The Davy Digest - 20th January 2025

Both macro data and corporate earnings released last week helped equities post gains with the S&P500 up close to 4%. In the US, we saw easing inflation data, with headline inflation coming in at 2.9%, in line with consensus. This raised expectations for a Federal Reserve rate cut in the coming months and US Treasury yields dropped in response. The CPI figure, coupled with strong quarterly bank results, resulted in the best day for US stocks since the November election on Wednesday, with the S&P 500 closing 1.8% higher and the Nasdaq up by 2.5%. The US Producer Price Index rose 3.3% year-on-year in December, lower than expected. Elsewhere, German inflation rose by 2.8% year-on-year in December. Germany’s economy contracted for the second consecutive year in 2024, as data released last week confirmed the economy shrank by 0.2% last year. In the UK, inflation slowed to 2.5% year-on-year in December and weak retail sales data this week confirmed that the UK faces significant challenges ahead. The pound remains at recent lows around the 1.22 mark against the US dollar. Elsewhere, China's economy achieved the government's growth target last year, driven by a late-stage stimulus effort and a surge in exports that boosted the economy. China’s Q4 GDP grew by 5.4% year-on-year, and data also revealed an uptick in economic activity including industrial production and retail sales.

Last week's highlights

	Producer Price Index (14/01) – Rose to 3.3% year-on-year, coming in slightly lower than expectations but higher than November’s figure. US Inflation (CPI) (15/01) – Increased to 2.9% year-on-year in December, in line with expectations. US Retail Sales (16/01) – Rose 0.4% in December month-on-month.
	German Inflation (HICP) (16/01) – Rose 2.8% in December year-on-year, in line with expectations and the same as November’s figure.
	UK Inflation (CPI) (15/01) – Slowed to 2.5% in December, down from 2.6% the month before. UK Retail Sales (17/01) – Unexpectedly fell to 3.6% year-on-year, well below the 4.9% expected.
	China Q4 GDP (17/01) – Grew 5.4% year-on-year, significantly above expectations and enabling the government to meet its annual growth target. China Industrial Production (17/01) – Up by 6.2% year-on-year in December and coming in higher than November’s figure.  China Retail Sales (17/01) – Rose by 3.7% year-on-year in December, ahead of consensus.

This week promises to be a busy week, starting with President Trump’s inauguration on Monday and what the new administration will focus on first from a policy perspective. The week will see PMI data releases from the US, Eurozone and the UK, as well as a Eurozone Consumer Confidence figure. The Bank of Japan will meet this week, with markets expecting a rate hike, as long as the arrival of President Trump doesn’t trigger many negative surprises.

What's on the radar

	Donald Trump Inauguration (20/01) Manufacturing PMI (24/01) Services PMI (24/01)
	German Producer Price Index (20/01) Eurozone Consumer Confidence (23/01) Eurozone HCOB Composite PMI (24/01)
	UK Composite PMI (24/01)
	People’s Bank of China Meeting (20/01) Bank of Japan Meeting (24/01/)

Chart of the moment

The first cut is the weakest

Source: Bloomberg as of 20/01/2025. Change in yield is calculated from the date of the first reduction of the Federal Funds Rate for interest rate easing cycles beginning in October 1984.

• The yield on US 10-year Treasuries has risen by nearly 100 basis points since the Federal Reserve began cutting interest rates in September.
• This move has been in stark contrast to the historical performance of US Treasuries following the start of previous easing cycles.
• Disinflationary progress has slowed, complicating the outlook for further rate reductions, and investors remain concerned over the long-term fiscal outlook in the US.
• The victory of Donald Trump, and the prospect of his inflationary policies, complicate this issue even further.