Summary of the week - 21 Feb 25

Interest rate

• US: The Federal Reserve has paused its rate-cutting cycle, keeping the federal funds rate steady at 4.25%–4.5% in January 2025. This decision follows three consecutive rate cuts in 2024, totaling 100 basis points, aimed at balancing inflation control with economic stability. While inflation has eased from its peak, rising consumer expectations and resilient wage growth have prompted the Fed to adopt a "wait-and-see" approach before considering further cuts.

• UK: The Bank of England cut its benchmark Bank Rate by 25 basis points to 4.5% in February 2025, marking the third consecutive cut since August 2024. While the decision was widely anticipated, the unanimous 9-0 vote, including two members advocating a steeper 50bps cut, highlighted mounting economic growth concerns. Known hawk Catherine Mann surprisingly pushed for a deeper cut, signaling shifting priorities within the committee.

• EU: The European Central Bank (ECB) cut its key interest rates by 25 basis points in January 2025, reducing the deposit facility rate to 2.75%, the main refinancing rate to 2.90%, and the marginal lending rate to 3.15%. This decision aligns with the ECB's updated inflation outlook, reflecting easing price pressures and the region's weaker economic momentum.

Inflation

• US: The University of Michigan's Consumer Survey showed year-ahead US inflation expectations surged to 4.3% in February 2025, the highest in over a year, up from 3.3% in January. The five-year inflation outlook also climbed to 3.5%, the highest since 1995, exceeding the preliminary estimate of 3.3% and January's 3.2%.

• UK: The UK’s annual inflation rate accelerated to 3% in January 2025, up from 2.5% in December and exceeding the 2.8% forecast, marking the highest level since March 2024. Key drivers included transport costs (1.7% vs. -0.6%), driven by higher airfares and motor fuel prices, while food and non-alcoholic beverages surged 3.3%, led by meat, bread, and cereals. Education costs spiked 7.5%, reflecting the 20% VAT on private school fees, while services inflation rose to 5%, below the Bank of England's 5.2% prediction. Core inflation increased to 3.7%, matching expectations.

• EU: The Eurozone Consumer Price Index (CPI) fell by 0.3% month-over-month in January 2025, reversing the 0.4% increase seen in December, according to preliminary estimates. This decline reflects easing inflationary pressures, driven by lower energy costs and weaker consumer demand amid sluggish economic growth across the region.

Equity market

• US: US stocks plunged on Friday as mounting concerns about a slowing economy, persistent inflation, and escalating trade tensions under President Trump’s tariff policies rattled investors. The S&P 500 fell 1.7%, the Nasdaq 100 slipped 2.1%, and the Dow Jones dropped 748 points, marking its biggest single-day loss of the year. UnitedHealth led the declines, plummeting 7.2% after reports of a Department of Justice investigation into its Medicare billing practices. Adding to the bearish sentiment, the University of Michigan’s consumer sentiment index fell to 64.7, reflecting growing inflation fears, with year-ahead expectations surging to 4.3%, the highest in over a year. Corporate warnings also weighed on the market, as Walmart fell 2.5% following a disappointing outlook. Broader concerns stemmed from Trump’s aggressive tariff stance, including potential 25% tariffs on autos, semiconductors, and pharmaceuticals, further fueling market volatility. For the week, the S&P 500, Dow, and Nasdaq dropped 1.6%, 2.5%, and 2.4%, respectively. This sharp sell-off underscores the fragility of equity markets amid inflationary pressures, trade uncertainties, and the Federal Reserve’s cautious stance on rate cuts, with investors increasingly shifting towards safer assets like US Treasuries and gold.

• UK: The FTSE 100 closed nearly flat on Friday as strong UK consumer spending data for January was offset by concerns over rising unemployment and slowing business activity. Consumer spending surged 1.7%, surpassing forecasts, but the S&P Composite PMI for February dipped slightly to 50.5, signaling stagnation, while employment fell to its lowest level since 2020. Financial stocks led the gains, with Natwest rising 3.8% and Standard Chartered up 3.4% following strong earnings reports. In contrast, gold miners like Fresnillo (-3.4%) and Endeavour (-3.2%) faced pressure amid volatile commodity prices, while oil majors BP (-0.8%) and Shell (-1.5%) also declined. With weak economic growth and persistent inflation, traders are now scaling back expectations for Bank of England rate cuts. The FTSE 100 posted its worst weekly performance of the year, down nearly 1%, highlighting growing market caution amid mixed economic signals.

• EU: European stocks edged higher on Friday, recovering some losses from earlier in the week as investors evaluated the latest PMI data, corporate earnings, and the upcoming German elections. The STOXX 50 rose 0.3%, while the broader STOXX 600 gained 0.5%, reflecting resilience in the Eurozone’s private sector, where strength in services continued to offset manufacturing contraction. On the political front, Germany’s center-right CDU led the latest polls, while the incumbent SPD slipped to third place. Strong earnings boosted individual stocks, with Air Liquide climbing over 3% after upbeat fourth-quarter results and guidance, while L’Oréal advanced 2.5%. Banks also closed higher. Outside the Eurozone, Novo Nordisk surged 5.5% after the FDA confirmed that shortages of its popular drugs Wegovy and Ozempic had been resolved, potentially limiting the sale of cheaper alternatives.

Fixed Income market

• US: The 10-year US Treasury yield fell below 4.45% on Friday, hitting a two-week low as weak economic data and supportive bond market conditions fueled expectations for Federal Reserve rate cuts. The unexpected contraction in the US services sector, driven by concerns over reduced government spending, led clients to scale back new orders, ending two years of resilience. This downturn reinforced market bets for rate cuts, with only 15% of traders now anticipating no reductions by year-end. Adding to bond market strength, the Treasury opted to maintain current long-term debt issuance levels, while the latest FOMC minutes hinted at a potential pause in the Fed's asset-selling program, signaling a possible end to quantitative tightening.

• UK: The UK's 10-year gilt yield dipped below 4.6% as markets reacted to economic data and President Trump’s latest tariff threats. January retail sales jumped 1.7%, surpassing expectations, with food store sales posting their strongest gain since March 2020, though December's numbers were revised downward. The UK recorded a budget surplus of £15.4 billion, the highest on record for January but below forecasts. Consumer confidence remained weak, despite slight improvement. Inflation climbed to 3%, above the 2.8% projection, while services inflation eased to 5%. Accelerating wage growth fueled inflation concerns, though Bank of England Governor Andrew Bailey downplayed risks, pointing to regulated costs. The BoE also halved its 2025 growth forecast, and traders now anticipate two rate cuts this year. Meanwhile, Trump proposed a 25% tariff on autos, pharmaceuticals, and semiconductors, cautioning they could rise further by April 2.

• EU: Germany's 10-year bond yield dropped below 2.5% after weak economic data reinforced expectations for deeper European Central Bank rate cuts. February’s Eurozone business activity remained stagnant, with slight growth in Germany contrasting with France’s steepest contraction in over a year. This fueled market bets for 78 basis points of ECB easing this year, up from 74 basis points previously. Attention now turns to Germany’s general election, where the conservative CDU/CSU bloc leads the polls but may need coalition partners to govern. Adding to uncertainty, the US indicated plans to reduce support for Ukraine while pursuing Russia negotiations that exclude both Ukraine and Europe. Meanwhile, President Trump's plan to impose a 25% tariff on auto, semiconductor, and pharmaceutical imports from April 2 threatens to disrupt European exports further.

Commodity

• Gold: Gold hovered near $2,930 per ounce on Friday, just below its record high of $2,950 reached the previous session, as it headed for an eighth consecutive weekly gain. The precious metal's strength was fueled by its safe-haven appeal amid escalating global uncertainties, including geopolitical tensions and economic instability.

• Oil: WTI crude oil futures remained above $72 per barrel on Friday, heading for their strongest weekly performance since early January, driven by supply concerns. A Ukrainian drone attack on a pumping station disrupted Russia’s Caspian Pipeline Consortium, cutting oil flows by 30%-40%. Uncertainty also surrounded the resumption of oil exports from Iraq's Kurdistan region, as Turkey awaited confirmation from Iraq to reopen the Ceyhan port. OPEC+ officials hinted at delaying production increases, citing a fragile market and past challenges in meeting output targets. However, oil prices faced some downward pressure amid signs of easing US-Russia tensions and potential peace talks regarding the Russia-Ukraine conflict, which could eventually lead to the lifting of sanctions on Russian oil exports.

FX

• GBP/USD: The British pound slipped to $1.265 as February PMI data revealed stagnant business activity for the fourth consecutive month, with rising job losses amid weaker sales and higher operating costs. This economic stagnation, coupled with persistent inflation, has heightened fears of stagflation, complicating the Bank of England's policy path. Despite the drop, sterling remains up 0.5% for the week, reaching its highest since December 17 following an unexpectedly high inflation reading. Meanwhile, UK retail sales exceeded forecasts, both including and excluding fuel. The Office for National Statistics (ONS) reported a £15.4 billion budget surplus for January, though below the £20.3 billion estimate. Consumer sentiment, as measured by GfK, remained negative but showed modest improvement across key metrics.

• EUR/USD: The euro hovered below $1.05 as markets awaited Germany's general election results and digested PMI data from major European economies. Polls indicate a likely win for the conservative CDU/CSU bloc, led by Friedrich Merz, though coalition partners will be needed to form a stable government amid ongoing economic stagnation. Eurozone private sector activity showed minimal growth in February, with the PMI holding steady at 50.2, missing the expected 50.5. Adding to market caution were geopolitical concerns, as the US signaled plans to reduce support for Ukraine while engaging in direct negotiations with Russia, excluding both Ukraine and Europe. Furthermore, President Trump announced plans to impose a 25% tariff on automobile, semiconductor, and pharmaceutical imports starting April 2, a move likely to hit European carmakers.

• YEN/USD: The Japanese yen weakened past 150 per dollar on Friday, reversing gains that had pushed it to 11-week highs, despite inflationary pressures suggesting a more hawkish Bank of Japan (BOJ) stance. Japan's core inflation rose to 3.2% in January, up from 3% in December and surpassing the 3.1% forecast. Headline inflation also climbed to 4%, the highest level in two years. While such inflationary trends typically bolster expectations for tighter BOJ policy, the yen’s depreciation reflects broader market sentiment favoring the US dollar amid ongoing global uncertainties.

Source: CNBC, Bloomberg, FTnews, TradingEconomics and Reuters.

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