UK, while also signaling possible new levies on EU imports. Meanwhile, BoE Deputy Governor Dave Ramsden acknowledged growing uncertainty in the UK labor market and inflation outlook, affirming that while the disinflation process remains on track, risks exist in both directions. Ramsden emphasized a gradual and cautious approach to rate cuts, though he suggested the pace could accelerate if economic conditions warrant. With markets now pricing in two BoE rate cuts totaling 59 basis points in 2025, investors remain focused on upcoming UK inflation data and economic indicators to gauge the central bank’s next moves.

  
  

• EU: Germany’s 10-year bond yield held around 2.46% this week as traders closely monitored the country’s post-election political landscape and economic outlook. Meanwhile, final GDP data confirmed that Germany’s economy contracted by 0.2% in Q4 2024, marking a second consecutive year of economic decline. Investors now await signals from the incoming government on potential measures to stimulate growth, ease energy costs, and boost infrastructure investment to revive Europe’s largest economy.

Commodity

• Gold: Gold prices dipped below $2,910 per ounce on Tuesday, as investors locked in profits following Monday’s record-breaking session. The rally was fueled by safe-haven demand, as markets reacted to renewed trade policy risks from President Donald Trump. Trump reaffirmed that tariffs on Canadian and Mexican imports would proceed as planned, raising concerns about inflationary pressures and potential Federal Reserve responses. Despite the pullback, gold continues to see strong investor demand, with holdings in the SPDR Gold Trust—the world's largest gold-backed ETF—rising to 904.38 tonnes on Friday, the highest level since August 2023. Traders remain focused on U.S. inflation data and Fed policy signals, which could determine whether gold extends its bullish trend or faces further profit-taking.

  
  

• Oil: Brent crude oil futures climbed to $74.9 per barrel on Tuesday, extending gains for a second straight session as fresh U.S. sanctions on Iran’s oil trade heightened supply concerns. The latest move by President Donald Trump targeted over 30 brokers, tanker operators, and shipping firms linked to Iranian petroleum sales, marking the second round of sanctions in a broader effort to eliminate Iran’s crude exports and curb its nuclear ambitions. However, upside momentum was restrained by demand uncertainty, as Trump confirmed that tariffs on Canadian and Mexican imports would proceed as planned, raising fears of weaker global trade and slower economic growth. Investors are now closely watching OPEC+ output policies and geopolitical developments for further direction in oil markets.

FX

• EUR/USD = The euro hovered around $1.046, giving up most of its post-election gains as investors reassessed the political landscape in Germany. While the conservative CDU/CSU bloc secured victory, it now faces difficult coalition negotiations, raising concerns about potential political gridlock. The uncertainty over Germany’s future fiscal policies and economic direction has weighed on the euro, limiting its upside. Additionally, investors are closely watching upcoming inflation data across the Eurozone for signals on the European Central Bank’s (ECB) next policy moves. Market sentiment remains cautious as global trade risks and US monetary policy developments continue to influence currency markets.

  
  

• YEN/USD = The Japanese yen remained steady around 149.5 per dollar on Tuesday, hovering near its strongest level in 12 weeks, as investors priced in expectations of further interest rate hikes by the Bank of Japan (BOJ). The yen’s strength was underpinned by upside surprises in fourth-quarter inflation data, reinforcing views that the BOJ may continue its policy normalization in 2025. Market participants are now closely monitoring upcoming economic indicators and BOJ commentary, with traders anticipating a potential shift away from Japan’s long-standing ultra-loose monetary policy. However, global risk sentiment and US Federal Reserve signals could influence further yen movements in the near term.

  
  

• BTC: Bitcoin prices slipped below $92,000 in late February, nearing their lowest levels since November 2024, as risk-off sentiment gripped global markets. The continued selloff in risk assets followed heightened concerns over the US economic outlook, driven by President Donald Trump’s escalating tariff threats and the Federal Reserve’s persistent hawkish stance on interest rates. The downward pressure on Bitcoin mirrored the decline in US equities, which extended their losses as investors sought safer assets amid rising geopolitical and macroeconomic uncertainties. Market participants are now closely monitoring monetary policy signals and broader risk appetite trends to gauge Bitcoin’s next moves.

Source: CNBC, Bloomberg, FTnews, TradingEconomics and Reuters.

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