Markets Wary Over Policy Uncertainty

For the week ending 28 February 2025

As of midday Friday, global equities were lower on the week amid worries that uncertainty over policy would slow economic growth and that a slowdown in AI infrastructure would reduce big-tech profit margins. From week-ago levels, the yield on the US 10-year note tumbled 20 basis points to 4.25% while the price of a barrel of West Texas Intermediate crude oil declined $2 to $69.50. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 21 from 17.1 last Friday.

MACRO NEWS

US tariffs on Canada, Mexico and China slated for next week

In a social media post on Thursday, US President Donald Trump, citing a lack of progress on halting the flow of fentanyl into the United States, said that 25% tariffs on goods imported from Canada and Mexico will come into effect on Tuesday, 4 March, along with an additional 10% tariff on imports from China. The hike in levies against China will take the effective US tariff rate to about 25%. Just a day before the announcement, Trump told cabinet officials that tariff hikes would likely wait until 2 April, when reciprocal tariffs are slated to take effect. In his post, Trump did not mention the proposed steel and aluminum levies that are scheduled to take effect Tuesday. Unlike Trump’s earlier tariff threats a month ago, there appear to be no last-minute negotiations to derail the duties this time. Canadian Prime Minister Justin Trudeau said Thursday afternoon that Canada would counter with an “immediate and extremely strong response.”

Slide in consumer confidence raises alarm

The Conference Board’s measure of consumer confidence slid to 93.8 is February from 105.3 in January amid concerns that inflation is on the rise and economic growth may be slowing. It was the largest monthly drop since August 2021. The results mirrored a plunge in the University of Michigan’s consumer sentiment index last Friday. Analysts noted that the volatile policymaking backdrop in Washington seemed to contribute to consumer unease. Investors fear rising uncertainty, and pessimism over labor market conditions will prompt consumers to hold back on making major purchases.

Zelensky to sign mineral deal in Washington

Ukrainian President Volodymyr Zelensky is set to sign an agreement with the United States on Friday establishing a reconstruction investment fund jointly managed with Ukraine that uses revenues from Ukrainian state-owned natural resources. A draft of the agreement does not specify the size of the US stake in the fund, though Trump said this week that the US will be able to recoup the aid disbursed since the Russian invasion three years ago. While the deal doesn’t include an explicit US security guarantee for Ukraine, Zelensky said this week that the minerals accord is a framework for a wider agreement. Thus far, Trump has refused to commit to a US security backstop for Ukraine.

German election plays out as expected

There were few big surprises in Sunday’s German parliamentary elections, with the Christian Democratic Union winning the largest share of the vote at 28.6%, the right-wing Alternative for Deutschland garnering 20.8% and the ruling Social Democrats slipping to third with 16.4%. The CDU and SPD, the two historically dominant centrist parties, are expected to form a grand coalition though the process is expected to take several months. Amid uncertainty over the US commitment to NATO, Chancellor-in-waiting Friedrich Merz has begun talks with the SDP to speed as much as €200 billion in defense outlays through the lame duck parliament, which will govern until late March. Efforts to ease the country’s constitutional limits on government borrowing are expected to wait until the new parliament is seated.

QUICK HITS

The final piece of January’s US inflation puzzle was released on Friday, with the personal consumption price index dropping to a 2.5% annual rate from a 2.6% rate in December. The core rate declined to 2.6% from 2.9% the month before. The readings were in line with economists’ expectations. Personal income rose a robust 0.9% in January, though spending declined 0.5%, pushing the savings rate to 4.6%.

The US posted a record $153.3 billion preliminary trade deficit in January as importers rushed to stock shelves ahead of any import tariffs.

Early in the week, in the runup to a White House meeting with Trump, British Prime Minister Keir Starmer committed the United Kingdom to increasing defense spending to 2.5% of GDP by 2027 without raising taxes or increasing borrowing. The defense buildup could revive the UK’s industrial base, Starmer said. Trump said Thursday that there is a good chance of a US-UK free trade deal which would avoid the need for tariffs.

The US House of Representatives narrowly passed a budget framework that calls for spending cuts of $1.5 to $2 trillion over the next decade and extending $4 to $5 trillion in expiring tax cuts. The House’s plan differs substantially from one passed by the Senate, which is narrowly focused on defense, energy and border security, so legislators have their work cut out for them in the months ahead to reconcile the two approaches. 

Trump this week floated the idea of replacing the EB-5 visa program, which allows foreign investors to become permanent US residents, with a $5 million “gold card” which would secure the holder permanent residency and a path to US citizenship.

With US tariffs looming, China is said to have increased its focus on spurring domestic demand.

The White House has ordered federal agencies to plan for large-scale job cuts and has given the agencies until 13 March to submit their plans. The reductions are expected to take place by summer.

Trump announced that he will reverse the Biden administration’s concession to US companies operating in Venezuela due to Venezuelan President Nicolás Maduro’s failure to promptly repatriate US deportees.

The number of babies born in Japan last year fell to the lowest level since records began 125 years ago. Japan recorded 720,988 births in 2024, according to preliminary government figures published on Thursday, the ninth-straight yearly decline. Combined with a record 1.6 million deaths last year, the figures mean Japan’s native-born population shrank by almost 900,000 people.

US Q4 GDP was unrevised at 2.3%, though the core GDP price deflator was revised up to a 2.7% annual rate from an initial 2.5% reading.

US durable goods orders rebounded strongly in January, rising 3.1% compared with a decline of 1.8% in December. Nondefense capital goods orders ex aircraft rose a stronger-than-expected 0.8%

A streak of weak January US home sales figures continued this week as new home sales fell 10.5% and pending home sales declined 4.6%. Last week existing homes sales were reported to have dropped 4.9%. Unusually, cold January temperatures in much of the US may have contributed to the sales slump.

While visiting the White House on Tuesday, French President Emmanuel Macron said Europe will shoulder its share of the burden on Ukraine. Referring to Russian President Vladimir Putin, Macron said, “We want peace, he wants peace. We want peace swiftly, but we don’t want an agreement that is weak."

Canadian GDP rose at a stronger-than-expected annual pace of 2.6% in Q4, and Q3 was revised sharply higher, to 2.2% from 1%.

EARNINGS NEWS

With about 97% 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 18.1% compared with the same quarter a year ago, according to data from FactSet. Blended sales rose 5.3% year over year.

THE WEEK AHEAD

Monday: Manufacturing PMIs, eurozone CPI

Tuesday: Japan unemployment, Australia RBA minutes, retail sales, US tariffs scheduled to come into force, Trump delivers State of the Union address.                                                                                                                                       

Wednesday: Services and composite PMIs, Australia GDP, US factory orders, Fed Beige Book

Thursday: Eurozone retail sales, ECB meeting, US trade, productivity, unit labor costs

Friday: US employment report