RECAPPING LAST WEEK

U.S. equity indices wobbled as investors weighed concerns about artificial intelligence spending, tariffs, Federal Reserve policy, and the latest inflation figures. The S&P500 and Russell 2000 indices ended the week down 1%, while the Nasdaq Composite recovered from a sharp selloff to finish lower by 1.6%. Value stocks outperformed growth as rotation was evident. The technology sector plunged more than 5% on Monday, before clawing back some of the losses, after the release of a new cost-efficient AI model from China initiated a hotly contested debate about chip and energy demand. Mixed earnings results from technology mega-caps fueled additional volatility. Gold futures jumped 2% to a new weekly closing high, while crude oil slumped 1.5% after news that the White House was expected to announce 25% tariffs on Canadian and Mexican goods beginning March 1. Oil is the top U.S. import from Canada and a top five import from Mexico.

U.S. Treasury yields fell modestly across the curve despite a FOMC statement that could be interpreted as mildly hawkish. The Fed left interest rates unchanged, portraying the labor market as “solid” but describing inflation as “somewhat elevated”, a change from the prior statement that suggested ongoing progress towards the committee’s 2% goal. The final PCE index reading from 2024 revealed a 2.6% increase YOY—slightly higher than the November figure—while the core reading came in at 2.8% YoY. Fed Chair Powell expressed optimism for progress on lowering inflation but said that being set up for it is one thing, while having it is another. U.S. economic growth slowed more than expected in Q4, while consumer spending remained robust. GDP increased 2.3% versus forecasts of 2.5%, as compared with growth of 3.1% in Q3. Trade was a drag on performance, as businesses likely front-loaded imports ahead of potential tariffs. However, consumer spending—which accounts for two-thirds of economic activity—rose 4.2% in the quarter.

Consumer confidence fell to a four-month low in January, as Americans expressed higher inflation expectations and less optimism on jobs. New homes sales continued to rise in December, but pending sales—the strongest indicator of current activity—were hampered by mortgage rates moving above 7% once again. Overseas, the European Central Bank lowered interest rates by a quarter-point to 2.75% and kept the door open for further easing. Europe’s economy saw no growth in Q4 2024, while Germany and France—the region’s two largest economies—contracted slightly over the same period. Additionally, Germany’s preliminary flash CPI estimate for January slipped to 2.3% YoY from 2.6% the prior month, although services inflation remained elevated. The Bank of Canada reduced its benchmark rate by 25 basis points to 3%, citing U.S. trade policy as a major source of uncertainty. Australia’s consumer inflation slowed in Q4, raising expectations for a rate cut next month. Meanwhile, Japan’s inflation accelerated, keeping hopes alive that more rate hikes are forthcoming. Finally, China’s factory activity unexpectedly shrank in January, with manufacturing PMI slipping to 49.1. Deflation pressures persisted, highlighting needs for more government stimulus.

THE WEEK AHEAD

As the calendar flips to a new month, investors’ attention will turn to jobs data in the U.S., while the
Bank of England gets the central bank spotlight. U.S. non-farm payroll growth is expected to be
around 150k, while average hourly earnings are forecasted to ease slightly. Given the Fed’s comments last week, an in-line or stronger report is likely to reinforce keeping interest rates on hold. ISM manufacturing and services PMIs will be released today and Wednesday.

Factory orders, preliminary Q4 productivity numbers, and consumer sentiment round out the domestic economic calendar. For the final major week of earnings season, company reports to watch include Palantir, Advanced Micro Devices, Amazon, Qualcomm, MicroStrategy, and more. Overseas, the Bank of England is likely to cut interest rates by a quarter-point on Thursday. It may also signal more future reductions than previously thought, due to the UK economy stalling and inflation unexpectedly easing last month.

Ahead of the meeting, the BOE launched a new financial stability tool to help ease bond market volatility during times of stress. In Europe, flash CPI readings were released today, with German factory orders and industrial production figures due later in the week. The OPEC+ alliance of major oil producers is scheduled to meet today, where President Trump’s recent proposal to expand U.S. output is likely to be a topic of discussion. Last of all, China’s Caixin PMI data is expected to confirm weakness from the official government numbers from last week, and inflation data will be released over the weekend.

(Schwab)