Week of FEBRUARY 3

Last week was busy for markets, with the Fed holding rates while the ECB and the BOC cut rates, and German GDP disappointed.

Looking ahead, a lighter calendar sees the release of Euro Area inflation ahead of the rate decision and the NFP on Friday.

Week in Review

Equity markets started the week on a negative footing, weighed down by tech following reports of an open-source Chinese AI model that required significantly fewer resources. However, they managed to recover from the initial shock, trending generally higher throughout the week despite several major risk events.

The Fed halted its rate-cutting cycle for the first time in three meetings as expected, largely reiterating its December statement. Fed Chair Jerome Powell said that there was no urgency to ease further, insisting on a data-dependent approach.

The Q4 flash GDP reading came in slower than expected in the US, at an annualised rate of 2.3% instead of the 2.6% forecast, a significant slowdown from 3.1% in Q3.

The ECB cut rates as expected, but yields slid after the meeting as the rhetoric seemed to imply that back-to-back rate cuts would continue at the next meeting. This came after preliminary German Q4 GDP turned negative by more than expected, and the Euro Area registered no growth in the quarter.

The BOC also cut rates by 25 basis points, as widely expected, cutting its growth forecast as well. The central bank said it would end QT in March and emphasised the risk of implementing tariffs, which could go into effect over the weekend.

Tariffs remained a central theme for geopolitics, with reports that the White House would apply as much as 25% tariffs on Mexican and Canadian goods as soon as Saturday and potentially apply a 10% regime on Chinese goods as well. However, reports also circulated that staff were working on ways to avoid applying tariffs or scaling back their scope in the hours ahead of the deadline.

Biggest Market Movers

• The yen was among the better-performing currencies, trending higher in the wake of the BOJ rate hike over a week ago and following hawkish inflation data.
• The Aussie was on the back foot after a drop in quarterly inflation raised speculation about sooner-than-expected rate cuts, sending AUDUSD plunging by 1.50%.
• Crude oil prices ended the week around 3% lower after the US reported an uptick in inventories for the first time in ten weeks.
• Gold hit an all-time record high after five consecutive weeks of gains as the threat of tariffs appeared to crystallise.

Top Events in the Week Ahead

Markets are expected to remain agitated next week as they process the fallout of the Trump tariffs (whether applied or not) and the return of major Asian markets after the end of the Lunar New Year. This, while still featuring several market-moving events.

US Jobs Market in Focus post-FOMC

After the Fed suggested that it was still keeping an eye on the labour market, the focus of the week could be all the way at the end with Friday's release of January NFP figures. The US unemployment rate is expected to stay at 4.1%, while the number of job additions is expected to come in slightly lower at 180,000 compared to the 223,000 reported in December. A hot report could weigh on tech, dragging the Nasdaq back below 21K, while a new record above 22K might pan out should the NFP disappoint.

EU CPI Looms Large Following Bloc Releases

Before that, the Euro Area inflation data released on Monday will be closely watched, as it has already been telegraphed with lower inflationary pressures out of Germany and France. The consensus is that inflation in the shared economy ticked up to 2.5% from 2.4%, but the increasing chance of a miss could keep the ECB in easing mode. Undershooting expectations could pressure the single currency, bringing 1.03 and 1.025 in focus, whereas resistance sits at 1.045 and the recent 1.0532 peak.

Can the BOE Stop the Footsie?

Both economists and the market expect the BOE to ease by 25 basis points when it meets on Thursday after economic data over the last month has provided mixed signals. The focus will likely be on the updated economic projections to get some clarity on what aspects the central bank is focusing on and what could determine the evolution of rates. The market is pricing in three rate cuts for the whole year, with a weighting in the first half. A dovish stance would provide further tailwinds for a record-breaking UK equities market, opening the door to 8800 points and beyond. Conversely, support lies at the prior record of 8590, followed by 8480.

Other Events, Earnings

The new week begins with the release of China's Caixin Manufacturing PMI on Monday. Wednesday brings trade balance figures for the US and Canada. Australia's trade balance data will be published on Thursday. Friday features the German trade balance alongside the UK Halifax house price index.

This week is slated to mark the peak of the earnings season, with a multitude of prominent companies scheduled to report their earnings results. These include Palantir, Alphabet, Merck, PepsiCo, Alibaba, Walt Disney, Arm Holdings, Uber, Amazon, Eli Lilly, AstraZeneca, Honeywell, and ConocoPhillips.