The Davy Digest - 13th January 2025

US equities finished lower last week as nonfarm payrolls surged past expectations, pushing Treasury yields higher and prompting markets to lower expectations to just one Fed rate cut this year. FOMC minutes for the December meeting were released, Fed officials voiced concerns about inflation and the potential effects of Trump's policies, indicating that they would be moving more slowly on interest rate cuts due to the uncertainty. The US ISM services data came in higher than expected while a prices paid measure was the highest since February 2023, pointing to inflationary pressures. European equities had a strong week, boosted by reports that US tariffs may be more narrow than previously expected, even though those reports were later denied by Trump on social media. A measure of Eurozone inflation edged higher to 2.4% year-over-year in December, but the report did little to impact expectations for a rate cut at the ECB’s next meeting at the end of January. In Switzerland, inflation slowed to 0.6% year-over-year in December, supporting the case for more interest rate cuts. It was a turbulent week in the UK as the pound and UK gilts came under pressure due to concerns about weak growth combined with lingering inflation. Finally, in China, there was mixed data as inflation came in lower than expected due to weak demand while the Caixin services PMI beat expectations, largely due to stimulus impacts.

Last week's highlights

	ISM Services PMI (07/01) – Came in at 54.1 vs 53.3 expected, prices paid measure was highest since February 2023. FOMC Minutes (08/01) – “Careful approach” to monetary policy near term.  Nonfarm Payrolls (10/01) - Surged 256k vs 155k forecast. Unemployment rate down to 4.1%.
	Eurozone HICP Inflation (07/01) – Edged higher to 2.4% YoY in December, in line with estimates. ECB still expected to cut in January.   Swiss Inflation (07/01) – Inflation slowed to 0.6% YoY in December, supporting the case for more easing in interest rates.
	UK BRC Retail Sales (07/01) – Q4 growth was 0.4% YoY, as consumers prioritised spending on food and drink over the holiday season.
	China Inflation (10/01) – Fell to 0.1% YoY in December, due to weak demand.  China Caixin Services PMI (06/01) – Came in at 52.2 in December vs 51.7 expected.

This week promises to be a busy week on the macro front. In the US, the producer price index is due out tomorrow while US CPI will be released on Tuesday. Federal Reserve officials expect inflation to keep moving toward 2%, but the effects of potential trade and immigration policy changes mean the process could take longer than previously anticipated. In the UK, inflation data will be closely watched on Wednesday as UK investors start to worry about “stagflation.” (when slow growth, high unemployment, and high inflation occur simultaneously). In China, a slew of data points will be released on Friday.

What's on the radar

	Producer Price Index (14/01) US Inflation (CPI) (15/01) US Retail Sales (16/01)
	German Inflation (HICP) (16/01)
	UK Inflation (CPI) (15/01) UK Retail Sales (17/01)
	China Q4 GDP (17/01) China Industrial Production (17/01) China Retail Sales (17/01)

Chart of the moment

A Great British Pounding

Source: Bloomberg as of 13/01/2025

• The pound fell to its lowest level in over a year against the US dollar, as stagflation concerns amass.
• Concerns over the UK’s prospects have increased with a toxic concoction of; zero economic growth, lingering inflation, gilt yields rising to highest levels since 1998, all whilst running fiscal deficits of -5%.
• Furthermore, last week’s strong US economic data bolstered investors' view that US rates will stay higher for longer, pushing up Treasury yields and boosting the dollar against most major currencies.
• Rising UK borrowing costs could lead to further tax increases or spending cuts as the government tries to meet its self-imposed rule not to borrow to fund day-to-day spending.