Macro
This week was marked by high-profile events, including pivotal elections in Germany, Powell’s congressional testimony, and Trump’s tariffs, which further contributed to the overall sense of uncertainty in global markets.
Recent U.S. retail sales data pushed Treasury yields lower, though the broader outlook remains uncertain amid persistently sticky inflation. Historically, the Federal Reserve pauses when economic indicators are murky, and current conditions suggest a similar approach.
Although January’s inflation data may not indicate a new trend, markets now expect that rate cuts will be unlikely in the near term. In his testimony before the Senate Banking Committee following the CPI release, Fed Chair Jerome Powell acknowledged progress in combating inflation but stressed that the target was not yet met. He emphasized that, despite the economy being in a “pretty good place,” further progress is needed, and there is no urgency to cut rates now. This reinforces expectations that rates will remain unchanged at the upcoming March OMC meeting unless significant economic weakness or market stress emerges.
The “last mile” of inflation remains a significant challenge for policymakers. While headline inflation has begun to decline, it has stubbornly lingered between 2.5% and 3% for an extended period. Declines in durable goods prices primarily drove the initial post-COVID disinflation, yet other components—especially in the services sector—have proven resistant.
One encouraging sign has been the decline in shelter inflation. However, the persistent strength of the U.S. labour market continues to support high service-sector inflation. Without a meaningful drop in services inflation, breaking below the current range and reaching the Fed’s 2% target will be difficult.
The upcoming Personal Consumption Expenditures (PCE) data will be crucial. For instance, if month-over-month PCE inflation comes in at 0.29%, this would imply a year-over-year CPI inflation rate of 2.59% and, on a Freeman annualized basis, 2.29% YoY—a notable improvement from December’s 2.81% YoY. Nonetheless, until services inflation eases further, the Fed is likely to remain cautious and keep rates on hold longer than markets had anticipated.
Complicating the inflation picture are continued pressures in core CPI. A 0.4% jump in shelter costs—accounting for nearly 30% of the overall monthly increase—has contributed to the stickiness in core inflation. Additionally, rising prices in airline fares, food, car insurance, and energy, along with a two-year high in core goods, have pushed market expectations for rate cuts to the latter half of the year. As a result, analysts are now forecasting only one to two rate cuts for 2023.
Moreover, mixed signals from retail sales data—with January figures falling well below expectations while December’s numbers were revised upward—and resilient labour market data add further complexity to the current economic landscape.
Tariffs are expected to exert upward pressure on prices through a one-time shock while creating long-term economic uncertainty that could slow growth, which compounds over time. The Congressional Budget Office estimates that tariffs imposed between 2018 and 2020 reduced real GDP by about 0.5% in 2020 due to supply chain disruptions and increased business costs. As a result, the Federal Reserve is likely to focus more on the broader growth implications of tariffs rather than their temporary inflationary impact.
On the international stage, tariffs remain a central tool of economic policy, though their precise purpose remains ambiguous, whether as an end in itself or a bargaining tool. For instance, a proposed 25% tariff on imports from Canada and Mexico was postponed until March, contingent on stronger border controls, while a 10% supplemental tariff on Chinese imports continues, provoking selective retaliation from Beijing.
Additionally, a 25% tariff on all steel and aluminium imports will take effect on March 12, affecting not only Canada and Mexico but also nations like South Korea and Vietnam, with little indication of negotiation.
Domestically, the Trump administration is reshaping federal power by consolidating executive authority at the expense of Congress and the judiciary. Controversial appointments, such as assigning tech magnate Elon Musk to a role in an ambiguously defined department and placing figures like Pam Bondi in key positions at the Justice Department, have alarmed traditional political factions. Moreover, young tech professionals are now embedded in around 15 federal agencies to cut costs and introduce automation, signalling a significant overhaul of established bureaucratic structures.
Recent developments underscore a world in flux, where military strategy, geopolitical negotiations, and economic uncertainty intersect. Amid this turbulence, the technology sector faces its own challenges. A high-profile AI summit in Paris sparked intense debates over the future of artificial intelligence, with figures like Elon Musk and Sam Altman finding themselves at odds over the control and direction of AI enterprises. This conflict highlights the strategic rivalry between the United States and Europe over technological innovation and regulation. Meanwhile, central banks in China and Australia are set to announce monetary policy decisions, and upcoming European elections and economic data releases are expected to shape the global outlook further.
Rates
Despite persistent political uncertainty, yields have shown little volatility. U.S. Treasury yields experienced only a marginal decline over the past week. The 10-year yield eased slightly from 4.50% to 4.48%, even though it briefly spiked to 4.64% on Wednesday. In contrast, the 30-year yield edged up from 4.69% to 4.70%, indicating limited movement in long-duration bonds.
Government bond yields continued to decline this week, signalling growing investor confidence in central banks’ ability to engineer a soft landing. Recent auctions across major economies recorded lower borrowing costs, reinforcing expectations of easing financial conditions. For instance:
- United States: The U.S. Treasury issued 10-year bonds at an average yield of 4.63%, down from 4.68% in the previous auction.
- Germany: The German government secured five-year funding at 2.1%, a sharp decline from 2.42%, while its 30-year bond yield fell to 2.65% from 2.84%.
- Canada: The yield on five-year Canadian government bonds dropped to 2.85%, down from 3.23% previously.
- Italy: The Italian Treasury paid 3.18% for seven-year bonds, lower than the 3.49% recorded at the last auction.
Japan remains a clear outlier, with bond yields rising as the Bank of Japan gradually unwinds its ultra-loose monetary policy in its ongoing normalization efforts. This week, the BoJ offered five-year Japanese Government Bonds (JGBs) at a yield of 0.982%, up from 0.876% in the previous issuance.
If inflation would remain sticky, some predict that the 10-year yield could climb above 5% later this year. Notably, when CPI data came in hotter than expected on Wednesday, the 10-year yield surged to a weekly peak of 4.65%. Over the following two days, it fell by 20 basis points to close the week near 4.45%.
Meanwhile, as Treasury yields firmed alongside a steepening yield curve, the Dollar Index slid by about 1.2%, even as the greenback strengthened against the yen. Gold edged higher by 0.5%, breaking past the $2,900 per ounce mark.
Credit
With range-bound yet volatile yields and exceptionally tight spreads, credit investors increasingly turn to private credit as a more attractive exposure. Private credit’s allure stems from its potential to deliver higher yields relative to traditional fixed-income instruments while offering diversification benefits. However, challenges such as liquidity constraints and increased market competition persist.
January saw record inflows into loan markets, driven by a surge in leveraged buyout transactions executed at remarkably narrow spreads, propelling the private credit market to an estimated size of approximately $1.6 trillion.
Opportunities remain robust in this sector, particularly as demand for debt financing intensifies in key areas such as energy, infrastructure, power utilities, and digital technology. In addition, the anticipated uptick in mergers and acquisitions, coupled with private equity funds raising historic levels, will require significant financing. This evolving landscape will likely shift private credit from traditional direct lending toward more complex deal-making. This creates opportunities for structured products in the private investment-grade space.
Convergence between private credit and broader private market dynamics is underway as several major players strive to transform private credit into a more dynamic and liquid asset class. Nevertheless, geopolitical uncertainties and unexpected inflationary pressures could trigger rising yields and exacerbate financial tightening, presenting ongoing challenges for market participants.
Equities
U.S. equity markets rebounded this week, erasing some of last week’s modest losses. Leading the recovery was the Nasdaq, propelled by strong Big Tech gains – Nvidia jumped 6.9% while Apple surged 7.5%. However, market breadth was a concern as the S&P equal‐weighted index lagged its market-cap-weighted counterpart by 1%.
The Technology sector outperformed with a robust gain of 3.76%, while Communication Services (+1.98%), Materials (+1.75%), Consumer Staples (+1.73%), Utilities (+1.05%), and Energy (+1.05%) also posted solid results. In contrast, Healthcare declined by 1.11%, and other sectors moved modestly, ranging from a slight dip in Financials (-0.08%) to a modest rise in Consumer Discretionary (+0.28%).
Investor sentiment was buoyed by a blend of encouraging signals amid lingering uncertainties. Enthusiasm for artificial intelligence continued to drive gains, highlighted by Apple’s AI collaboration with Alibaba and Dell’s discussions with xAI. Additional positive developments included T-Mobile’s upcoming satellite-to-cell service powered by SpaceX’s Starlink and Intel’s impressive 25.5% rally following upbeat remarks on U.S. policies favouring domestic AI development. Support also came from easing rate concerns, broader earnings growth, and increased hedge fund buying, while hints of a Ukraine ceasefire and evolving talks on reciprocal tariffs further lifted market confidence.
The earnings season delivered broadly upbeat results. As reported by Factset, 76% of S&P 500 companies beat EPS expectations, and 62% surpassed revenue estimates, pushing year-over-year earnings growth to 16.9% from 16.4% last week. This week’s highlights included:
- Tech & Digital: Intel surged 25.5% after VP Vance indicated that the White House is set to favour domestically built, high-powered AI systems using American materials and designs. Dell rose 7.5% as it nears a potential $5 billion agreement to supply AI servers to xAI. Meanwhile, Apple, up 7.5%, is teaming up with Alibaba (whose shares jumped 20.5%) to enhance AI functionality in iPhones for the Chinese market. Cisco climbed 4.2% on advancements in AI initiatives, Splunk partnerships, and new product offerings, while Shopify outperformed expectations with a 9.3% beat and an optimistic outlook. Lyft and Humana missed expectations by 5.2% and 7.5%, respectively. DoorDash, despite an 8.1% beat, and Zillow Group, facing a stricter housing outlook, offered subdued guidance.
- Consumer & Retail: McDonald’s delivered a 4.8% rise driven by strong guest counts, while Coca-Cola’s organic growth of 7.9% exceeded expectations by over 700 basis points.
- Healthcare & Industrials: Gilead’s 8.4% gain was supported by its robust HIV franchise, and CVS surged over 21% following a strong Q4.
From a sentiment perspective, the market displays an interesting dichotomy: most investors remain bullish, yet they are simultaneously anxious about U.S. market valuations. For example, the Buffett Indicator—the ratio of U.S. equity market cap to GDP—has surged to 200%. For context, this measure had reached only 130% during the tech bubble of 2000 and 100% ahead of the 2007 crisis. However, it’s important to note that U.S. companies have become increasingly global, deriving a larger portion of their revenues from foreign markets.
Buffett’s record cash holdings of $325 billion are primarily used to secure Berkshire Hathaway’s insurance operations, generating a substantial “float” from premiums awaiting claim payouts. Traditionally, Buffett has been quick to reinvest. However, with prices significantly stretched, he currently sees fewer attractive domestic investment opportunities, prompting him to diversify internationally by acquiring Japanese equities at more favourable valuations.
Furthermore, the S&P 500’s dividend yield has fallen to a historic low of 1.5%—the lowest since 1957—while its price-to-earnings ratio has climbed to 27x, well above its five-year average of 19x. These indicators collectively suggest that market valuations are stretched, reaching levels unsupported by underlying economic fundamentals and heightening the risk of a correction.