Global Markets Weekly Wrap KW 7 : Global Market Trends and Inflation Impact on Stocks and Economy

Global Markets Weekly Wrap KW 7 : Global Market Trends and Inflation Impact on Stocks and Economy 

The past week in global financial markets saw a generally positive trend, with notable movements across various regions. In the United States, stock markets saw a mostly upward trajectory, led by a strong performance from the Nasdaq Composite. Growth stocks continued to outpace value shares for the second time this year, with small-cap stocks falling behind relative to larger indexes. By the end of the week, both the S&P 500 and the Nasdaq were within one percent of their highest-ever levels.

A significant boost to investor sentiment came on Thursday when President Donald Trump decided against implementing new global tariffs. Instead, he signed an order that leaves open the possibility of reciprocal tariffs on a country-specific basis after further review, with a final decision expected by April 1. While the announcement left some uncertainty in the market, it was received positively as it introduced a delay in the implementation of new tariffs, potentially providing room for further negotiations between the U.S. and its trade partners.

The economic landscape was shaped by inflation data, with figures released on Wednesday revealing a stronger-than-expected increase. According to the Bureau of Labor Statistics, the consumer price index showed a rise of 0.5% for the month and a 3.0% increase compared to the previous year. This was an acceleration from the previous month's numbers. A significant portion of this increase was attributed to rising housing costs, which accounted for nearly a third of the total monthly gain. The core consumer price index, which excludes food and energy prices, also rose at a faster pace than before.

Additional inflation data emerged on Thursday with the release of the producer price index. This index also exceeded expectations, climbing 0.4% for the month. Despite these increases, some key components, such as healthcare-related expenses and airfares, showed signs of stabilization, which helped to ease concerns over sustained inflationary pressures.

Federal Reserve Chair Jerome Powell, during testimony before the Senate Banking Committee, acknowledged that while progress had been made in curbing inflation, more work remained. He emphasized that the central bank intended to keep monetary policy restrictive for the time being. Supporting this view, Chicago Federal Reserve President Austan Goolsbee described the inflation data as a wake-up call, noting that consecutive months of similar readings would indicate that the job of controlling inflation was far from over. As a result of the inflation data, market expectations regarding interest rate cuts shifted, with the anticipated timeline for the next rate reduction moving from September to December.

Treasury yields fluctuated throughout the week, responding to the inflation data releases. The yield on the 10-year Treasury note temporarily spiked to its highest level of the week before retreating. Municipal bonds, meanwhile, underperformed relative to U.S. Treasuries following the inflation report, though they recovered partially the following day. In the corporate bond market, investment-grade bonds fared well, benefitting from strong demand despite limited issuance. The high-yield bond market also remained steady, despite volatility in Treasury yields and fluctuations in stock prices.

Turning to European markets, stock indexes showed strong performance, with the STOXX Europe 600 Index reaching new record levels. Optimism surrounding potential progress in the Ukraine-Russia conflict and robust corporate earnings helped fuel gains. Major indexes in Germany, France, and Italy all posted notable increases, while the UK's FTSE 100 also ended the week higher.

In the UK, economic data showed unexpected growth in the final quarter of the previous year. Analysts had projected a contraction, but an increase in services and construction activity led to a modest expansion. For the full year, economic growth was significantly stronger than the prior year. The Bank of England's Chief Economist, Huw Pill, urged caution regarding potential interest rate cuts, citing persistent wage growth as a factor that could sustain inflationary pressures. Meanwhile, another member of the central bank's policy committee suggested that a larger rate cut could have been warranted in the most recent decision, as a weakening labor market and slowing consumer demand were helping to ease inflationary concerns.

In the eurozone, industrial production fell more sharply than expected in December, with significant declines in the output of capital and intermediate goods. Despite this setback, economic growth in the final quarter was revised slightly higher, reflecting marginal expansion rather than stagnation. For the full year, the eurozone economy posted modest growth.

Japanese stock markets experienced gains over the past week, supported by a weaker yen and positive market sentiment following the U.S. decision to delay reciprocal tariffs. The Japanese government indicated that it would assess any future developments in trade policy before determining its response.

Expectations regarding Japan's interest rate outlook remained uncertain. While many anticipate the next rate hike to occur in the second half of the year, bond yields trended higher as investors speculated that the central bank might move more aggressively. Japanese government bond yields climbed to their highest level in nearly 15 years.

Meanwhile, inflation data in Japan pointed to continued price pressures. The latest corporate goods price index, which measures input costs for businesses, showed an annual increase higher than expected. Agricultural products were a primary driver of this increase. In response to rising food costs, the government announced plans to release rice from its reserves in an effort to stabilize prices. This move was unprecedented outside of emergency situations and reflected growing concerns over food price inflation. The central bank acknowledged that persistent inflation in food prices could shape broader inflation expectations among consumers.

Chinese stock markets posted gains, buoyed by hopes that U.S. trade tariffs on Chinese imports might not be as severe as previously feared. The benchmark indexes in mainland China and Hong Kong all rose, with the latter seeing a particularly strong rally led by technology stocks. Investors showed renewed enthusiasm for artificial intelligence-related companies, which helped lift sentiment.

On the economic front, China's consumer price index increased at a faster rate than in the previous month, driven in part by a surge in spending ahead of the Lunar New Year holiday. However, factory prices remained in deflationary territory, marking the 28th consecutive month of declining producer prices. The prolonged slump in the housing sector continued to weigh on consumer spending, despite ongoing government efforts to stimulate demand.

In corporate news, credit rating agency Moody's downgraded the debt rating of a major Chinese real estate developer, signaling growing concerns about financial stability in the sector. Reports indicated that the Chinese government was working on measures to provide financial support to the company, though full-scale bailouts remained unlikely.

Elsewhere, in the Philippines, the central bank opted to keep interest rates unchanged in light of global economic uncertainties. While domestic growth prospects remained firm, policymakers noted that external risks had increased, prompting a wait-and-see approach to monetary policy adjustments.

In Hungary, inflation data came in significantly higher than expected, with strong increases in food and services costs. The surprise jump in inflation reduced the likelihood of near-term interest rate cuts, as central bank officials reassessed the path of monetary policy.

Looking ahead, investors will closely monitor key economic indicators scheduled for release in the coming week. In the United States, data on jobless claims, consumer sentiment, housing market activity, and manufacturing trends will be in focus. Internationally, inflation reports from the UK, Sweden, and Canada, as well as economic sentiment surveys in Germany and employment data from Japan, will provide additional insights into global economic conditions. 

Checklist for the next week

Major economic events in the US include: 

Initial Jobless Claims; Umich Sentiment; MBA Mortgage Applications; Housing Starts; S&P Global US Manufacturing PMI

Major economic events around the world include: 

UK CPI YoY; Germany ZEW Survey Expectations; Sweden CPI; Canada CPI; UK Jobless Claims Change; Japan Core Machine Orders