Weekly Market Recap

The UK labour market weakened in the three months through November, and pay growth slowed further. The International Labour Office unemployment rate stayed at a five-year high of 5.1%, with retail and hospitality bearing the brunt of job cuts, official numbers showed. Annual wage growth excluding bonuses declined to 4.5% from 4.6% in the prior period. YoY growth in private-sector pay, a measure monitored by the Bank of England (BoE), slowed to 3.6%—the lowest level since November 2020.

Retail sales volumes rose 0.4% sequentially in December, after falling in the previous two months. The increase came against a backdrop of an unexpected acceleration in inflation to 3.4% from 3.2% in November, driven by higher airfare and tobacco costs. However, the BoE has called for annual consumer price inflation to recede to its 2% target in April or May.

Preliminary composite PMI for the UK rose to a 21-month peak of 53.9, suggesting robust quarterly GDP growth.

Stocks traded sharply lower to start last week on Tuesday, with the S&P 500 Index posting its largest daily decline since October amid renewed fears of a global trade war after US President Donald Trump announced that he would impose new tariffs on European nations that opposed the US purchasing or otherwise taking control of Greenland.

However, major indexes reversed course on Wednesday after Trump appeared to soften his stance. In a social media post, Trump said that he and NATO Secretary General Mark Rutte had “formed the framework of a future deal with respect to Greenland” and that he would no longer “be imposing the Tariffs that were scheduled to go into effect on February 1st.” Stocks rallied on the news, ultimately finishing the week above their worst levels.

On the economic data front, an updated estimate from the Bureau of Economic Analysis (BEA) showed that the US economy grew at a faster-than-expected pace in the third quarter. The agency reported that real gross domestic product (GDP) increased at an annual rate of 4.4%, a tick higher than a previous estimate of 4.3% and ahead of the second quarter’s 3.8% pace. The upward revision was largely driven by higher exports and investment.

The BEA also released its November core personal consumption expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—which rose 0.2% from the prior month, in line with October’s reading. On a year-over-year (YoY) basis, the index rose 2.8%, remaining well ahead of the Fed’s long-term inflation target of 2%.

The week’s employment data suggested that layoffs remain relatively subdued despite some signs of softening in the US labour market. New applications for unemployment benefits for the week ended 17 January came in at 200,000, a slight increase from the previous week’s revised 199,000 and below estimates for around 207,000. The reading brought the four-week moving average down to 201,500, the lowest level in two years. Continuing unemployment claims came in at 1.849 million in the week ended 10 January, a decrease from the prior week’s downwardly revised 1.875 million.

Meanwhile, the University of Michigan released the final January reading of its Index of Consumer Sentiment on Friday morning. The index reading came in at 56.4 for the month, up from 52.9 in December. However, the report also noted that January’s reading is over 20% lower YoY, “as consumers continue to report pressures on their purchasing power stemming from high prices and the prospect of weakening labour markets.”

Elsewhere, S&P Global reported that US business activity growth inched higher in January, according to its Flash US Composite Purchasing Managers’ Index (PMI). An acceleration in manufacturing growth outpaced that of the services sector, and businesses’ confidence in the year ahead “remained positive but dipped slightly,” as “ongoing worries over the political environment and higher prices” offset optimism about economic growth prospects and demand conditions.

Business activity in the eurozone expanded modestly in January thanks to an increase in new orders, according to surveys of purchasing managers by S&P Global. A provisional estimate of the HCOB Flash Eurozone Composite PMI Output Index was unchanged at 51.5 (a reading above 50 signals expansion.) Optimism in the business outlook hit a 20-month high.

The European Union’s (EU’s) trade deal with Mercosur, the South American trading bloc, faces a potentially lengthy delay. The European Parliament voted by a slender majority in favour of a resolution to seek an opinion from the Court of Justice of the European Union on whether the texts of the agreement comply with EU treaties.

In Norway, Norges Bank kept its policy rate at 4.0%, as expected, repeating its guidance for rate cuts “in the course of the year.”

China’s economy grew 4.5% in the fourth quarter YoY and expanded 5% in 2025, the country’s statistics bureau reported Monday. The fourth quarter marked the slowest growth pace since China reopened after pandemic lockdowns in late 2022, and 2025 marked the third straight year that the country met its official growth target of around 5%. Nominal economic growth, which is unadjusted for price changes, reached 4% in 2025, the slowest pace since 1976, excluding 2020, when the pandemic began.

Other indicators showed that domestic demand remains weak. Industrial production rose 5.2% in December, slightly above estimates and the fastest pace in three months. But fixed asset investment shrank 3.8% in 2025, marking the first annual decline in the data dating back nearly three decades. Retail sales, a key barometer of consumer demand, edged up 0.9% in December, lagging estimates and marking the weakest pace since the pandemic reopening.

China’s industrial sector powered the country's economy in 2025 amid solid demand for its exports, but many analysts believe sustaining the current pace of growth will be difficult amid surging worldwide protectionism. The first quarter of 2026 may be particularly challenging due to comparisons with the year-ago period, when China recorded strong growth as consumer subsidies bolstered spending and exports surged amid front-loading by trade partners.

Prime Minister Sanae Takaichi’s announcement on Monday of an early parliamentary election on 8 February was widely anticipated, as she seeks to consolidate power and secure public support for her aggressive spending plans. However, Takaichi surprised investors by pledging that if she secures a fresh mandate for her new coalition, the government would reduce the consumption tax on food (currently at 8%) to 0% for two years—leaving investors to question how lost revenue would be offset and adding to growing concerns about the health of Japan’s finances.

The yield on the 10-year Japanese government bond (JGB) rose to 2.25% from 2.18% at the end of the previous week, reaching its highest levels since 1997 on investor concerns about Takaichi’s proposed temporary consumption tax cut. Similarly, upward moves on Tuesday in 30- and 40-year JGB yields were the biggest since the US “Liberation Day” tariff announcements in April 2025, reflecting fears about Japan’s high debt burden. Speaking at the World Economic Forum in Switzerland, Japan’s Finance Minister Satsuki Katayama sought to calm the Japanese bond markets, promising to pursue market stabilisation and referring to the country’s conduct of fiscal policy as “consistently responsible and sustainable, not expansionary.”

On the monetary policy front, at its January meeting, the Bank of Japan (BoJ) left its key policy rate unchanged at 0.75%. Having raised the rate twice in 2025, the central bank reiterated that it would increase it further if the economy and prices evolve in line with its forecasts. In its quarterly outlook, the BoJ revised upward four of its six inflation forecasts as well as its GDP forecasts for fiscal years 2025 and 2026, noting that an improving economy and a tight labour market would continue to lift wages and prices.

The yen traded within the JPY 158 range against the US dollar for much of the week but ended the week stronger at 155.7 after BoJ Governor Kazuo Ueda highlighted discomfort with the speed of moves at the long end of the JGB yield curve, as well as a willingness to intervene in periods of heightened market volatility.

Australian employment increased by 65,200 in December, notably stronger than the market expectation of 27,000. The increase was broad-based across full-time (54,800) and part-time employment (10,400), with “more 15–24-year-olds moving into employment" contributing to the rise. Even after accounting for the fall in employment in November, average monthly employment growth in the fourth quarter of 2025 picked up to 25,000 from 10,000 in the third quarter. The unemployment rate fell by 0.2% to 4.1%, the lowest level since May 2025. Australian flash output and new orders PMIs rose strongly in January. The increase was evident in both services and manufacturing sectors.

Tensions with the US escalated amid geopolitical concerns over Greenland, though these eased later in the week after President Trump stated he would not use force to take control of Greenland and discussed a "framework" security deal with NATO allies related to the Arctic Region, which includes Canada. Domestically, hundreds of Albertans lined up near Edmonton to sign a petition forcing a referendum on Alberta leaving Canada, reflecting regional frustrations. Economically, Canada reported stronger-than-expected November retail sales, rising 1.3% month over month (versus an estimate of 1.2%), with retail sales excluding autos up 1.7% (versus an estimate of 1.0%).

Last week, the MSCI All Country World Index (MSCI ACWI) shed -0.1% (2.3% YTD).

The US S&P 500 Index finished a volatile, holiday-shortened week down -0.3% (1.1% YTD). US markets were closed on Monday in observance of Martin Luther King Jr. Day. Value stocks outpaced their growth counterparts for the fourth straight week, while small-cap stocks ended broadly on par with large-cap stocks. The Russell 1000 Growth Index returned -0.5% (-1.0% YTD), the Russell 1000 Value Index -0.2% (3.9% YTD), and the Russell 2000 Index -0.3% (7.6% YTD). The technology-heavy Nasdaq Composite pulled back -0.1% (1.1% YTD).

In Europe, the MSCI Europe ex-UK Index declined -1.1% (2.6% YTD) amid renewed trade and geopolitical uncertainty. Major stock indexes retreated. Germany’s DAX Index lost -1.6% (1.7% YTD), France’s CAC 40 Index fell -1.4% (-0.1% YTD), and Italy’s FTSE MIB Index weakened -1.8% (0.1% YTD). Switzerland’s SMI dropped -2.0% (-0.9% YTD). The euro appreciated against the US dollar, closing the week at USD 1.18 for EUR, up from 1.16.

The FTSE 100 Index in the UK was down -0.9% (2.2% YTD), but the FTSE 250 Index inched higher by 0.1% (3.9% YTD). The British pound strengthened against the US dollar, closing the week at USD 1.36 for GBP, up from 1.34.

Japan’s stock markets were mixed over the week. The TOPIX Index lost -0.8% (6.5% YTD), but the TOPIX Small Index gained 0.2% (6.7% YTD). Domestic political uncertainty weighed on stock markets, and talk of unfunded tax cuts sent JGB yields soaring as investors grew increasingly concerned about the country’s already fragile finances. The BoJ left interest rates unchanged, as expected.

In Australia, the S&P/ASX 200 Index shed 0.5% (1.7% YTD) amid geopolitical turmoil over Greenland and tariffs. Australian shorter-term government bond yields rose more than longer-term yields, resulting in a bear flattening. The Australian dollar strengthened meaningfully by 2.4% against the US dollar.

In Canada, the S&P/TSX Composite advanced 0.3% (4.6% YTD).

The MSCI Emerging Markets Index rose 1.1% (6.9% YTD), with markets in Taiwan, South Korea and Brazil contributing to the gains. The Indian stock market contributed negatively.

Mainland Chinese stock markets ended the week mixed after a handful of indicators underscored uneven economic growth. The onshore CSI 300 Index, the main onshore benchmark, lost -0.6% (1.7% YTD), but the Shanghai Composite Index added 0.8% (4.3% YTD). Hong Kong's benchmark Hang Seng Index decreased by -0.4% (4.4% YTD). The MSCI China Index, which primarily consists of offshore-listed stocks, slipped -0.6% (4.1% YTD).

In Bulgaria, on 1 January, the country became the 21st major European nation to adopt the euro. This major step for a former Soviet bloc nation integrating into the EU, however, has been overshadowed by internal political turmoil. The Bulgarian government collapsed in December and, more recently, the country’s president, Rumen Radev, who has held this office since 2017 and overseen the collapse of several governments since then, resigned.

Prime Minister Rosen Zhelyazkov’s government resigned in December after street protests broke out over corruption allegations, anger over the mismanagement of EU funds, and unpopular economic policies, such as proposed tax and spending increases. The resignation of President Radev earlier in the week is a possible indication that he intends to run in the snap elections later this year—possibly as early as March or April—and that he may even create his own political party with an agenda to implement reforms and curb corruption.

While there is likely to be some social and political volatility in the months ahead, T. Rowe Price emerging markets credit analyst Peter Botoucharov expects to see some consolidation of the political scene ahead of the early elections. He also believes that the government will be forced to adopt a more responsible budget for the year ahead. In addition, he is not concerned about the country’s macroeconomic policy direction and notes that Bulgaria, which has one of the lowest debt-to-GDP ratios in the EU, will likely stay on a path of convergence with the EU.In Türkiye, the central bank held its scheduled monetary policy meeting, and policymakers decided to reduce the one-week repo auction rate by 100bps, from 38.0% to 37.0%. At the same time, policymakers lowered the overnight lending rate from 41.0% to 40.0% and the overnight borrowing rate from 36.5% to 35.5%. While a rate reduction was generally expected, some investors were disappointed that the central bank did not make larger rate cuts.

According to the very short post-meeting statement, policymakers noted that the “underlying trend of inflation declined in December.” Indeed, the government recently reported that the annual inflation rate in December was 30.89%, down from 31.07% in November. As for January, policymakers believe that consumer inflation “has firmed” due to higher food prices, though they consider the rise to be “limited.”

While they acknowledged “signs of improvement,” they believe that “inflation expectations and pricing behaviour continue to pose risks to the disinflation process.” With a commitment to maintain the “tight monetary stance…until price stability is achieved,” policymakers opted to proceed with a relatively small rate cut.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) was little changed (0.1% YTD), the Bloomberg Global High Yield Index (hedged to USD) returned 0.2% (0.7% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.4% (0.3% YTD).

Despite rallying alongside equities on Wednesday, US Treasuries posted modest losses, with short- and long-term yields edging higher. Over the week, the 10-year Treasury yield rose by 1bp, ending at 4.23% from 4.22% (up 6bps YTD). The 2-year Treasury yield rose by 1bp, ending the week at 3.60% from 3.59% (up 12bps YTD).

Meanwhile, US corporate bonds posted gains, outperforming US Treasuries amid improving macroeconomic sentiment and resilient investor demand.

Over the week, the 10-year German Bund yield increased by 8bps, ending at 2.91% from 2.83% (up 5bps YTD). The 10-year UK gilt yield rose by 11bps, ending the week at 4.51% from 4.40% (up 4bps YTD).