Weekly Market Pulse - Week ending January 31, 2025

Market developments

Equities: Earlier in the week, markets were shaken by news that a Chinese AI startup, DeepSeek, had developed a low-cost artificial intelligence model, raising fears about inflated valuations in the booming AI sector. However, investors regained confidence after major tech firms, including Apple and Meta, delivered reassuring earnings. Nvidia’s CEO met with Trump, fueling speculation about AI policy and trade relations. U.S. stock markets closed lower even as we saw strong earnings forecasts from tech giants.

Fixed Income: The Federal Reserve maintain interest rates steady between 4.25% and 4.5% in this week’s meeting, while the ECB and Bank of Canada both cut rates by 25bps, as expected. Investors found relief in the Federal Reserve’s preferred inflation measure aligning with expectations, despite inflation remaining above the 2% target. Overall, yields were lower this week, pushing bond prices higher.

Commodities: Gold prices hit new highs on Friday. The surge came after Trump said he would follow through on imposing 25% levies on imports from Canada and Mexico on Feb. 1. He also threatened China with tariffs, without specifying a level.

Performance (price return)

Source: Bloomberg, as of January 31, 2025

Macro developments

Canada – Bank of Canada Cuts Rates Amid Economic Concerns, Economy Faces Setbacks Amid Strikes and Tariff Risks

The Bank of Canada reduced its key interest rate by 25bps to 3% in January, marking a total of 200bps in cuts since June 2024. The central bank also ended quantitative tightening and will resume asset purchases in March to support liquidity. Inflation aligned with the 2% target, but concerns persisted over potential economic disruptions from U.S. tariffs. Despite challenges, the BoC expects GDP growth to strengthen, projecting 1.8% growth over the next two years.

GDP unexpectedly declined by 0.2% in November, with only a moderate rebound in December, resulting in lower than expected 1.6% annualized growth. The contraction was partly due to strikes in the transportation sector and declining output in oil sands and retail. However, arts and entertainment saw gains, likely boosted by Taylor Swift concerts in Toronto. Future growth remains uncertain, especially if the U.S. imposes a 25% tariff on Canadian imports.

U.S. – Federal Reserve Holds Rates Steady Amid Inflation Uncertainty, Growth Slows in Q4, Driven by Consumer Spending, Inflation Inches Up as Energy Prices Rise

The Federal Reserve maintained its fed funds rate at 4.25%-4.5% in January 2025 after three rate cuts in 2024. Chair Powell emphasized a cautious approach, waiting for more inflationary progress before further reductions. The economy continues to expand, unemployment remains low, and inflation is still somewhat elevated. The Fed acknowledged economic uncertainties and remains vigilant in balancing growth and price stability.

The U.S. economy grew by 2.3% annualized in Q4 2024, the slowest in three quarters, missing expectations of 2.6%. Personal consumption remained strong, with goods and services spending increasing, but fixed investment contracted. Private inventories and net trade made minimal contributions, while government spending slowed. For the full year, GDP expanded by 2.8%.

PCE price index rose by 0.3% in December, marking the highest monthly increase in eight months. Core PCE inflation remained stable at 2.8% year-over-year, aligning with forecasts. While food prices saw modest increases, energy costs surged 2.7%, driving inflation higher for the third consecutive month.

International – Eurozone Growth Stalls as Major Economies Contract, ECB Cuts Rates Amid Easing Inflation, Eurozone Unemployment Ticks Up Slightly, China’s Manufacturing Sector Contracts Amid New Year Slowdown

The Eurozone economy stagnated in Q4 2024, marking its weakest performance of the year. Germany and France saw unexpected GDP contractions, while Italy and Austria showed no growth. In contrast, Spain, Portugal, and Lithuania posted robust gains. Year-on-year, the Eurozone grew 0.9%, with full-year expansion reaching 0.7%, surpassing 2023’s 0.4% growth.

The European Central Bank reduced its key interest rates by 25bps in January 2025, lowering the deposit facility rate to 2.75%. The decision reflects easing inflation pressures, although domestic inflation remains elevated due to wage and price adjustments. The ECB remains cautious, emphasizing data-driven decision-making rather than a fixed rate-cutting path.

The Eurozone Composite PMI rose to 50.2 in January, marking its first expansion since August. Growth in services offset manufacturing contraction, led by Germany. New orders fell for the eighth month, though at a slower pace. Rising input costs boosted output inflation to a five-month high.

The Eurozone unemployment rate rose to 6.3% in December 2024 from a record low of 6.2% in November. The number of unemployed increased to 10.83 million, with Spain maintaining the highest jobless rate at 10.6%, while Germany had the lowest at 3.4%. Youth unemployment slightly declined to 14.8%.

China’s official Manufacturing PMI dropped to 49.1 in January 2025, signaling the first contraction since September and the steepest decline in five months. Output and new orders shrank, reflecting weak factory activity ahead of the Lunar New Year. Despite lower foreign orders and employment struggles, business confidence improved to a ten-month high.

Quick look ahead

P = Preliminary