Summary of the week - 8 Feb 25

Interest rate

• US: The Federal Reserve maintained the fed funds rate at 4.25%-4.5% during its January 2025 meeting, meeting market expectations. After three rate cuts in 2024 totaling 100 basis points, the Fed has paused further reductions to monitor inflation progress. Chair Powell emphasized the central bank's patience in lowering rates, citing higher-than-expected wage growth and a lower unemployment rate in January, despite slower payroll growth. Upcoming CPI and PPI reports will be crucial in assessing inflation trends.

• UK: The Bank of England reduced its Bank Rate by 25 basis points to 4.5% in February 2025, marking the third rate cut since August 2024. Markets anticipate an additional 60 basis points of cuts this year. Meanwhile, strong US jobs data reinforced the Fed's stance on the resilience of the labor market, minimizing the need for immediate changes to rate expectations.

• EU: The European Central Bank cut its key interest rates by 25 basis points in January 2025, bringing the deposit rate to 2.75%, the main refinancing rate to 2.90%, and the marginal lending rate to 3.15%. The decision reflects easing inflationary pressures and a more optimistic inflation outlook. While domestic inflation remains elevated due to delayed price and wage adjustments, wage growth is slowing, and corporate profits are cushioning some cost pressures. The ECB emphasized a cautious, data-driven approach, ensuring inflation aligns with the 2% target without committing to a fixed rate path.

Inflation rate

• US: Inflation expectations in the US surged in February 2025, with year-ahead projections rising to 4.3%, the highest since November 2023, up from 3.3% in January, according to the University of Michigan Consumer Survey. The five-year inflation outlook also increased slightly to 3.3%, the steepest since May 2008. This rise underscores growing concerns over persistent inflation pressures.

• UK: Bank of England Chief Economist Huw Pill noted that while inflation is expected to climb this year, second-round effects are unlikely, though strong wage growth remains a key concern for future rate decisions. In the US, steady but slowing job growth combined with rising inflation expectations suggest the Federal Reserve is likely to hold rates steady.

• EU: Annual inflation in the Euro Area increased to 2.5% in January 2025, up from 2.4% in December and slightly above expectations, marking the highest rate since July 2024. This rise was largely driven by accelerating energy prices (1.8% vs 0.1%). Core inflation, excluding food and energy, remained steady at 2.7% for the fifth straight month, slightly above forecasts but still at its lowest since early 2022. Slowing price increases for services and food provided some relief, but inflation pressures remain elevated.

Equity market

• US: The Dow Jones rebounded sharply on Monday after President Trump announced a one-month pause on tariffs against Mexico, reversing steep losses from earlier in the day. However, US stocks ended lower on Friday as investors digested the potential for additional Trump tariffs, rising inflation expectations, and mixed jobs data. The S&P 500 and Nasdaq dropped 0.9% and 1.3%, while the Dow fell 443 points. Inflation concerns were fueled by the University of Michigan’s report showing a surge in one-year inflation expectations to 4.3%. Meanwhile, January's jobs report revealed 143,000 new jobs, below expectations, though unemployment fell to 4.0%.

• UK: The FTSE 100 slipped on Friday but still posted a weekly gain, supported by the Bank of England’s recent rate cut. Marks & Spencer shares dropped over 2% after its clothing and beauty chief announced his departure, while homebuilder stocks fell more than 3% as UK house prices unexpectedly rose by 0.7% in January, surpassing forecasts of 0.2%.

• EU: Europe’s STOXX 50 declined 0.6% on Friday, retreating from record highs, as investors weighed mixed US jobs data. The US report showed weaker job gains of 143,000 in January, down from December’s 307,000, but stronger wage growth at 0.5%. L’Oréal shares fell over 4% after reporting its slowest quarterly sales growth since the pandemic, while Porsche tumbled nearly 7% due to impairment announcements and a disappointing 2025 sales outlook.

Fixed income market

• US: The 10-year US Treasury yield ended the week near 4.5%, rebounding from a seven-week low earlier in the week as strong labor market data offset expectations of further Federal Reserve rate cuts. January's jobs report revealed 143,000 jobs added, below expectations, but wage growth and a lower unemployment rate signaled resilience in the labor market. While the ISM manufacturing index unexpectedly improved, slowing prices for services tempered bond yields earlier in the week. Fiscal factors, including a reduced borrowing estimate and steady long-term debt sales, also supported Treasuries.

• UK: The UK’s 10-year gilt yield rose to 4.5%, following the movement in US Treasury yields. The Bank of England cut rates by 25bps to 4.5%, lowering its growth forecast to 0.75%. Hawkish policymakers like Catherine Mann pushed for a larger 50bps cut, highlighting divisions within the BoE. Governor Andrew Bailey sought to calm markets, but uncertainty persisted as strong US labor data raised questions about global rate policies.

• EU: Germany's 10-year Bund yield climbed above 2.4% after hitting a one-month low earlier in the week, driven by the US postponing tariffs on Mexico and Canada. Concerns over trade tensions remained elevated, particularly with China imposing tariffs on US goods in response to Trump's tariff policies. Meanwhile, Eurozone inflation hit 2.5% in January, exceeding forecasts, while core inflation held steady at 2.7%. Economic struggles in Germany and France fueled expectations of further ECB rate cuts this year, with markets pricing in at least three reductions. Last week’s 25bps ECB rate cut reinforced speculation of additional easing to counter economic and trade-related pressures.

Commodity

• WTI crude oil futures edged up 0.5% on Friday, closing at $71 per barrel following new sanctions on Iran's crude exports. However, gains were capped by mounting trade tensions as President Trump escalated his tariff dispute with China and threatened further levies on other nations. Despite the day's rise, oil recorded its third straight weekly decline, falling 2%, driven largely by concerns over global demand stemming from Trump's recent tariff measures.

FX

• USD: The dollar index surged to 108.2 on Friday, driven by President Trump's fresh tariff threats, which may reduce dollar outflows. Trump announced retaliatory tariffs against countries imposing trade levies on the US, targeting imports from the European Union, including pharmaceuticals, chemicals, and vehicles. This move follows recent tariffs on Chinese goods and delayed measures against Canada and Mexico, further bolstering the dollar.

• GBP/USD: The British pound stabilized at $1.243 after the Bank of England lowered interest rates to 4.5% and halved its annual growth forecast to 0.75%.

• EUR/USD: The euro fell below $1.04 as the interest rate gap between the US and Europe widened. Strong US jobs data supported the Federal Reserve’s steady stance, while the European Central Bank’s recent rate cuts and hints of further easing in March weighed on the euro. Fears of US tariffs triggering deflationary pressures have heightened expectations for deeper ECB cuts, with markets projecting a deposit rate of 1.87% by year-end.

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

  
  
  
  

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