Weekly Market Recap

The UK economy unexpectedly shrank 0.1% in January, reflecting a fall in production. Gross domestic product (GDP) expanded by 0.4% sequentially the month before. Nevertheless, the rolling quarterly growth rate of 0.2% was higher than the 0.1% posted in December.

The week’s relatively light economic calendar was highlighted by Wednesday’s release of the Labor Department’s consumer price index (CPI), which indicated that consumer prices rose 0.2% month over month (MoM) in February, while core CPI (less food and energy) saw its lowest year-over-year (YoY) increase since April 2021, rising 3.1% over the prior 12 months. February’s monthly and annual inflation readings slowed from January, and both were slightly below consensus expectations. The encouraging inflation print seemed to help alleviate some concerns about the US economy entering a period of stagflation—an economic scenario in which growth is stagnant, inflation is high, and unemployment rises; however, data from the report predate a large portion of the Trump administration’s recent tariff actions, and investors were quick to return their focus to the uncertainty surrounding the impact that these actions will have on prices over the next several months.

Thursday’s producer price index (PPI) data painted a similar picture for February, with headline prices unchanged from January and core prices declining for the first time since July compared with expectations for a 0.3% increase for both readings. While the overall results appeared promising, several components of the PPI that feed into the personal consumption expenditures (PCE) index—the Fed’s preferred measure of inflation—remained elevated, suggesting that the PCE will likely remain well above the Fed’s 2% target when it is released at the end of the month. Fed policymakers are widely expected to hold interest rates steady following their upcoming meeting on 18–19 March.

Meanwhile, the University of Michigan reported its Index of Consumer Sentiment for March on Friday morning, which declined 11% MoM to 57.9. The index has now declined three months in a row and is down 22% from December 2024. According to the report, consumer expectations “deteriorated across multiple facets of the economy, including personal finances, labour markets, inflation, business conditions, and stock markets,” primarily due to “uncertainty around policy and other economic factors.” Notably, year-ahead inflation expectations increased to 4.9% from 4.3% in February, the highest since November 2022 and the third consecutive monthly increase of 0.5% or more.

Days after the European Central Bank (ECB) decided to lower interest rates for a sixth time since June, comments from a clutch of policymakers appeared to cast doubt on another cut in April. “Exceptionally high uncertainty” could make it harder for the ECB to meet its 2% inflation target in the short term, ECB President Christine Lagarde suggested in a speech in Frankfurt. According to the Handelsblatt newspaper, Executive Board member Isabel Schnabel warned that inflation was more likely to remain above the target than fall below it, indicating her reluctance to back an even easier stance. According to Bloomberg, Governing Council member Martins Kazaks said at a conference in Lisbon that rate-setters needed to keep an open mind on April’s decision because of uncertainty stoked by geopolitical shocks and a potentially massive increase in defence spending. In contrast, in an interview with The Wall Street Journal, Bank of Portugal governor Mário Centeno stuck to his view that borrowing costs needed to be even lower to shore up a weak economy and prevent inflation from settling below target. “I would prefer to move sooner rather than later,” Centeno said.

Germany’s coalition government-in-waiting and the Greens agreed to a deal for a massive increase in state borrowing, according to two sources close to the talks cited by Reuters. The next chancellor, Friedrich Merz, wants the outgoing parliament to approve a EUR 500 billion infrastructure fund and loosen the so-called debt brake to increase defence spending.

Officials from China’s finance ministry, commerce ministry, central bank, and financial markets watchdog are expected to appear on Monday for a briefing that “will introduce the situation of boosting consumption,” according to the State Council's announcement. News of the conference sparked a rally in Chinese shares on Friday, pushing the CSI 300 Index to its highest level since mid-December.

Increasing consumption to drive economic growth has become more important for China’s policymakers since the onset of the US-sparked trade war. At the just-concluded National People’s Congress meeting, China set an ambitious economic growth target of about 5% for the third straight year and stated that boosting consumption is the government’s top priority for 2025.

Weak domestic consumption was underscored in China’s latest inflation report. According to the statistics bureau, CPI fell a greater-than-expected 0.7% in February from a year ago, marking the first contraction since January 2024. According to Bloomberg, the core CPI—excluding food and energy costs—declined 0.1% YoY, its first decrease since 2021 and only the second time the gauge contracted in more than 15 years. Meanwhile, PPI, which tracks wholesale prices, fell 2.2% in February, its 29th straight monthly contraction.

Stamping out deflation is a matter of growing urgency for Beijing, which rolled out a slew of monetary and fiscal stimulus measures last September to spur demand. However, a yearslong housing slump has prompted people to save rather than spend, frustrating officials’ attempts to bolster consumption.

Investors focused on the takeaways from Japan’s spring “shunto” labour-management wage negotiations, which secured the largest pay deal over three decades and indicated a steady wage growth trend, including among smaller companies. The spring wage negotiations have delivered significant wage increases for three straight years. Factoring into the decision-making of the Bank of Japan (BoJ), wage growth momentum could influence the timing of the central bank’s next interest rate hike as it watches for a virtuous cycle of wages rising in tandem with prices, driving economic progress. Market views that the central bank will raise rates again later this year are firmly entrenched.

The 10-year Japanese government bond (JGB) yield hovered around its highest levels since the 2008 global financial crisis of 1.51% in anticipation of further rate hikes this year. BoJ Governor Kazuo Ueda said that the rising JGB yield trend since last year was a natural reflection of the market’s view on the economy and inflation, or shifts in interest rates overseas, and emphasised that bond yields should be determined freely in the market. Ueda said that only if yields rose sharply in a way that differs from normal market movements would the central bank step up its JGB purchases to curb yield rises. Some interpreted this as raising the bar for intervention.

NAB surveyed business conditions edged up 1 point to +4 in February but remain a bit below the longer-term average of +7. Business confidence fell 6 points to -1. CBA’s measure of Australian nominal household spending fell 0.2% MoM in February, following a downward revision of -10.1% in January.

The Bank of Canada has cut its overnight lending rate by 25 basis points (bps) to 2.75%, as an ongoing trade war with the US begins to strain the Canadian economy. Bank of Canada governor Tiff Macklem said the economy started the year strong, with solid GDP growth and inflation within its 2% target. However, tariff uncertainty caused by the on-again, off-again trade war between Canada and the US has weighed on business spending and hiring, and shaken consumer confidence. Manufacturing businesses in particular have lowered their sales outlooks.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -1.8% (-0.3% YTD).

The US S&P 500 Index posted a loss of -2.2% (-3.9% YTD) for the week, with the S&P 500, Nasdaq Composite and Russell 2000 Index all notching a fourth consecutive week of negative returns, while the Dow Jones Industrial Average slid -3.1%, putting all four indexes into negative territory for the year. Ongoing uncertainty surrounding trade policy seemed to drive much of the negative sentiment as new tariff announcements from the Trump administration continued throughout the week. Growth concerns and increasing recession fears—amplified by comments from President Donald Trump regarding a “period of transition” for the US economy—also weighed on sentiment during the week.

Growth stocks underperformed value shares, and large caps lagged behind small caps. The Russell 1000 Growth Index returned -2.5% (-8.0% YTD), the Russell 1000 Value Index -1.9% (0.6% YTD), and the Russell 2000 Index -1.4% (-8.1% YTD). The technology-heavy Nasdaq Composite fell -2.4% (-7.9% YTD).

In Europe, the MSCI Europe ex UK Index ended the week -1.4% lower (9.1% YTD) amid worries about how US trade tariffs would affect economic growth and uncertainty over monetary policy. Along with hopes for a Ukraine-Russia ceasefire, news that Germany’s incoming chancellor had secured parliamentary support for a large increase in state borrowing helped to curb losses. Major stock indexes were lower or flat. Germany’s DAX Index gave back -0.1% (15.5% YTD), France’s CAC 40 Index retreated -1.1% (8.9% YTD), and Italy’s FTSE MIB Index eked out a modest gain of 0.2% (13.5% YTD). Switzerland’s SMI Index lost -0.7% (12.1% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.09 for EUR, up from 1.08.

The FTSE 100 Index in the UK slid -0.5% (6.6% YTD), and the FTSE 250 Index was down -0.6% (-2.6% YTD). The British pound changed slightly compared to the US dollar, ending the week at USD 1.29 for GBP.

Japan’s stock markets rose modestly over the week. The TOPIX Index added 0.3% (-3.0% YTD), and the TOPIX Small Index rose 0.3% (-0.4% YTD). The yen weakened to JPY 148.6 against the US dollar, from 148.0 at the end of the prior week, providing a tailwind for Japanese exporters. However, uncertainties about global trade dented sentiment, capping gains. Japan is particularly concerned about the Trump administration’s proposed duties of around 25% on imported cars, as autos make up roughly one-third of Japan’s total exports to the US.

In Australia, the S&P ASX 200 Index declined -1.9% (3.2% YTD) on growing concerns that tariff policy uncertainty could tip the economy into a recession. The Australian government bond yield curve marginally steepened. The Australian dollar remained largely unchanged versus the US dollar.

In Canada, the S&P/TSX Composite lost -0.7% (-0.2% YTD).

The MSCI Emerging Markets Index was -0.7% lower (4.5% YTD), with the stock markets of China, South Korea and Brazil contributing positively to performance, while those of Taiwan and India contributed negatively.

Mainland Chinese stock markets rose on stimulus hopes after Beijing said it would hold a press conference on Monday with policymakers focusing on boosting consumption. The onshore CSI 300 Index rose 1.6% (2.0% YTD), and the Shanghai Composite Index gained 1.4% (2.3% YTD). Hong Kong's benchmark Hang Seng Index lost -1.1% (20.3% YTD). MSCI China Index shed -0.1% (20.2% YTD).

In Hungary, the government reported that inflation in February was measured at a YoY rate of 5.6%. This was higher than expected and higher than January’s 5.5% reading. It was the second consecutive monthly upside inflation surprise.

Looking at the underlying data, T. Rowe Price credit analyst Ivan Morozov concludes that inflation acceleration is pretty broad-based, with core inflation accelerating to more than 6% versus 5.8% YoY. While inflation in the next few months should decline due to base effects, Morozov believes that the current level of inflation does not give much room for the central bank to cut short-term interest rates. He expects policymakers to keep rates steady until sometime in the second half of the year, and possibly all year.

In Poland, the central bank concluded its regularly scheduled two-day monetary policy meeting and kept its key interest rate, the reference rate, at 5.75%. Policymakers also left other interest rates controlled by the central bank unchanged.

According to the post-meeting statement, policymakers acknowledged that the global outlook for inflation and economic activity is “fraught with uncertainty, which is related to…changes in trade policies” and other factors. In the Polish economy, central bank officials acknowledged that YoY GDP growth accelerated to 3.2% in the fourth quarter versus 2.7% in the third quarter and that growth in domestic demand has been picking up.

As for inflation, policymakers noted that the annual CPI inflation rate in January rose to 5.3%, which is higher than the 4.7% reading for December and “significantly above” the central bank’s inflation target. They also observed that core inflation is “elevated, mainly due to rapidly rising services prices, amid high wage growth.” Since policymakers expect inflation this year to be “markedly above” the central bank’s inflation target, it is unsurprising that they decided to leave interest rates unchanged.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.1% (0.5% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.5% (1.3% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index -0.2% (2.5% YTD).

US Treasury yields were little changed across most maturities in response to the week’s cooler-than-expected inflation data. Over the week, the 10-year Treasury yield increased 1bps to 4.31% from 4.30% (down -26bps YTD). The 2-year Treasury yield rose 2bps, ending the week at 4.02% from 4.00% (down -23bps YTD).

US investment-grade bond spreads widened through Thursday, and new issuance in the market was lighter than expected. The week’s sell-off in equity markets also weighed on sentiment in the high yield bond market. The asset class’s performance was somewhat bifurcated, as most buyers focused on BB-rated names. At the same time, lower-quality credits and industries that are likely to be impacted by tariffs came under pressure.

Over the week, the 10-year German bund yield increased 3bps, ending at 2.87% from 2.84% (up 51bps YTD). The 10-year UK gilt yield rose 2bps, ending the week at 4.66% from 4.64% (up 10bps YTD).