Global Markets Weekly Wrap KW 9 : Global Markets React to Inflation, Trade Policies, and Rate Cuts

Global Markets Weekly Wrap KW 9 : Global Markets React to Inflation, Trade Policies, and Rate Cuts 

The performance of U.S. stock markets was under pressure as concerns over government policies and economic growth led to declines in most indexes for the second consecutive week. However, the Dow Jones Industrial Average managed to rise by 0.95%, continuing its stronger performance relative to other major indexes. Growth-oriented stocks struggled significantly, and the Nasdaq Composite saw its sharpest weekly drop since early September. The decline was primarily driven by losses in the technology sector, particularly among the leading tech giants known as the "Magnificent Seven." Investors were uncertain about regulatory developments, and worries grew that the artificial intelligence-driven surge of recent years might be losing momentum. Shares of NVIDIA, a major player in the AI and semiconductor space, tumbled 8.48% on Thursday after delivering its highly anticipated earnings report. The market was also weighed down by ongoing fears over trade policies, as President Donald Trump reiterated his plans to introduce new tariffs on several trading partners, set to take effect by March 4.

Inflation remained a key concern, affecting consumer sentiment and financial decisions. The week's most notable economic update came from the Labor Department, which released its core personal consumption expenditures (PCE) price index on Friday morning. This index, a favored measure of inflation for the Federal Reserve, showed that prices increased by 0.3% in January, aligning with expectations. On a year-over-year basis, the price rise stood at 2.6%, lower than the 2.9% recorded in December but still above the central bank's long-term target of 2%. Additionally, while personal incomes saw a notable increase of 0.9% in January, consumer spending showed a contraction, indicating that individuals may be exercising caution in response to ongoing inflation and economic uncertainty.

In a related development, The Conference Board released its Consumer Confidence Index for February on Tuesday, revealing a significant decline. The index dropped seven points to a reading of 98.3, marking the most substantial monthly drop since August 2021. A particularly concerning aspect of the report was the expectations component, which measures short-term consumer outlook on income, business conditions, and employment. This metric fell below 80 for the first time since June 2024, a level often associated with an increased likelihood of an economic recession. Additionally, inflation expectations among consumers for the next 12 months rose sharply from 5.2% to 6%, reinforcing concerns about the economic outlook. The disappointing data added to broader worries about economic growth, following a series of recent reports that came in below market expectations.

Meanwhile, the Commerce Department reported that the U.S. economy expanded at an annualized rate of 2.3% in the final quarter of 2024. This growth was driven primarily by resilient consumer spending, which advanced by 4.2% over the period. These figures remained unchanged from earlier estimates. Over the full year, the nation's gross domestic product (GDP) grew by 2.8%. However, labor market data presented a mixed picture. The Labor Department reported on Thursday that initial applications for unemployment benefits rose by 22,000 to 242,000 for the week ending February 22, reaching the highest level since October. Additionally, the four-week moving average, which smooths out volatility, increased by 8,500 to 224,000. Continuing jobless claims, which represent the number of people receiving ongoing unemployment benefits, dropped by 5,000 to 1.86 million.

U.S. Treasury securities saw positive returns amid the week's generally weaker economic data. Treasury yields declined across most maturities through Thursday, with intermediate-term yields falling more than short- and long-term yields. Since bond prices and yields move inversely, the decline in yields reflected higher demand for Treasuries. Municipal bonds also recorded positive returns but underperformed relative to Treasuries. Traders noted that the supply of newly issued municipal bonds was well received by investors and largely oversubscribed.

In Europe, stock markets showed resilience in the face of uncertainty over U.S. trade policy. The pan-European STOXX Europe 600 Index edged 0.60% higher, marking its longest streak of weekly gains since August 2012. Strong corporate earnings and gains in defense stocks helped sustain the momentum. However, individual country performances were mixed. Germany's DAX advanced by 1.18%, and Italy's FTSE MIB gained 0.61%. In contrast, France's CAC 40 slipped 0.53%, while the UK's FTSE 100 registered a strong gain of 1.74%.

Inflation data across major European economies presented a mixed picture. In Germany, inflation remained steady at 2.8%, slightly above the consensus forecast of 2.7%. Italy's inflation rate held at 1.7%, falling short of expectations. France, on the other hand, saw a significant decline in inflation, reaching a four-year low of 0.9% from the previous 1.8%. Meanwhile, final GDP estimates confirmed that Germany's economy contracted by 0.2% in the last quarter of 2024, while France's economy shrank by 0.1%.

Minutes from the European Central Bank's January meeting suggested that policymakers remained confident that inflation was moving toward the 2% target. However, some members expressed concerns about potential upside risks to inflation and argued for a more cautious approach regarding the pace and extent of future interest rate reductions. A survey indicated that consumer inflation expectations for the short and medium term had eased, suggesting that inflation expectations remain well anchored.

Political developments in Germany saw the conservative alliance of the Christian Democratic Union (CDU) and Christian Social Union (CSU), led by Friedrich Merz, secure a victory in the national election with 28.52% of the vote. However, they fell short of an outright majority. The far-right Alternative for Germany (AfD) came in second with 20.8%. The CDU/CSU bloc has initiated discussions with the defeated Social Democratic Party regarding the potential formation of a coalition government.

In Japan, stock markets faced declines, with the Nikkei 225 Index falling 4.18% and the broader TOPIX Index dropping 1.99%. The technology sector, particularly AI-related and semiconductor stocks, led the declines following a broader sell-off in U.S. tech stocks. Additionally, concerns grew over the impact of potential U.S. tariff increases, including an additional 10% duty on Chinese imports, on Japan's economic prospects and the central bank's monetary policy direction.

Bank of Japan Governor Kazuo Ueda emphasized the uncertainty surrounding the impact of U.S. tariffs on the global economic outlook. The central bank will closely assess the implications of these policies for Japan's economy before making any decisions on monetary policy. Ueda also reaffirmed the Bank of Japan's readiness to increase its purchases of Japanese government bonds if necessary to counter any abrupt yield increases. The yield on the 10-year Japanese government bond fell to 1.37% from 1.43% in the previous week, influenced by softer inflation data. The core consumer price index for the Tokyo area, a leading indicator of nationwide trends, rose by 2.2% in February, lower than expectations of 2.3% and down from January's 2.5%. The slowdown was largely attributed to the government reinstating subsidies to mitigate energy costs.

The Japanese yen weakened against the U.S. dollar during the week, trading at the lower end of the JPY 150 range. However, for the month of February, the yen recorded significant gains, supported by market expectations that the Bank of Japan will raise interest rates again in 2025. Although the central bank is maintaining a tightening stance due to high inflation and robust wage growth, it remains cautious about its next policy moves.

In China, stock markets declined as tensions with the U.S. escalated. The CSI 300 Index, which tracks the largest stocks on mainland exchanges, fell 2.22%, while the Shanghai Composite lost 1.72%. The downward trend intensified after President Trump announced additional tariffs on Chinese imports, effective March 4. In response, China vowed to take countermeasures to protect its interests. The latest trade actions came shortly after the U.S. administration instructed the Committee on Foreign Investment to limit Chinese investments in key sectors like technology and energy.

Investors are now focusing on China's annual Two Sessions political meetings, where the government will outline economic goals for the coming year. Analysts expect the country to maintain a GDP growth target of approximately 5% and announce a record-high fiscal deficit ratio of 4% of GDP. The meetings, scheduled to begin on March 4 and 5, are likely to provide further insights into China's economic policy direction. 

Checklist for the Next Two Weeks

Major economic events in the US include: 

Change in Nonfarm Payrolls; Initial Jobless Claims; ISM Manufacturing; ADP Employment Change; S&P Global Manufacturing PMI; MBA Mortgage Applications; Unemployment Rate

Major economic events around the world include: 

European Central Bank Rate Decision; Japan Jobless Rate; HCOB France Manufacturing PMI; Hong Kong Retail Sales; DNB and Swedbank PMI Manufacturing; Netherlands CPI