Stocks and Bonds Rally As Inflation Fears Ease

For the week of 17 January 2025

As of midday Friday, global equities were higher on the week after cooler inflation readings in the United States and United Kingdom and on signs that US–China relations may not be as contentious as feared. The yield on the US 10-year Treasury note declined 15 basis points to 4.60% while the price of a barrel of West Texas Intermediate crude oil rose $1.70 to $78.70. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 15.7 from 19.2 a week ago.

MACRO NEWS

Markets breathe easier after US inflation data

Last Friday’s hot US employment report had investors on guard for this week’s inflation data, but markets breathed a sigh of relief when the data proved benign. At the headline level, consumer prices rose 0.4% in December, largely on the back of an uptick in gasoline prices, though the core rate rose a modest 0.2%. On a year-over-year basis, CPI rose 2.9% in December, up from 2.7% in November while the core reading rose 3.2%, down from 3.3% the month before. The shelter index, which has been sticky, rose 4.6%, its slowest pace in almost three years.

Trump upbeat after call with China’s Xi

US President-elect Donald Trump posted an upbeat message on social media after a phone conversation with China’s Xi Jinping. Trump said the call was a good one for both the United States and China and that he expects that the two leaders will solve many problems together, starting immediately. They discussed balancing trade, the fentanyl crisis, TikTok and other subjects, the president-elect said. His upbeat tone suggests Trump is unlikely to impose large day-one tariffs on China.

Fragile Gaza ceasefire reached

A tentative ceasefire agreement between the Israeli government and Hamas was announced on Wednesday. Israel’s security cabinet approved the deal on Friday. Under the terms of the first phase of a three-phase agreement, Hamas is to release 33 hostages and Israel free hundreds of Palestinian prisoners while the two sides attempt to negotiate a lasting truce in six weeks. Two Americans are among those expected to be released in the first wave. Large quantities of humanitarian aid are expected to flow into Gaza as soon as Sunday.

Fed heavyweights see continued inflation progress

Two influential US Federal Reserve officials said this week that they expect inflation to continue falling. Federal Reserve Bank of New York President John Williams said that the disinflation process “remains in train” and that he doesn’t expect the labor market to be a significant source of inflation this year. Fed Governor Christopher Waller went further, suggesting that rates could come down more quickly than markets expect and that if the data cooperate, the Fed could cut three or four times this year. Waller said he doesn’t expect tariffs to significantly impact inflation.

Bessent focuses on government spending

Trump’s nominee for Secretary of the Treasury Scott Bessent testified before the Senate Banking Committee as part of the confirmation process on Thursday and said the US doesn’t have a revenue problem but a spending one. Bessent said the economy is barreling toward a crisis if the 2017 Tax Cuts and Jobs Act is not extended this year and vowed to get the government’s house in order on the budget while also preserving Social Security and Medicare. The former hedge fund manager said he favors more robust sanctions on Russian oil and said he sees no use-case for a central bank digital currency. Bessent stated flatly that the US will not default on its debt during his tenure.

QUICK HITS

US retail sales rose 0.4% in December, slightly below expectations of a 0.6% advance. However, November sales were revised up to 0.8% from 0.7%. Core retail sales, which exclude auto dealers, building materials and sales at gas stations, rose a solid 0.7%, suggesting the US consumer remains healthy.

The IMF raised its 2025 world GDP growth outlook to 3% on strong growth in the US.

Tougher new US sanctions on Russian oil companies and on tanker fleets will reduce flows of crude oil to China and India, forcing those countries to buy more on the open market.

China’s 2024 trade surplus totaled nearly $10 trillion on strong exports and weak imports. Weak domestic consumption has curtailed demand for imports while the front-running of orders ahead of potential US tariffs under the second Trump administration helped propel exports.

US industrial production rose 0.9% in December, beating expectations of a 0.3% advance.

A survey by the Federal Reserve Bank of New York showed that one-year consumer inflation expectations held steady at 3% but that expectations three years out rose to 3% from 2.6%. In five years, those surveyed expected a 2.7% inflation rate, down from 2.9% the month before.

Goldman Sachs expects China’s economic growth rate to slow to 4.5% in 2025 from around 5% in 2024 and says China will use a broad range of monetary and fiscal stimulus measures to offset the effects of expected US levies and a persistent housing downturn.

The Bank of Canada said it will end its quantitative tightening program in the first half of 2025.

French Prime Minister François Bayrou proposed a deficit target of 5.4% of GDP for 2025 in a speech outlining his budget plans on Tuesday. He said he is considering reopening the contested 2023 pension reform for renegotiation but said any potential modifications must not worsen the country’s finances. French companies shouldn’t face huge tax increases, he said. Bayrou survived a no-confidence vote initiated on Thursday by the left-wing France Unbowed.

Markets have priced in a nearly 84% chance of a rate hike from the Bank of Japan after Governor Kazuo Ueda said Wednesday that a hike will be debated at the 24 January meeting. The remark prompted a short-covering rally in the yen versus the major currencies.

Canadian energy minister Jonathan Wilkinson told the Financial Times that the country is open to buying more US military hardware and forging a deeper critical minerals partnership with its larger neighbor to persuade Trump not to impose substantial tariffs. However, press reports on Thursday indicated that Canada is preparing retaliatory tariffs on $105 billion of US goods if Trump follows through on his threats.

Consumer prices in the United Kingdom rose 2.5% year over year in December and the core rate rose 3.2%. Both measures were lower than expected, easing stagflation fears and sparking a rally in gilts. However, Friday’s retail sales figures were a disappointment as sales fell 0.6% in December from the month before.

The People’s Bank of China said it will shift its focus from spurring investment to paying greater attention to consumption.

Germany’s economy contracted for a second straight year in 2024, shrinking 0.2% after shrinking 0.3% in 2023, the first back-to-back declines in two decades.

The Financial Times reported that Chinese citizens’ doubts are mounting that the economy is growing around 5%. Many feel the economy is in recession, the paper reported. Government data released Friday indicated that GDP growth hit the government’s 5% goal in 2024. The country’s population fell for a third straight year.

Germany’s DAX index made an all-time high Thursday, closing at 20,655 Wednesday after softer US and UK inflation data earlier in the week.

US housing starts rose 15.8% in December, far exceeding expectations. Building permits declined 0.7%.

Former Canadian Finance Minister Chrystia Freeland said Friday that she will run for leader of Canada’s ruling Liberal Party. Former Bank of Canada Governor Mark Carney will also seek the post.

THE WEEK AHEAD

Monday: Japan industrial production, US closed for Martin Luther King Day

Tuesday: UK unemployment, Canadian CPI

Thursday: Canadian retail sales

Friday: Global: Flash PMI readings, US existing home sales