Weekly Market Recap

The Bank of England (BoE) said net mortgage lending rose to GBP 4.207 billion in January from GBP 3.343 billion in December, the most since September 2022. First-time buyers of homes have been rushing to take advantage of a temporary reduction in stamp duty that expires at the end of March.

Ongoing uncertainty around trade policy remained a focal point throughout last week as Tuesday marked the deadline for President Donald Trump’s previously announced tariffs of 25% on Canadian and Mexican imports and an additional 10% on Chinese imports. The Trump administration announced a slew of exemptions and delays for the tariffs later in the week—including an announcement that goods covered by the US-Mexico-Canada Agreement would be exempt for one month—however, the continued uncertainty and changing policies appeared to take a toll on investor sentiment during the week.

The week’s busy economic calendar kicked off on Monday with the Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI). According to the report, manufacturing activity expanded slightly in February with an index reading of 50.3%, down -0.6% from January (readings above 50% indicate expansion, while readings below 50% signal contraction). Notably, the new orders portion of the index registered a sharp drop into contraction territory—falling to 48.6% from 55.1%—and the prices component of the index surged to 62.4% from 54.9% in January.

Meanwhile, the ISM’s services PMI increased 0.7% to 53.5%, the eighth consecutive month of expansion, and the services employment index increased 1.6% to 53.9%, the highest reading since December 2021. Steve Miller, Chair of the ISM Services Business Survey Committee, said, “February was the third month in a row with all four subindexes that directly factor into the services PMI—business activity, new orders, employment, and supplier deliveries—in expansion territory.” However, he also noted that “anxiety continues” due to respondents’ uncertainty regarding tariffs and federal spending cuts.

On Wednesday, the Federal Reserve released its Beige Book—a summary of economic conditions in each Fed region—which noted that “overall economic activity rose slightly since mid-January,” but “consumer spending was lower,” “price sensitivity” rose, and “prices increased moderately in most districts.” Tariffs were mentioned 49 times in the report, and most districts reported continued uncertainty regarding the potential impacts of the Trump administration’s new policies.

Speaking on Friday afternoon, Fed Chair Jerome Powell referenced this heightened uncertainty regarding “trade, immigration, fiscal policy, and regulation” and said that policymakers “do not need to be in a hurry” and will “wait for greater clarity” before adjusting monetary policy further.

The week’s economic calendar wrapped up on Friday with the Labor Department’s closely watched nonfarm payroll employment report. According to the report, the US economy added 151,000 jobs in February, slightly below expectations but ahead of January’s reading of 125,000. Health care, financial activities, transportation, and warehousing saw the largest increases in employment, while federal government employment dropped the most. The unemployment rate increased a tick to 4.1% from 4.0% in January.

As expected, the European Central Bank (ECB) cut its key deposit rate by 25 basis points (bps) to 2.5%. ECB President Christine Lagarde said rates were now “meaningfully less restrictive.” Touching on a potential trade war with the US and other risks, she said, “We have huge uncertainty. Some people have used the adjective ‘phenomenal’ uncertainty.” This uncertainty already appears to be affecting investment and exports, prompting the ECB to lower its forecast for eurozone economic growth to 0.9% for 2025. The central bank also revised its projection for inflation to 2.3% for 2025, up from the 2.1% expected three months ago.

Meanwhile, the latest data indicated that annual inflation in the eurozone slowed to 2.4% in January from 2.5% in December. The core rate, which excludes volatile energy and non-alcoholic beverages prices, fell to 2.6% from 2.7%.

In Germany, Friedrich Merz’s conservative alliance and the Social Democratic Party, which are in talks to form the next government, agreed to create an off-balance sheet EUR 500 billion infrastructure fund, exempt defence spending above 1% of gross domestic product (GDP) from the constitutional borrowing limit, and loosen debt rules for states. The proposals will be put before parliament in the coming week. After the accord was announced, Germany’s 10-year Bund yield posted its biggest daily increase since just after the Berlin Wall fell in 1990. EU leaders said they backed plans to jointly borrow EUR 150 billion to spend on their militaries amid fears that Europe could no longer depend on US military aid.

China unveiled several key targets at the recent National People’s Congress (NPC) meeting, an annual event in which the central government announces its economic priorities for the coming year. For 2025, China set a growth target of 5% for the third straight year. Officials also set a fiscal deficit goal of about 4% of GDP—the highest level since 1994, according to Bloomberg—and reduced its annual inflation target to about 2%, the lowest level since 2003, reflecting deflationary pressures in the economy.

Most of China’s economic targets were telegraphed before the NPC meeting and broadly in line with market expectations. However, many analysts think China will have a more challenging time repeating its 5% growth pace this year given US tariff uncertainty and a yearslong housing slump that has yet to hit bottom.

Increasing the fiscal deficit target to 4% this year was seen as a major change for China, which has long sought to cap the official deficit at no more than 3% of GDP. However, the onset of the US-sparked trade war has spurred expectations that the government will substantially ramp up borrowing and spending to meet its annual growth target. China's Premier Li Qiang told delegates at the NPC that boosting consumption is the government’s top priority for 2025. Even so, Beijing offered few details about how it plans to increase consumption in its annual work report, which serves as China’s economic blueprint for the year.

The 10-year Japanese government bond yield rose to 1.52% from the previous week’s 1.37%, reaching its highest level since 2008 based on expectations that the Bank of Japan (BoJ) would continue raising interest rates this year. Japan’s government is ready to officially announce the end of long-term price deflation, with Economy Minister Ryosei Akazawa asserting that all the indicators used to assess deflation have turned positive. This would mark a notable shift in the government’s economic stance and could influence the timing of the BoJ’s next hike. The BoJ reiterated its core message that it would raise interest rates if its forecasts were realised.

As both the government and the BoJ look for signs of sustainable wage growth to support Japan’s economic recovery, the country’s largest labour union group, RENGO, said that its member unions were seeking an increase in average wages of over 6%—the highest request in more than three decades. This follows last year’s Shunto spring labour-management wage negotiations where companies agreed to a 5.1% increase in average wages. A stronger-than-expected outcome of the 2025 negotiations could bring forward the timing of the BoJ’s next interest rate hike, as it watches for a virtuous cycle of wages rising in tandem with prices driving economic progress.

Australia’s GDP grew 0.6% quarter over quarter (QoQ) in the fourth quarter of 2024, the strongest quarter since 2022. Government spending continued to rise strongly in the quarter, contributing 0.3% to the quarterly GDP growth. However, the sequential improvement in the quarter came from the private sector, both through consumption (0.4% QoQ) and investment (0.3% QoQ). The household backdrop was solid in the quarter, with disposable income rising 1.4% QoQ, helped by tax cuts and wage growth.

Australia's housing prices rose 0.3% month on month (MoM) in February after declining in the prior three months, buoyed by the expectation of a rate cut by the Reserve Bank of Australia (RBA). Residential building approvals increased 6.3% MoM in January, above market expectations of a flat month. Australian nominal goods exports to the US rose sharply further in January amid heightened uncertainty around US import tariffs.

US President Trump has signed orders expanding the goods exempted from his new tariffs on Canada and Mexico that were imposed last week. It was the second time in two days that Trump rolled back his taxes on imports from the US's two biggest trade partners, which raised uncertainty for businesses and worried financial markets. On Wednesday, Trump said he would temporarily spare carmakers from 25% import levies just a day after they came into effect. Canadian Prime Minister Justin Trudeau said he had had a "colourful" conversation about tariffs in a phone call with Trump. Trudeau told reporters that a trade war between the two allies was likely for the foreseeable future, despite some targeted relief.

The uncertainty around tariffs and poor winter weather are to blame for Canada’s hiring slowdown in February, likely meaning more interest rate cuts by the Bank of Canada. According to Statistics Canada, the unemployment rate held steady at 6.6% in February, with the economy adding just 1,100 jobs during the month, which was lower than the 20,000 gain economists expected.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -1.2% (1.5% YTD).

The US S&P 500 Index decreased -3.1% (-1.7% YTD), declining for the third consecutive week in the worst week for some major indexes since early September. Growth stocks underperformed value shares, and large caps outperformed small caps. The Russell 1000 Growth Index returned -3.9% (-5.6% YTD), the Russell 1000 Value Index -2.4% (2.5% YTD), and the Russell 2000 Index -4.0% (-6.8% YTD). The technology-heavy Nasdaq Composite fell -3.4% (-5.7% YTD).

In Europe, the MSCI Europe ex UK Index ended the week -0.2% lower (10.6% YTD). Uncertainty about US trade policy weighed on investor sentiment. Still, the prospect of increased spending on defence and infrastructure by Germany and the EU helped to moderate losses. Major stock indexes were mixed. Germany’s DAX Index rallied 2.0% (15.6% YTD), France’s CAC 40 Index advanced 0.1% (10.2% YTD), and Italy’s FTSE MIB Index shed -0.2% (13.3% YTD). Switzerland’s SMI Index added 0.6% (12.8% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.08 for EUR, up from 1.04.

The FTSE 100 Index in the UK slid -1.2% (7.0% YTD), and the FTSE 250 Index was down -0.9% (-2.0% YTD). The British pound strengthened versus the US dollar, ending the week at USD 1.29 for GBP, up from 1.26.

The performance of Japan’s stock markets was mixed over the week, with the Nikkei 225 Index down, the TOPIX Index adding 1.0% (-3.3% YTD), and the TOPIX Small Index rising 2.1% (-0.6% YTD). Uncertainty about US President Donald Trump’s tariff and other policies dented global risk appetite. The yen gained on safe-haven demand, strengthening to JPY 148.0 against the US dollar, from 150.6 at the end of the prior week.

In Australia, the S&P ASX 200 Index declined -2.1% (-1.3% YTD), dragged down by concerning US economic data, new tariff threats, and somewhat hawkish RBA narratives. Australian government yields increased with the curve steepening, and the Australian dollar strengthened against the US dollar by 1.8%.In Canada, the S&P/TSX Composite dropped -2.4% (0.6% YTD).

The MSCI Emerging Markets Index was 2.9% higher (5.3% YTD), with the stock markets of China, India, South Korea and Brazil contributing positively to performance, while that of Taiwan contributed negatively.

Mainland Chinese stock markets advanced for the week after Beijing unveiled economic growth targets in line with forecasts and signalled more stimulus later this year amid an escalating US trade war. The onshore CSI 300 Index rose 1.4% (0.5% YTD), and the Shanghai Composite Index gained 1.6% (0.9% YTD). Hong Kong's benchmark Hang Seng Index surged 5.9% (21.6% YTD). MSCI China Index rallied 6.5% (20.3% YTD).

In the Czech Republic, the government reported that the year-over-year (YoY) inflation rate in February was 2.7%. This was in line with expectations and marginally lower than the 2.8% YoY rate measured in January. According to T. Rowe Price credit analyst Ivan Morozov, who estimates that core inflation slowed to about 2.2%, the latest inflation data are neutral—neither hawkish nor dovish—and seem unlikely to discourage the central bank from reducing short-term interest rates.

Morozov notes that the Czech bond market during the week was dominated not so much by the inflation data but by weakness in neighbouring Germany’s bond market, where bund yields spiked in response to the German government’s plans to ramp up infrastructure and defence spending. While he believes the Czech Republic is unlikely to expand its own military budget significantly—so far, the government announced plans to increase military spending from about 2% of GDP currently to 3% of GDP by 2030, with 0.2% annual increases starting in 2026—increased German spending and stronger German economic growth would likely have some second-round effects on the Czech Republic, and the entire Central Eastern European region.

In Türkiye, the central bank held its scheduled monetary policy meeting, and policymakers decided to reduce the one-week repo auction rate from 45.0% to 42.5%. This 250bps (2.50%) rate cut—the third since late December—was generally in line with expectations. For perspective, the headline 12-month inflation rate in Türkiye was recently measured at about 39% in February versus about 42% in January.

According to the post-meeting statement, policymakers noted that “the underlying trend of inflation decreased in February,” as core goods inflation remained “relatively low” while services inflation decelerated following an “idiosyncratic increase in January.” Central bank officials also believe domestic demand, which was at “disinflationary levels” in the fourth quarter of 2024, remains disinflationary thus far this year, based on leading indicators. This seems to have given policymakers leeway to cut rates again.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -1.0% (0.6% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.3% (1.8% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.2% (2.7% YTD).

US Treasuries rallied on Friday morning following the nonfarm payroll employment report, although this largely reversed course later in the day. Over the week, the 10-year Treasury yield increased 9bps to 4.30% from 4.21% (down -27bps YTD). The 2-year Treasury yield rose 1bps, ending the week at 4.00% from 3.99% (down -24bps YTD).

Interest rate volatility and swings in the Treasury and equity markets weighed on the fixed income market activity, with many investors in a “wait-and-see” mode. The tone in the high yield bond market was cautious as investors focused on tariff headlines, while the energy segment experienced weakness after OPEC announced supply increases starting in April.

Over the week, the 10-year German bund yield surged 43bps, ending at 2.84% from 2.41% (up 47bps YTD). The 10-year UK gilt yield rose 16bps, ending the week at 4.64% from 4.48% (up 7bps YTD).