31 January 2025
Market Volatility Amid DeepSeek Announcement
A review of the week’s top global economic and capital markets news.
AUTHOR
Michael Miranda
Strategist, Strategy and Insights Group
For the week ending 31 January 2025
As of midday Friday, global equities were flat on the week after initially declining at the start of the week. The yield on the US 10-year note declined approximately 12 basis points to 4.5% while the price of a barrel of West Texas Intermediate crude oil edged down $2.51 from a week ago to $72.15. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), increased to 15.35 from 14.85 a week ago. The increase came after an initial spike at the start of the week in response to the DeepSeek announcement that rattled AI stocks.
MACRO NEWS
DeepSeek Announcement Rattles Market
This week, Chinese AI startup DeepSeek unveiled DeepSeek R1, which reportedly cost approximately 95% less to develop than similar large language models (AI systems). US technology stocks declined to start the week in response to the announcement as they trade at relatively stretched valuations and have large upcoming capital expenditures related to AI. Investors are currently validating DeepSeek’s claims and working through any potential ripple effects for markets should these claims be validated.
Fed Keeps Rates on Hold, Other Central Banks Cut
The US Federal Reserve left the federal funds target rate unchanged at a range of 4.25% to 4.5%. The pause in rate cuts was expected as US inflation remains above the Fed’s 2% target and the Fed is taking a wait-and-see approach to forthcoming economic policies. The Bank of Canada and ECB both cut their policy rates by 25 basis points to 3% and 2.75%, respectively. Despite persistent inflation, growth concerns in Europe spurred the decision to cut. The Bank of Canada’s decision comes as inflation and inflation expectations have moderated.
US GDP Grows at a 2.3% Annual Rate in Q4
Fourth quarter 2024 US real GDP slowed to 2.3% from the 3.1% annual rate seen in the third quarter. The consumer continues to drive economic growth as strong employment, increases in wages and the wealth effect continue to encourage spending. Overall, consumption and government spending remained the primary contributors to positive real growth while private investment declined.
Eurozone GDP Flat in Q4
The eurozone experienced no growth in Q4, coming in below expectations of 0.1% quarter/quarter growth. Growth was mixed across countries, with both Germany and France contracting over the quarter, Italy experiencing no growth, and Spain and Portugal growing 0.8% and 1.5%, respectively, over the quarter. Year-on-year growth for the region was just 0.9% for the region. High energy costs, savings rates and weak manufacturing in Germany and France contributed to weak growth.
QUICK HITS
US PCE increased 0.3% month/month in December, while Core PCE increased 0.2%. Year-on-year PCE and Core PCE were 2.6% and 2.8%, respectively, in line with estimates.
US new home sales increased 3.6% in December, to a 698,000 annualized rate, 6.7% greater than December 2023. The median sales price rose to $427,000 despite an increase in inventory.
US consumer confidence declined to 104.1 from 109.5 in December, below projections.
The US Employment Cost Index rose 0.9% q/q and was 3.8% year over year. Inflation-adjusted wage increases were 0.9% over the last 12 months, contributing to strong consumer spending.
Japan’s unemployment rate in December was 2.4%, declining 0.1% from the previous month.
Australia’s annual CPI inflation was 2.4% year-on-year ended December. The core inflation rate declined to 3.2%, below expectations.
EARNINGS NEWS
With about 36% of the constituents of the S&P 500 Index having reported for Q4 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose around 13.1% compared with the same quarter a year ago, according to data from FactSet.
THE WEEK AHEAD
Tuesday: Eurozone, CPI, US Construction Spending, ISM Manufacturing
Wednesday: US Auto Sales, Eurozone PPI
Thursday: Bank of England Official Bank Rate, Japan Real Household Income, Eurozone Retail Sales, Japan Real Household Income
Friday: US Unemployment, Canada Unemployment
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The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.
The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.
Past performance is no guarantee of future results.
Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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