Week ending 21st February 2025.

This week in financial markets, key economic indicators and central bank minutes provided mixed signals, contributing to a cautious tone for global markets.

US stocks ended the holiday-shortened week lower after an early rally lost momentum. With markets closed on Monday for Presidents’ Day, equities rose on Tuesday and Wednesday, pushing the S&P 500 to record highs. However, losses later in the week erased those gains, dragging major indexes into negative territory.

The Federal Reserve’s January meeting minutes offered no major surprises for markets. Policymakers noted a resilient economy but emphasised that progress on inflation is needed before rate cuts can be considered. Despite a strong labour market, high inflation keeps policy tight. The Federal Open Market Committee (FOMC) also highlighted that the risk of rising inflation outweighs concerns about slowing growth, citing potential cost increases from Trump-era tariffs and immigration restrictions. This suggests that the Fed will continue prioritising inflation control.

Geopolitical developments and trade policy remained key themes this week. President Trump’s push to resolve the Russia-Ukraine conflict made headlines, while his announcement of potential tariffs on automobiles, pharmaceuticals, and lumber added further uncertainty. Although details were limited, the prospect of new trade barriers dampened investor sentiment. However, as seen with previous tariff proposals, there is still room for negotiations or possible concessions from certain countries.

Later in the week, the market faced pressure amid concerns over consumer spending causing major US indices to pull back from near record highs and close the week in negative territory. Walmart’s quarterly earnings report, released on Thursday, exceeded expectations, though its cautious outlook for the year ahead tempered investor sentiment. US business activity showed signs of slowing in February, Composite Purchasing Managers’ Index (PMI) falling to 50.4, its lowest level in 17 months. While the PMI suggests near stagnation, it still indicates modest growth. The services sector dipped into contractionary territory, but manufacturing remained strong. Rising input costs and policy uncertainties were identified as key factors influencing the data, contributing to market jitters towards the end of the week.

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UK retail sales rebounded in January, rising 1.7%, surpassing expectations. While food stores saw a strong 5.6% increase, sectors like household goods, clothing, and automotive fuel experienced declines, highlighting uneven growth.

UK manufacturing continued to struggle, with the PMI dipping further into contraction due to weaker domestic and overseas sales. The services sector showed some promise, rising to 51.5, indicating modest expansion. However, new business declined as firms faced budget cuts and inflationary pressures, amid payroll tax hikes and higher labour costs. The Bank of England’s recent decision to lower interest rates by 0.25 percentage points for the third time since August reflects its concern over weak growth, but the central bank remains cautious about further cuts, preferring to wait for more clarity on inflation trends.

Asian markets saw positive momentum, with Hong Kong’s Hang Seng Index climbing 2.98% to its highest level since February 2022, driven by strong investor sentiment. A key catalyst was better-than-expected earnings from tech companies, particularly Alibaba, whose shares surged 12.9% after reporting a significant profit increase for the December quarter. Sentiment was further boosted by a high-profile meeting between President Xi and leading tech entrepreneurs, alongside a more supportive government stance towards the private sector.

European markets had a relatively strong week, driven by cautious optimism as investors monitored US trade policy developments and efforts to resolve the Russia-Ukraine conflict. Major stock indexes showed mixed results, with Germany’s DAX dropping 1.00% ahead of Sunday’s federal election. Germany’s conservative Christian Democrats (CDU) and the Christian Social Union (CSU) emerged victorious in the country’s federal elections. Meanwhile, the far-right Alternative for Germany (AfD) achieved its best-ever result, and Chancellor Olaf Scholz’s party suffered a significant defeat.

Looking ahead, this week will feature US durable goods orders and the core PCE, the Federal Reserve’s preferred measure of inflation, as well as Eurozone economic sentiment and Japanese industrial production and retail sales.

Kate Mimnagh, Portfolio Economist