European, US Equity Indices at or Near Record Levels

For the week ending 14 February 2025

Global equities extended their gains this week as markets took the possibility of US reciprocal tariffs in stride given that levies are not expected to be imposed for at least several months. The yield on the US 10-year Treasury note edged slightly lower from week-ago levels to 4.47%, but not before spiking to 4.65% on Wednesday after strong US inflation data. The price of a barrel of West Texas Intermediate crude oil was little changed at $71.50. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), was steady, at 16.1.

MACRO NEWS

US consumer prices jumped in January

The US Consumer Price Index rose 0.5% in January while core prices rose 0.4%. On a year-over-year basis CPI rose 3%, up from 2.9% the month before. Excluding food and energy, prices rose 3.3%, up from 3.1% in December. Most alarmingly, the core services ex housing measure of inflation rose 0.76% last month to the highest level in a year. Some suspect that hurricanes and wildfires may have contributed to January’s price bump. Others suspect a seasonal price aberration at the start of the year as companies reset pricing. However, housing inflation continued to moderate. Thursday’s PPI data was also strong at the headline level, but the components that feed into the US Federal Reserve’s preferred personal consumption expenditures measure suggest a more benign reading is likely when that index is released at the end of the month. Bond yields backed up aggressively on Wednesday but reversed course on Thursday. 

Trump readying reciprocal tariff plan

US President Donald Trump on Thursday directed the US Trade Representative and the Department of Commerce to study on a country-by-country basis how to adjust US tariff rates on trade partners to match their existing duties and nontariff barriers, such as value-added taxes and industry subsidies. The study is expected to be completed by 1 April, with US levies expected to follow shortly after. Trump said he would later impose tariffs on cars, semiconductors and pharmaceuticals above and beyond the reciprocal rate. Markets appear unconcerned, viewing the delay in implementation as an opportunity for negotiations with trading partners. The imposition of reciprocal tariffs is seen as making less likely the across-the-board levies Trump promised during his campaign.

Hopes for Ukraine peace deal rise as Trump engages Putin

Trump and Russian President Vladimir Putin spoke on Wednesday and agreed to open immediate peace talks over Ukraine. Trump downplayed the odds of Ukraine recovering all its territory or joining NATO, angering Ukrainian officials for making concessions before negotiations had formally begun. Ukraine is seeking a security guarantee from the United States, fearful that Europe cannot offer such guarantees on its own, Ukrainian President Volodymyr Zelensky told the Guardian. Trump sent Treasury Secretary Scott Bessent to Kyiv this week where he presented Zelensky with a plan to provide Ukraine with military aid in exchange for US access to Ukrainian rare earth minerals. Goldman Sachs estimates that a limited Ukraine ceasefire scenario would boost eurozone GDP by about 0.2% while a complete ceasefire would boost growth by 0.5%. The analysis assumes a limited resumption of Russian natural gas flows to Europe, which would push down energy costs broadly.

QUICK HITS

US retail sales unexpectedly fell in January, declining 0.9%. Core sales fell 0.8%, reversing December’s gain. US industrial production rose 0.5% in January, beating expectations for a 0.3% advance.

The Federal Reserve Bank of New York reported on Thursday that the share of outstanding US consumer debt in delinquency rose in the fourth quarter to 3.6%, the highest level since 2020. Total household debt went up to a record $18 trillion. While delinquencies are increasing, they remain at historically low levels, well below the prepandemic average of about 5%.

Around 75,000 US government employees have reportedly accepted the Trump administration’s buyout offer. 

French Prime Minister François Bayrou this week survived another no confidence motion over the government’s 2025 budget.

Bank of England Governor Andrew Bailey warned this week that the financial stability risks posed by multimanager hedge funds have not been fully taken on board. De-risking by these funds could amplify market moves, he said.

On Sunday night, Trump announced that he had directed the US Treasury to halt minting pennies given that one penny costs 3.69 cents to produce. Nickels could be next as they are even more expensive, costing 13.8 cents each to produce.

Despite this week’s upticks in inflation readings, Fed Chair Jerome Powell cautioned against overinterpreting one or two bad inflation readings. He called the underlying economy very strong but said the outlook is uncertain. Long-term inflation expectations appear well anchored, he said, while repeating that policy is well positioned for risks and uncertainties.

Bank of Japan Governor Kazuo Ueda warned Wednesday of upside risks to inflation expectations from elevated food prices, suggesting monetary policy normalization will continue.

Bundesbank President Joachim Nagel said this week that he expects inflation to reach the European Central Bank’s 2% target by midyear.

The minutes of the January 29 Bank of Canada rate-setting meeting indicated that souring confidence due to the threat of tariffs has strengthened the case for rate cuts.

Indian Prime Minister Narendra Modi met with Trump at the White House on Thursday and agreed to begin trade negotiations. India has historically maintained very high trade barriers.

The budget committee of the US House of Representatives approved a massive budget resolution that addresses tax cuts, border security, defense spending and energy policy. If adopted, the resolution would pave the way for a comprehensive budget reconciliation bill that extends the 2017 Tax Cuts and Job Act, along with other measures. The Senate has so far adopted a two-phase approach rather than the House’s “one big, beautiful bill” envisioned by Trump.

EARNINGS NEWS

With about 77% 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 16.8% compared with the same quarter a year ago, according to data from FactSet. Blended sales rose 5.25% year over year.

THE WEEK AHEAD

Monday: US markets closed for Presidents Day, Japan industrial production

Tuesday: Reserve Bank of Australia rate-setting meeting, UK unemployment, Canada CPI

Wednesday: UK CPI, US housing starts and building permits, FOMC minutes

Thursday: Australia unemployment

Friday: Global flash PMIs, UK retail sales, US existing home sales