Macro
The Federal Open Market Committee (FOMC) maintained the federal funds rate between 4.25% and 4.5%, noting that inflation continues to be “somewhat elevated”. The Federal Reserve’s statement was somewhat hawkish, revealing cautious optimism about achieving inflation and employment targets.
Interestingly, J. Powell omitted previous language indicating progress toward the 2% target. By removing the positive remark about inflation progress while emphasizing solid employment, investors interpreted this change as a signal that the committee might be less confident about achieving its inflation target. Some market participants have linked this sentiment, in part, to concerns over the potential inflationary impact of President Trump’s tariff policies. J. Powell clarified that this omission was merely a stylistic choice and should not be interpreted as any change in policy.
Powell further noted that inflation has been following a slow but steady decline, citing improvements in the labor and housing markets that have already contributed to stronger stock prices. Recent data indicate that while both goods and services prices are easing, the housing component continues to lag. Encouragingly, lower rents—as seen in online listing indicators—are expected to eventually help pull the overall inflation rate down. Despite a modest rise in breakeven rates, market sentiment remains upbeat, December’s core PCE data aligned with forecasts and personal consumption exceeded expectations, while Q4 GDP came in slightly below projections. This cooling trend has fueled expectations of two rate cuts later in the year—one in June and another in September—while the Fed adopts a cautious “wait-and-see” approach until its March meeting, closely monitoring incoming economic data.
President Trump has initiated several assertive executive actions that have disrupted traditional policymaking. This audacious exercise of authority is reshaping political norms, as the administration’s actions are already triggering legal challenges that may eventually escalate to the Supreme Court. Furthermore, internal divisions have surfaced between those advocating a technocratic, market-driven agenda and more nationalist voices.
The new administration wishes to employ tariffs as a revenue tool and a strategic measure to revive domestic manufacturing. However, the prospect of imposing steep tariffs on key trading partners—such as a blanket 25% levy on imports from Canada and Mexico or even punitive rates of up to 60% on Chinese goods—has ignited concerns about potential economic repercussions. Many US manufacturers with facilities in neighbouring Canada and Mexico fear that sudden tariff increases could disrupt production networks and drive up costs.
Trade accounts for only 10% of the US GDP; China, Canada, and Mexico represent 45% of that. Therefore, ifif the planned tariffs were imposed, they would likely cause only a one-time inflation increase of 0.9%. However, these tariffs could still disrupt supply chains and affect the sourcing of goods. Aggressive tariffs will provoke retaliatory policies that could destabilise global trade relationships.
Economists agree that tariffs represent the most damaging aspect of Trump’s economic agenda, while his other proposals are largely seen as beneficial for the U.S. economy. So far, the market has reacted positively, and risk assets have enjoyed the strongest start of any presidency since Ronald Reagan was inaugurated in 1985.
Rates
Interest rates are now 10 basis points lower than they were just before the election. The 10‐year yield currently sits at 4.52%, down from a recent high of 4.80%. Given that short-term GDP data has been negative, rates are unlikely to exceed the 4.8% level reached a few weeks ago, even as the economy remains resilient amid sticky inflation.
The yield curve has flattened as progress in reducing inflation has slowed. This flattening reflects weaker-than-expected short-term GDP data and the influence of external factors, such as tariffs imposed by the current administration on major trading partners, including China, Canada, and Mexico, which are anticipated to exert upward pressure on inflation. These external shocks may still keep yields elevated and will continue to restrain further rate cuts. It is possible to see 10Y trading within a range of 4.25% to 5%.
In the current landscape, treasury yields appear attractive compared to equity earnings yields and the very tight credit spreads available in the credit market. This relative attractiveness makes U.S. Treasuries a compelling asset; however, the primary risk factor remains inflation. With tariffs adding uncertainty to the mix, more conservative investors might consider a tilt towards inflation-protected instruments (such as TIPS).
Credit
The US credit market has demonstrated robust issuance and impressive stability amidst macroeconomic uncertainty. US investment-grade issuance in January reached USD 186 billion, exceeding forecasts and closely tracking last January’s level of USD 189 billion. Leveraged loans enjoyed an even stronger January, setting a new record with USD 202 billion raised.
This year, we anticipate a large redemption tower, as the refinancing calendar is projected to be busy. Many companies are facing significant redemptions and frontloading their maturity stacks. Demand is also increasing from firms seeking to fund higher capital expenditures, particularly in the energy and infrastructure sectors. Furthermore, analysts predict a rise in M&A activity, which should further stimulate debt issuance. This combination of refinancing needs and proactive funding for CAPEX is expected to result in substantial issuance this year.
Credit investors are benefiting from a credit market that has largely ignored the turbulence seen in equities. Despite a recent loss of approximately USD 0.6 trillion in equity market value, the credit market has remained remarkably stable. IG credit spreads widened by only 2 basis points, whereas HY spreads increased by 13 basis points—levels that reflect the lowest spread volatility observed since 2023. Elevated interest rates have anchored demand, maintaining spreads within a narrow range and ensuring that most of the changes in corporate yields are driven by shifts in treasury yields.
In fact, roughly 85% of corporate yield is now attributed to treasury yields, with credit spreads contributing a mere 15%. This ratio represents a multi-decade tightness, forcing investors who seek additional returns from spreads to move further down the capital stack into lower-quality credits. A strong investor appetite is evident, as even lower-quality issues are oversubscribed.
Given that dynamics in the treasury market heavily influence credit yields, the broader macroeconomic environment remains the primary driver of credit market performance. With most of the yield compression stemming from treasury rates, any shifts in macro conditions—particularly changes in inflation expectations—are likely to be swiftly reflected in the credit market. While current spreads are tight and stable, this “priced-to-perfection” environment suggests that the limited upside can expose the market to idiosyncratic risks and deviations from historical correlation patterns.
Equities
US equities ended the week on a down note, with the tech-centric Nasdaq trailing the broader S&P 500. The equal-weight S&P 500 managed a smaller decline of about 0.5%, outpacing its cap-weighted counterpart by roughly 50 basis points thanks to rotations into more defensive and cyclical stocks.
Sector performance was notably varied. Communication Services led with a 2.67% increase, while Consumer Staples and Healthcare followed with gains of 1.92% and 1.74%, respectively. Financials and Consumer Discretionary recorded moderate increases of 1.22% and 0.83%, with Materials and Real Estate contributing slight upticks of 0.22% and 0.32%. Conversely, the technology sector dropped sharply by 4.55%, and Energy, Utilities, and Industrials also recorded declines of 3.79%, 2.05%, and 1.91%, respectively. Notable underperformers included semiconductors, software, and auto suppliers, while tech giants showed mixed results: Nvidia and Microsoft saw steep declines, whereas Apple and Meta posted solid gains.
Investor sentiment was significantly shaped by developments in artificial intelligence alongside persistent policy uncertainty. Early in the week, concerns over the Chinese LLM DeepSeek prompted a sharp sell-off on the Nasdaq, particularly affecting chipmakers amid fears that future AI might require lower capital expenditures. However, major US tech firms such as Google, Microsoft, and Meta swiftly reaffirmed their strong AI investment plans, supported by encouraging remarks from companies like ASML, which assisted many impacted stocks in recovering their losses. Analysts at Goldman Sachs downplayed the risks, suggesting that the DeepSeek episode could even facilitate broader AI adoption and alleviate regulatory challenges, noting that AI-related capital spending constitutes only a small fraction of the overall economy.
A turbulent week in tech trading set the stage for broader market reflection. Nvidia’s recent troubles triggered the second-highest late-night trading session on Robinhood—only surpassed by the volume observed on the night of the US presidential election in November. This event contributed to a tech-led selloff that, according to Goldman Sachs strategists, was simply a temporary blip against an otherwise positive economic outlook. They pointed out that recession fears are unlikely, diminishing the chances of a bear market caused by declining profits.
Investors are now scrutinising substantial AI spending by companies as the upcoming earnings season approaches. Some experts believe that recent developments, including the DeepSeek incident, could temper the exuberance in valuations within sectors like data centres and power-driven industries, potentially prompting a rotation towards value stocks. This transition takes place as market participants weigh the benefits of reallocating from an overly exposed tech sector while still capitalising on the resilient momentum of the US economy.
Amidst the volatility, concerns regarding the S&P 500’s significant reliance on technology persisted. Apollo’s Torsten Slok highlighted that despite the recent correction—illustrated by DeepSeek’s influence—the index’s concentration in technology continues to present a substantial risk. In fact, data reveals that fewer than one-third of the S&P 500’s constituents have outperformed the broader index over the past two years, emphasising an ongoing imbalance.
Big tech earnings were a focal point this week:
- Netflix delivered a strong showing, rising nearly 10% by exceeding all key metrics—including setting a record with almost 19 million new paid subscribers—and even raised its outlook for 2025 despite facing headwinds from a strong dollar.
- Meta stood out with a nearly 18% increase, driven largely by positive developments in its AI-related product strategies and future capex plans.
- Tesla had modest gain of 0.2%, although its performance was hampered by weaker-than-expected gross margins. Despite this, it forecasted a rebound in FY25 revenues, buoyed by optimism surrounding its Full Self-Driving technology and the introduction of new models. Meanwhile, Tesla shares surged past new intraday highs following Elon Musk’s bullish—albeit self-admittedly “insane”—revenue forecasts.
- Apple Apple’s stock fell by 5.7% despite the company exceeding Q1 expectations. This performance was driven by strong growth in its Services segment and improvements in margins. However, uncertainty remains over sales in key areas such as iPhones and wearables, as well as ongoing concerns about its operations in China and the prospects for its future AI initiatives. Apple’s search for an AI partner in China hints at strategic moves that could eventually involve DeepSeek technology, even though its current suite of multi-modal memory, specialized intelligence, and physical sensors is not yet ready for applications like robotics or autonomous driving.
- Microsoft lagged with a 6.5% drop, as growth in its Azure cloud services continued to slow, but upbeat signals from its AI efforts provided some relief.
Other key corporate updates presented mixed outcomes: companies in the AI sector, such as Lam Research and IBM, reported varied results; payment giants like Visa and Mastercard, along with cruise operator Royal Caribbean, demonstrated consumer strength. Thus far this earnings season, most S&P 500 companies have surpassed expectations, with approximately 77% posting better-than-expected earnings per share and 63% exceeding revenue forecasts.
The forward multiple for the S&P 500 is currently 22x, but ex-Mag 7, it’s 19, which is not concerning. The question is whether Mag 7 can sustain its multiples. Following the DeepSeek release, its extraordinary profit margins will be scrutinised. However, as strong as the AI trend is, it will take more than a few setbacks to halt it. Lower prices benefit users and the economy, but they do not favour companies that already hold a strong position in AI. Overall, while short-term jitters in the tech sector have rattled investors, many perceive these disruptions as temporary corrections. With solid economic fundamentals and cautiously optimistic views on tech earnings, the market seems prepared to navigate these turbulent waters in the near future.
Next week, the market will be closely watching the January payroll report. Other important data releases include the ISM Manufacturing, the Fed’s Senior Loan Officer Opinion Survey, JOLTS job openings, ADP Private Payrolls, ISM Services, Michigan Consumer Sentiment, as well as Treasury borrowing estimates and a refunding announcement.